Family Succession Planning with Tom Deans | E002
Navigating the challenges of family business succession.
Summary:
In the 2nd episode of Financial Planning for Canadian Business Owners, Jason Pereira, award-winning financial planner, university lecturer, writer, and host of the podcast Fintech Impact, welcomes Dr. Tom Deans, estate and family succession planning expert and author of NY Times Bestseller Every Family’s Business, to talk about how to handle exit planning with your business, especially when family succession is involved.
Episode Highlights:
● 01:29: – Tom shares his background and how he ended up working in his family’s business.
● 03:20: – Only 20% of business owners sell their business.
● 03:40: – Tom’s fundamental idea is that you shouldn’t gift your business to your children, but sell it to them at full market value.
● 06:00: – It’s impractical and damaging to teach your kids to expect that the only way they’ll have control over their finances and relationship to the family business is to wait for their parents to die.
● 08:40: – Every time Tom hears a story of family business drama across industries and around the world, he has heard it before; these are universal patterns.
● 10:09: – Gifting voting shares to the next generation makes it difficult for them to innovate inside the business; because they didn’t pay for it, they don’t feel they have the authentic permission to change or alter it but instead preserve it.
● 11:45: – Shift your perspective from preserving the business itself to preserving wealth.
● 13:15: – Very successful dynastic families like the Rockefellers taught their children about risk taking, the successes and failures, and to love business broadly instead of loving their family’s specific business.
● 16:15: – Question 1: What does our family business look like in 5 years?
● 18:12: – Question 2: Are you interested in selling your stock? If yes, to whom?
● 19:43: – Because people are living longer, succession planning is just getting delayed.
● 22:06: – Question 3: Are you interested in buying stock and acquiring control, yes or no?
● 22:42: – Question 4: Do you understand and agree that in order to maximize shareholder value, this business can be sold to a third party at any time?
● 25:30: – People think their business is their legacy, but people don’t even know the name of who founded Coca-Cola.
● 26:36: – Question 5: I agree that within 60 days I will put in place special compensation for my child/key employee in the event that the business is sold in the next 5 years.
● 28:42: – Question 6: As a fundamental principle, I understand that from time to time, people receive unsolicited offers from a third party to acquire the business. These offers will be considered and accepted at the discretion of the controlling shareholder.
● 29:47: – Question 7: In preparation for the annual update of this blueprint, I will arrange for an updated valuation of the business and calculate whether there is an appropriate amount of insurance in place. I will furnish evidence that this has been done, and the estate taxes will not impair the ability of this corporation to function after my death.
● 32:00: – When a business fails after children inherit it, we all rush to judgment and blame the next generation, when really it was the responsibility of the business owner to establish a transition plan.
● 35:27: – Question 8: What are at least three items in each of the following four categories that could affect the health of your business for the next five years? Strengths, Weaknesses, Opportunities, and Threats.
● 36:26: – Question 9: To secure our future prosperity together, should we either A) continue to run the business and invest more money into our company, or B) practically pursue the sale of our company?
● 38:22: – Question 10: Within 60 days of completing this blueprint, you will complete a salary and bonus compensation review.
● 38:35: – Many business owners will complete a salary review for everyone but their children, and they’re just as often underpaid and exploited as they are overpaid.
● 40:30: – Question 11: I agree to conduct an annual performance review.
● 40:48: – Even your children need performance reviews in order to feel ownership over the business.
● 41:25: – Question 12: Within 60 days of completing this blueprint, I will present an up to date job description to all family members/key employees working in the business that clearly describes their duties and responsibilities.
● 43:10: – When selling a business, the buyer often wants things like organizational charts and job descriptions, and the only way you’ll get top dollar on the sale of your business is if you have those things ready.
● 43:43: – In business, you really make your money on your way out, not along the way.
3 Key Points
1. Not everyone wants to take over their family’s business, so these questions are
designed to make sure you have both a willing seller and a willing buyer.
2. The responsibility for a smooth, successful transition is on the business owner, not their
children.
3. Treating your children like fully valued employees is crucial for their long-term
involvement and dedication to the company.
Tweetable Quotes:
● “What happens is the previous generation designs, quite unwittingly, the business to fail in the hands of the next generation. It’s not their desire, but gifting the voting shares makes it very difficult for the next generation to innovate inside the business.” –Tom Deans
● “The next gen, when they have their own ideas, and many of those visions for the five years are in contrast with the controlling shareholder, the parent, that’s not a problem, that’s an opportunity.” –Tom Deans
● “Starting from a pool of thousands of resumes, you’re telling me in a family business, from a pool of two kids, the statistical likelihood that you’re gonna find the best CEO for that business?” –Tom Deans
Resources Mentioned:
● Website – Jason Pereira’s Website
● Facebook – Jason Pereira’s Facebook
● LinkedIn – Jason Pereira’s LinkedIn
● Every Family’s Business by Dr. Tom Deans
Full Transcript:
Speaker 1: Welcome to the Financial Planning for Canadian Business Owners podcast. You will hear about industry insights with award-winning financial planner and entrepreneur, Jason Pereira. Through the interviews with different experts with their stories and advice, you will learn how you can navigate the challenges of being an entrepreneur, plan for success, and make the most of your business and life. And now, your host, Jason Pereira.
Jason Pereira: Hello, and welcome to the Financial Planning for Canadian Business Owners podcast. I'm your host, Jason Pereira. Today, on the show, I have Doctor Tom Deans. Tom is an expert and full-time on the subject of estate planning and family succession planning. He has also authored several books, including Every Family's Business in 2008, which is a New York Times best-seller. At 1.3 million copies, it is still the best-selling book on exit planning.
Jason Pereira: I brought him on to discuss an almost universal topic about exiting your business, especially when there's family involved. With that, here's my interview with Tom.
Jason Pereira: Hello, Tom.
Tom Deans: Jason, good morning. How are you?
Jason Pereira: Very well. Thanks for taking the time.
Tom Deans: Great to be here, and I love this subject.
Jason Pereira: Yes, no doubt. Well, you are the "man" when it comes to this subject. Doctor
Tom Deans is an expert on estate and family succession planning, and a full-time speaker on the subject. I brought him on specifically to deal with this because so many Canadian businesses and, sorry, just forget Canadian, businesses around the world struggle with the dynamics of this.
Jason Pereira: So, Tom, why don't you tell your story, and tell us about your book as well while you're at it.
Tom Deans: Well, sure, Jason. I was born into a family business, as was my father and grandfather. It's something that it's all I know, quite frankly. I had a career in banking. I did a number of other things before I got that call from my father, who turned 65 and was looking to have lunch. It was at that lunch where he talked about whether or not I wanted to join the firm, and I was 37 at the time, so quite late in the world of family businesses where usually children are coming right out of college or university or high school, and they're going right into the family business. Kind of all they knew.
Tom Deans: I actually had a career outside of the family business, which makes my story interesting. I joined that business. I ran that business for eight years as CEO, and we sold it. We sold it actually on February 8, 2007, which was extraordinary timing. I got to tell you, we're not that smart. We were just really, really lucky to find and monetize.
Tom Deans: We were a Canadian plastics company. We're really, really lucky to have that event. So I was in my mid- 40s when we had that exit, and it occurred to me that our family had done that a couple of times prior, that we had involved family, we had started businesses, we had grown them, scaled them. And we always sold them. We've never gifted our operating businesses to our kids. We've always asked them to purchase them. In the fullness of time, that didn't happen, and they got sold.
Tom Deans: I worked for the new owners for six months. I like to say I served a six-month sentence for a crime I didn't commit. It was a brutal chapter of my life, and it is for most business owners who sell their business and then find themselves having to work for someone, often for the first time in their lives. After six months, they said, "Look. Go home. There's nothing for you to do." We'd actually built a business that really wasn't reliant on myself.
Tom Deans: So, I thought, "I got to write this story. I got to write this book, this book that carries a different idea that there's no shame in selling a business." In fact, that ought to be the goal. As I started to dig into the data, it became pretty clear that only 20% of family businesses or any business in North America is sold, 20%. Only 20% of owners who have risked their capital, built something, poured their energy, their time, and efforts into something, only 20% will ever experience that magic moment when someone slides a check across the table.
Tom Deans: So, I thought, "I'm going to write this book." That little book, carrying that little idea that you never gift an operating business to your kids, they need to buy it at full market value, just took off. It took off. It particularly resonated with the leading-edge of the Baby Boomers, who, in 2008, 2009, were just starting to turn 65. That book just took on a life of its own, which led to a full-time speaking career. That was 1,000 speeches and 26 countries ago. The book just won't stop.
Jason Pereira: And 1.3 million copies later, so I'm going to plug you on that one. That book is Every Family's Business, and it's available anywhere you would look for it. I highly, highly encourage it because not only have I read it and liked it, I've actually had clients randomly discover it before we got to that stage of the conversation, and say, "This really spoke to me." You did a great job with that, Tom.
Tom Deans: Well, thank you.
Jason Pereira: Now, let's talk about an interesting point you made there, first off. You made several interesting points. The first one I want to focus in on is one of the core messages, which is don't give or gift the business to the next generation. Make them buy it. So, let's talk about what triggered that viewpoint and why you feel that resonates so much with everybody.
Tom Deans: I think culturally, it's just weird taking money from your children. I know you've got kids, Jason, so-
Jason Pereira: Very young ones, but yes.
Tom Deans: You will soon come to know that money seems to flow the other way.
Jason Pereira: I've got childcare in Toronto. Trust me. I'm well aware.
Tom Deans: I know you do, so I write this book, and I say one of the greatest gifts you can give your children is this idea that they need to earn their way through life. If you equip them, raise them well, and equip them with the basic ideas that hard work, saving more than you spend, like basics ... The power of compounding interest, but also, the importance of taking risk in business.
Tom Deans: Often, what happens in family businesses is we actually deny them that very last piece. We don't ask them to risk their capital. In fact, what we do is we overpay them, we discount the shares, or, even worse, we do nothing, and we leave them with this idea that all they have to do is work long enough in the family business and wait for someone to die.
Tom Deans: Think about that. You've got literally tens of thousands of children working in Canadian businesses who believe that their only hope for voting control is for someone that they love and care about to die. Think of-
Jason Pereira: Yeah. Think of the conflict that that raises in day-to-day because businesses are highly emotional things when you're running them.
Tom Deans: Completely.
Jason Pereira: Partnerships are very, very tricky to maintain. Now, it's even worse when you throw family dynamics on top of that, and you're absolutely right. The only time I'm ever going to control my own destiny is when dad dies, or mom dies. Give me a break.
Tom Deans: Or, even worse, not only when dad dies because I'm pretty sure, although I don't know because our family will talk about succession planning, which, by the way, they really just talk about management succession planning. They never really talk about shares they're going to move, the voting shares, so that there's silence. Often when dad dies, typically guys die first, the shares go to mom. So really, the idea is that the only way you're going to get voting control of the business is you've got to wait for both your parents to die. Well, what a horrific idea that is.
Tom Deans: So I wrote the book to help families start the most difficult and vexing conversation of all time, which is, how will this thing transition? That's all the 12 questions in Every Family's Business does, is it gives families that starting point. Actually, what I say is really after the 12 questions, there's really not much more to talk about because it covers issues around control, voting control, compensation, performance review, all the things that families skip over in family businesses. Just so that-
Jason Pereira: You jumped ahead of me because I was getting to the 12 questions because ... It's interesting because even in your book, you basically say, "Okay, read the book, but then come back to these 12 questions every year." Really, it's the last chapter that really is the bread and butter here.
Tom Deans: Yeah, it's an irritating feature of the book. All the way through the book, one of the characters in the book ... This is just a book about two people who have a chance encounter. They sit beside each other on a plane, and they get into the scotch, and they start confessing about what went well and what went terribly awry in their family business.
Tom Deans: Then the young guy, William ... Okay, that's my middle name. I did a terrible job of hiding myself in the narrative. William decides to share 12 questions that his father asked him to help them transition their business smoothly. All the way through the book, William keeps referring to these 12 questions, and John, the guy sitting beside him, this older guy, goes, "What are these 12 questions?" And he goes, "Hang on. I'm getting to them. I'm getting to them."
Tom Deans: You got to get all the way through the book, right to the very last chapter. It's deeply irritating, but it is a classic publishing, writing hook, right? Build the crescendo and keep people reading to the very end. That's where the 12 questions are revealed. It's a really fun read, two hours, and I promise the book never leaves families quite the same.
Jason Pereira: No, because the reality is that somewhere along this narrative, you will find something that, as a business owner in a family business, that you have experienced. You have experienced that frustration. You've experienced that difficulty. You've experienced those questions in your own mind, and people pick it up and read it, and say, "Oh, my God. This is exactly what I've gone through. Maybe not the entirety, but at least part of it.
Tom Deans: What is remarkable, as you know, as you reference in my bio, I'm a speaker. When I speak, I then sign books, and then I feel like a priest. People are confessing their sins and all that has gone wrong in their family business. They're telling me these stories like they are the only ones that are experiencing it. I don't have the heart to tell them that I have heard a version of their story literally tens of thousands of times.
Tom Deans: It is the patterns. Whether I'm speaking in Costa Rica or Europe or Asia ... I think I'm mentioned just before the podcast [inaudible 00:08:58] I'm off to Saudi Arabia. It is unbelievable, cross-culturally, the similarity and themes across industries, agriculture, manufacturing, the same issues that are confronting families.
Tom Deans: The amount of family ownership in Canada, it sounds like we're just talking about a little sliver of the businesses that are in the market.
Jason Pereira: Oh, God, no.
Tom Deans: Nine out of 10 firms are family-owned and controlled, and only 30% will make it to the second generation, and only 3% will make it to the third generation. Any business owner founders who are listening to this podcast, they've got a 3% chance of their business making it to their grandchildren.
Jason Pereira: Yeah, and in fairness, that's not necessarily the grandchildren's fault. We spoke about this previously, about sometimes the industry just changes. That kind of industry just fades away and is replaced by something new, or the makeup of their infrastructure surrounding them, plants or manufacturing will move to another country. Therefore, you no longer have someone to buy your goods locally. Those things happen.
Jason Pereira: It's not necessarily the family's fault, but it's one of these things that [inaudible 00:09:56] that these things are going to go on forever, and not commonplace some of the questions that you ask. Now, I'm alluding to the questions we'll get to in a minute, some of the questions that you ask because these are serious things people have to consider at all times.
Tom Deans: Well, it's interesting you say that because, Jason, I think what happens is the previous generation designs, quite unwittingly, the business to actually to fail in the hands of the next generation. It's not their desire, but it is this idea of gifting the voting shares that makes it very difficult for the next generation to innovate inside the business.
Tom Deans: I often say to my audiences, has anyone in the audience inherited a watch, a painting, something from a grandparent or an aunt or uncle. And people put up their hands. Then I ask them, "Did you take that watch and go to a pawn shop and sell it?" What did you do? They go, "Well, I cleaned it. I kept it in a safe place for the next generation." It's like, "Did you hear that?"
Tom Deans: A family business that is gifted is treated the same way. The next generation doesn't feel like they have the authentic permission to change or pivot or alter the business model or platform because they didn't buy it. It's not theirs to change, so they keep it just like the watch. They keep it just like they found it.
Jason Pereira: It's interesting because I've had the privilege of sitting down with some very, very wealthy people in this country or from very large, prestigious families that are three or four generations deep into passing on businesses. It's interesting because their view of wealth is a combination of two things.
Jason Pereira: A, preserving wealth. What's interesting about the way they look at it is they're not concerned about preserving the business. They're concerned about preserving wealth for the next generation. Those truly successful ones, have, I think, at least addressed some of the questions in your book regarding sale and time of the sale because they view the wealth as being the important aspect, not the identity surrounding the business and what dad built. Because, at some point, they all run their course.
Tom Deans: Wow. Bingo. Absolutely. I think you absolutely nailed it, and the dynastic families do nail it. They don't get emotional about their operating businesses. They understand that, at the end of the day, that operating business represents one stalk. The families that make that leap from single operating business to broadly-held holding companies with diversified assets, many hundreds or thousands of operating companies, those are the successful families because they made the leap.
Jason Pereira: I'll tell you. The second piece of that was when I asked these people because I'm always fascinated by how these things succeed. Basically, what do you do to the kids to make sure that you've taught them a great lesson? They look at me all the time. It's simple. Don't give them anything. Make them earn every last piece. You think my parents gave me anything?
Jason Pereira: I've sat across from these people. They say that, and I start doing the math on how much I know they're worth. I'm just like, "Really?" It's like, yeah. They all are hungry and have a sense to add to the family's wealth as opposed to just taking over the family's business and lining their pockets.
Tom Deans: I would agree to a large extent. I think that probably those types of answers from exceedingly wealthy families, multi-generational families is a little disingenuous. I think what they've given them is something more than nothing. What they've given them actually-
Jason Pereira: All the opportunities.
Tom Deans: ... is something more valuable than money, which is a fast, free, easy money in some kind of trust fund that begins at 18. They actually give them the benefit of family stories.
Jason Pereira: [crosstalk 00:13:04].
Tom Deans: Dynastic [crosstalk 00:13:05] are spending lots of time like the Rockefellers. From day one, J.D. invested heavily in facilitated family meetings. In those family meetings, they were telling the stories about how they made their money and how they took risks. This part is crucial, how they took risks and how those risks didn't work out. They showed their failures and their great outcomes.
Tom Deans: Really, what they're trying to say is, "Look. In order to make money and beat the street. There's no shortcut. You gotta take risks. You got to find that thing that you're really passionate about. You got to understand the basics of business." The really successful families teach their children to love business. Not to fall in love with one business, but to love commerce.
Jason Pereira: 100% guaranteed. The very successful ones I've seen have all made their kids go out, and they either start their own or get involved in other ones before they even consider working within their own family business.
Tom Deans: Well, that certainly was my experience.
Jason Pereira: Yeah, and you're absolutely right. They're not giving them the trust fund, let them do whatever it is that they want in life, but what they're doing is they're grooming them from day one to basically say that, "Hey, and it could be handed to you. Frankly, you have to go out and make it yourself. Hey, this is how we did it, and we're going afford you ... We're in a [inaudible 00:14:16] position. We're going to afford you every opportunity in the world, but it's up to you."
Jason Pereira: Those are tidbits of wisdom there. One funny story before I go to the 12 questions because we were talking about this earlier. We were discussing how the one place in the world that doesn't seem to have this problem is Japan because they will do whatever is necessary to make that the transition of the business succeed, even to the extent of adopting high-level managers to make sure that they have proper succession planning in place. Not something normal on this side of the world, is it now?
Tom Deans: Yeah, and those high-level managers will actually drop their own legal name and take on the family's name so that the family will still be able to say that it is 19 generations old. It is actually absurd and ridiculous, but in their culture, it makes sense to them for obvious reasons. It's not to pass cultural judgment, but you can see the emotional pull and the power of that pull for even business owners in this country to pursue the longevity of their business above even profits.
Tom Deans: It really was the impetus for me to write the book because I come at this completely the opposite, and say it is the goal of every business owner, actually, to find the finality of their business, to find its end defined as its sale to someone. I am completely agnostic. I love it when families sell inside the family to a family member at full-market value, or outside. I'm really indifferent. What I'm just absolutely opposed to, and I'm getting actually more dogmatic as time goes on, and I was pretty dogmatic when I wrote the book 10 years ago, but you look at the data, and you see just how dangerous it is to gift a business and make it easy and create economic incentives for people to make decisions to continue in a business that should actually be sold. It's at the end of its productive life cycle.
Jason Pereira: Absolutely. Sometimes just having a conversation about the permission for that child to basically get rid of it. It just happens.
Jason Pereira: We've been teasing 12 questions long enough. Let's jump into them. I actually grabbed your book off this shelf because we're doing this remotely, and I have it in front of me as a cheat sheet. How about I call them out, and you tell me why you think it's important. Question one, what does our family business look like in five years?
Tom Deans: Yeah, the order of the 12 questions are really important. Really, what I'm trying to do here is this is a pretty gentle question to ease into a conversation between a son or daughter and maybe their parent who's the controlling shareholder. Everyone has the opportunity to then answer the question. What does this business look like in five years?
Tom Deans: Now, I say to people all the time, if a son or daughter were to answer this question this way, "I don't know. I don't know, dad. I think the business in five years will be bigger and stuff."
Jason Pereira: And stuff. Love it.
Tom Deans: What I say to that business owner is, "Dude, that is not the language of the next generation of owners. Do not proceed to question number two. That is not the answer." You know what you're looking for? Wow, that's a really interesting question. I'm glad you asked. What's the business going to look like in five years? Well, if you're asking and you want an honest answer, first of all, I would sell that division. It's got a negative gross margin. I know it has your original product line, but it is a complete disaster.
Tom Deans: I'm taking on senior management responsibility, and I'm inheriting all sorts of really old managers. I know they were your friends. They started with you, but the reality is, they're not performing, and they're expensive. Any other company would have restructured and moved on, so I would terminate this person's contract, this person, this person. I would hire two smarter people. We need more online marketing. Online marketing, that's that thing called the internet.
Tom Deans: The next gen, when they have their own ideas, and many of those visions for the five years are in contrast with the controlling shareholder, their parent, that's not a problem. That's an opportunity. That's why it's question number one.
Jason Pereira: Absolutely. Makes perfect sense. That question is a litmus test in a lot of ways for just both parties' general level of involvement in the business and their mindset. If both people aren't passionate about talking about it and the future of it, then, frankly, that's a sign that it's time for one of them to potentially or both potentially think of something else.
Jason Pereira: So, question two, if both the owner and child are key employee-owned shares, are you interested in selling your stock? If yes, to whom?
Tom Deans: Yeah, so this is a really powerful question, and you can see what makes these questions so difficult is that they really require yes and no answers. There's no room to equivocate. Are you interested in selling your stock? This question, remember, is going to the controlling shareholder. Really, all 12 questions are trying to bring clarity to the relationship. This question is at the front end as well because I want the next gen to know that if their parent, the controlling shareholder, answers this question no, then you're working in a business where the controlling shareholder has no interest in ever relinquishing control, or certainly not right now.
Tom Deans: Just eyes wide open. There's a lot of kids that are making assumptions like one day all this will be mine. Right at the front end of these 12 questions, the parent, the controlling shareholder, is being asked, are you interested in selling your stock, yes or no. If the answer is yes, man, you get a seller. You may enjoy your job in the family business. You may also have the opportunity to purchase the stock.
Jason Pereira: Yeah, and it's funny. What comes to mind is going back to Japan. There's that Netflix documentary about that one 90-something-year-old sushi master who basically, his son has been understudying him for 50 years and is 70-something-years-old, and is just waiting for dad to retire so he can be the sushi master. Yeah, dad ain't retiring. I think about how many years the guy has waited, and how fruitless that's going to feel at the end.
Tom Deans: You've raised an interesting point because people are living ... Business owners in Canada, especially men, that demographic is living longer. We're tagging on years at the end like never before, and so we talked about how death was a triggering event for the transition of the business. Well, now you've got kids in their 60s waiting for their parents in their 80s to die.
Jason Pereira: Yeah, if anything, capacity's going to be the triggering event at this point.
Tom Deans: Absolutely. Right. So you've got succession plans that are just being ... The can is just being kicked down the road, and no one knows how to start the conversations. No one knows how to accelerate it. Quite frankly, and not to be overly critical on lawyers and accountants, but we have business owners turning to the most trusted advisor, which is accountants in Canada and lawyers second. What they're getting when they ask the question what should I do with my business, you have a built-in bias.
Tom Deans: Let me ask you the question, Jason. If you're the accountant and the business gets sold, what happens to the file?
Jason Pereira: Well, because they didn't typically build a relationship with the kid, it goes to the kid's accountant. Yeah, or to the new owner's accountant. So they answer, yeah. They got a built-in bias. They don't want to be fired.
Tom Deans: They don't want it sold. They don't want it sold, so what they do is they go ... This is a sweeping generalization. There are some amazing accountants and accounting firms that really understand that doing an estate freeze, which is what they do ... They go right to the page in the playbook, the oldest, warm out page in the playbook, which is we should do an estate freeze. Freeze the value of those common shares, and issue new pref shares, voting shares, so mom and dad get to control that family business right to their very last breath.
Tom Deans: And the children who are working and toiling hard in the family business will get the growth. They get the new common shares, the growth. Of course, we all know that businesses only go up in value, right?
Jason Pereira: Nothing ever drops in value like Canadian real estate. Sorry. [crosstalk 00:21:22].
Tom Deans: No!. No, no, no. We have this built-in bias for longevity, and it's an unwitting bias. I'm not painting a nefarious plat by accountants to destroy family businesses. They're just often unaware, and they're looking at the financial returns of family businesses and thinking, "Why would you ever sell this amazing investment? It's producing 20% returns. Way better than your mutual funds." So you have this built-in bias to keep these operating businesses and thrusting them into the hands of often ill-prepared and reluctant heirs.
Jason Pereira: Yep, and you know what? Again, every industry runs its course. I'm sure that buggy whip operators had 20% returns also, but you can't see what's coming on the horizon. You're not going to sell out when you're still at your peak value. That's really what it should be about.
Jason Pereira: Third question, are you interested in buying stock and acquiring control, yes or no?
Tom Deans: Yeah, so this is asking the next gens how much really do you love this? You may love your job and your income, but really, do you want to buy the stock based on really a third-party valuation? It is shocking how few next gen’s actually want to buy their parent's business. It's just not their dream. It's not their passion. Some do. Actually, some really are better educated, harder working, have their own ideas, and they're all in.
Tom Deans: It's a great alignment. I see this a lot in the farming industry. Some kids really are going to take that head start, and they're going to buy it. But I can tell you the vast majority, they don't want the ownership. They've watched what their parents have gone through, and they don't want that. They want something different, or they're got a different passion.
Jason Pereira: Yeah.
Tom Deans: You can see, first three questions, man, you're diving right into the core of the message of the book, which is really, do you have a buyer and seller in the house. Do you have someone who wants to sell? Do you have someone who wants to buy? Do you have a future transition plan? There's no right or wrong answer. All there is is clarity, so grown-ups, adults, get to make grown-up decisions together, collaboratively.
Jason Pereira: Yep, and you've uncovered. I think these are a wise three questions you've uncovered. If you can't answer yes to those and find alignment in those questions, you haven't mastered the problem. You haven't mastered the problem if you think that this business is going to be passed on to the next generation because they may be disengaged. They are not interested in paying for it, or they're not interested in controlling it.
Jason Pereira: If these are all nos, why are you progressing in the rest of the book? We already have an issue. Let's move on to question four. Do you understand and agree that in the interest of maximizing shareholder value, this business can be sold to a third party at any time?
Tom Deans: Yeah, I like to make this point really clear. There's lots of next gens who are answering question number three. The previous question, they're saying, "Yeah, I do want to buy the stock, but obviously, I'm young, and I don't have a lot of money, so I'm going to buy 1%. That's all I can afford. I've only got $5,000 or $10,000. I bought one share."
Tom Deans: Then they get a dividend from that one share, and the time goes on, and they're saving, and they buy two shares, and five shares, and eight shares. Often the next gen purchasing their parents business is a long tale. It's a slow process, but often, what can happen right in the middle of that is, I don't know, some major event, some trauma to the business. Loss of a major customer, foreign exchange, a fire, something big comes along, and both agree that they can shift and sell to a third party.
Tom Deans: It's just getting people to acknowledge that, that even though I'm buying this business, this thing can be sold to someone in the open market at a higher price. This is a business.
Jason Pereira: Yeah, and the cynical view is quite honestly, everything in this world has a price on it. It's just a question whether you want to agree to it or not. Sooner or later, someone basically, for more money than made any sense, you, on the table, what would you say? The vast majority of us would be hard-pressed. It would cause stress to say no to that.
Tom Deans: Well, a lot of them do say no to that because they think that their business is their legacy.
Jason Pereira: Meanwhile, their kids may not be on the same page. It's not just in businesses. We see this happen with cottages and other family things where essentially parents will struggle to maintain these things for the next generation, and then the kids are like, "I don't even want this, but she insists on doing it, or he insists on doing it." You're opening communication and making sure the people do really want it, which is valuable.
Tom Deans: Yeah, it's so true. Let me ask you a question, Jason. Who was the founder of Coca-Cola?
Jason Pereira: Oh, what is his name? You know he makes what? What's his name? Pemberton, Robert Pemberton. Is that right?
Tom Deans: Is it? I don't know.
Jason Pereira: I think it's Pemberton. No, it's definitely-
Tom Deans: Seriously, when I'm giving a speech with 5,000 people in my audience, 100, 500, it doesn't matter. It's crickets. No one knows. I can't believe you knew that.
Jason Pereira: Am I the first person to get that?
Tom Deans: Yeah. No one knows. No one cares. The third most valuable consumer brand in the world, and no one knows who the founder of Coca-Cola is. No one even googles it. It's shocking how business owners think that their greatest work of art, their business, is going to stand the test of time to be their greatest work of art, achievement, and legacy. I'm like, "Dude, you have no idea. No one is going to remember Larry's Tool and Die." No one. No one.
Jason Pereira: John Smith Pemberton. Long story, he created the formula, but the Coca-Cola bottling corporation was created by someone else, and that's the guy that made the real money.
Tom Deans: Yeah, that's very interesting. The closest I ever got to an audience member getting it right is someone says he was a pharmacist.
Jason Pereira: That is true.
Tom Deans: And someone will pipe in and think it's Dr. Pepper, but no.
Jason Pereira: Dr. Pepper.
Tom Deans: Dr. Pepper's not [crosstalk 00:26:31]. Yeah, no it's-
Jason Pereira: All right, I'm the first guy who got it.
Tom Deans: You are the first guy to get that. That is shocking.
Jason Pereira: There we go. Question five, I agree that within 60 days, I will put in place a special compensation formula for my child/key employee in the event that the business is sold in the next five years.
Tom Deans: Yeah, so this is crucial. Often business owners invite their children into their business, and they effectively paint themselves into a corner. Now, they have their family, their children, deriving a lifestyle, an income from their business, and then, of course, the phone rings, maybe it's an unsolicited offer from a third party or a competitor, strategic buyer. How do you sell a business without feeling like you're selling your family down the river?
Tom Deans: What these questions are doing is really getting people to understand that, hey, this thing is for sale all the time. By joining this firm, you're actually taking a risk just as you are if you joined any other firm. Any other firm can be sold. There's nothing that gives kind of a special dispensation to family businesses so they won't be sold.
Tom Deans: This question around compensation really says that we can align our interests. We can align our interests. If we sell this business, it's not like mom and dad get rich, and junior loses their job. It's like if that happens, here's how you can be compensated. I'll tell you, for business owners, this is crucial because if you sell your business and you've got your children in key positions of authority or responsibility, management, and they don't have this in place, often kids just ... They just bolt for the door.
Jason Pereira: Yes, and that [crosstalk 00:27:59].
Tom Deans: There's no management left, and they take money from escrow. The seller doesn't get his full entitlement, and the family is broken and distressed and never repaired. You can see that if this question around compensation in the context of the sale of the business is not addressed, one of two things happens. The business doesn't get sold, or two, it does get sold, and it's a complete disaster. The transition into the hands of the new owner is a disaster, and the owner doesn't get his full sale price.
Jason Pereira: And that happens all the time. We've all heard horror stories of the kids like, "Well, I've got nothing. New management comes in, and they want me to stick around." Then dad's like, "You've got to stay there because if you don't, I'm going to lose half a million dollars in escrow." It's like, "Well, you're not even paying me a fraction."
Jason Pereira: These conflicts are very, very, real, so let's move on to number six. As a fundamental principle, I understand that from time to time, we will receive unsolicited offers from a third-party to acquire the business. These offers will be considered and accepted at the discretion of the controlling shareholder and supported by blank, key employee's name or child.
Tom Deans: Yeah, so the thought behind this question is really to remind next gens who are purchasing their parent's business not to dither. That every day, month, year that goes by where they do not have definitive voting control, the business is in the marketplace really effectively open to other offers. This question really holds the next gen's feet to the fire. It really gets them to have to acknowledge that even though you're buying this business, this thing can be sold to someone else at any time. Please, acknowledge that idea. When that does happen, if it does happen, you're not going to be shocked. It really tries to accelerate that internal sale.
Jason Pereira: And it should. Frankly, you have to be on the same page, otherwise ... A lot of this is almost like prenup thinking or partnership-level thinking. You solve these problems before you have the problem. That's it. Let's start with an open, clean slate.
Jason Pereira: What you do that's smart, is you force both to revisit this on an annual basis because these things change as they should. So, in preparation for the annual update of this blueprint, I will arrange for an updated valuation of the business and will calculate whether there is an appropriate amount of insurance in place. I will furnish evidence that this has been done, and the estate taxes will not impair the ability of this corporation to function after my death.
Tom Deans: I like this question. You know I'm also [crosstalk 00:30:06].
Jason Pereira: So does every insurance advisor in the country, but continue on.
Tom Deans: Well, yeah, and they should.
Jason Pereira: For good reason. Yep.
Tom Deans: They should. As you know, I'm a full-time, professional speaker. I'm not licensed. I don't sell insurance. I don't sell investment products, but this question around insurance, it is shocking how cheap business owners are when it comes to insuring the retained earnings, the equity in their business. That's what happens.
Tom Deans: Let's walk through this scenario. Business owner dies. Guy. Guys die first. Shares go to the surviving spouse. Let's assume there's no shareholder agreement and no minority partners. Shares go to his spouse. This is very common in the farming sector. Manufacturing, huge problems in manufacturing. Even in software. Shares go to surviving spouse. She dies a couple of years later, trying to run the business. She doesn't have the relationships with the lenders, the suppliers, the customers.
Tom Deans: A lot of the key employees see this happen, the share transition. They bolt for the door. They're nervous about their future. Now, the business fails, or mom dies, and the shares go down to the kids. There's probably no will. 50% chance of no will, so now the provincial formula kicks in, thrusting all the children in business together as equal partners.
Tom Deans: Good news is they get a free business. They get a free business from last to survive, right? Their last parent dies. All the shares go to the kids in equal amounts. Then they get a letter from CRA, and you know what that letter says?
Jason Pereira: You owe this massive amount of money.
Tom Deans: Yeah, it doesn't say, "We're sorry to hear about your loss." It says, "You owe us this."
Jason Pereira: Yesterday.
Tom Deans: Yeah. The founder's original shares are worth a dollar. Fast forward today, business owners who are listening, what's your current share price? If you can't answer that question, you don't know how much capital gains exposure you've got. Maybe not you, but your children on last to survive. Where do the kids go for cash to pay the tax on their personal holdings of that brand new free family business?
Tom Deans: They reach into the corporation for free cash flow to pay their personal tax bill, and it's not there, and the business fails. Then everyone reads about that in the local newspaper, and we all rush to judgment that all next-generation kids are lazy spendthrifts. They're probably millennials. They have no drive. They blew up their parent's business. It drives me crazy. The responsibility for that transition plan was with the business owner. They really just didn't give a damn.
Jason Pereira: They basically look at it, and they say, "Oh, that's expensive." Well, expensive compared to the what? You're still going to pay a fraction of the total tax bill, especially given the way the tax code works surrounding corporately-owned insurance policies. You do this right, and you're paying a fraction.
Jason Pereira: I had Trevor Parry on the show, specifically talking about pipeline planning and just how lucrative the savings can be. I've had people reply, "Well, you can just suck it up and pay out of cash flow for a couple years." It's like so you're going to impair 100% of the free cash flow of the firm for five years, assuming nothing goes wrong, to pay out a deceased person? Now, I don't know about you, but especially if I'm the one who's passed away, and this is a partnership, maybe there's more than one family member involved in the partnership, I want my side of the family with their cash the second I die. I don't want them waiting five years to receive the entire payout because I understand there's business risk.
Tom Deans: Well, most business owners don't have family meetings, and they don't walk through the scenario of their death. So all of this is being revealed while family and siblings are grieving the loss of their last parent. All it takes is one to lawyer up, and you can see why so many family businesses are ending in court fighting over the estate.
Tom Deans: Kids outside the business want their cash. Kids inside the business are going, "Hey, the business doesn't have any cash. I don't have any cash. I can't pay you out." Here we go again, and then we wonder why only 30% of family businesses survive to the second generation.
Jason Pereira: The current premier of Ontario was embroiled in one of these lawsuits.
Tom Deans: Oh, the list is long. We could spend the next hour talking about the Edens, and never mind the family businesses, but the Nortels and the amount of business destruction that takes place. No one talks about, writes about it, or really wants to understand how temporary and frail all businesses are. And that even if you had a great 30-year run, there's no guarantee that the next 30 are going to be anything like the previous 30.
Tom Deans: This book was really contrarian, and some would call it controversial because it was going right into the lion's den and blowing up a lot of these ideas that it's your job as a family business owner to give your business to your kids and perpetuate your legacy. That's such crap. It's such nonsense.
Jason Pereira: Not only that, they get born to you, and their destiny's decided because they were born to you? I don't know. That takes away any concept of free will or basic control over their own lives and destiny. Yeah, I get it.
Tom Deans: The average search firm executive will tell you that they start with literally thousands of resumes to find the best CEO, and they have a process for whittling that down to the top 10 candidates. The massive number of just telephone conversations, face-to-face interviews, whittle that down to three candidates, then boom. You find your best CEO in Canada for your business, starting from a pool of thousands of resumes. Now, you tell me in a family business, from a pool of two kids, the statistic likelihood that you're going to find the best CEO for that business.
Jason Pereira: No, exactly. It's what Buffet called the lottery of the womb.
Tom Deans: I've not heard that, but you can see, right, Jason? You can just see why so few family businesses survive and why so many try.
Jason Pereira: Yeah, unfortunately, business savvy is not something that's passed on genetically. It's a trained and learned behavior that also is very, very specific to people's individuality. It's a recipe that doesn't always work.
Jason Pereira: On to question eight. List at least three items in each of the following four categories that could affect the health of your business over the next five years. What you've done here is a SWAT analysis. There's strengths, weaknesses, opportunities, and threats.
Tom Deans: Yeah, so basic SWAT analysis. Obviously, I didn't invent that process, but it is a great, great little exercise for family businesses to do, a parent and a child to go through a SWAT. It's very interesting. The strengths and opportunities, it's really interesting. The person who's got less risk in the business will have a much longer list of strengths and opportunities. People, particularly aging business owners, can see the weaknesses and the threats to the businesses much clearer because they've got more to lose.
Tom Deans: It's really interesting for parents and children to compare their lists of strengths, weaknesses, opportunities, and threats. This is actually a really, really interesting exercise.
Jason Pereira: Agreed, and frankly, some of this should be happening on a regular basis anyways as part of business planning. But as you know, that typically does not happen. This is, frankly, a really good excuse to basically do that, and a great discussion point.
Jason Pereira: Question nine, to secure our future prosperity together, should we either A, continue to run the business and invest more money in our company, or B, practically pursue the sale of our company?
Tom Deans: Yeah, so as you know, you can fund growth of a business through one of two ones, through debt or equity. And, by the way, money, capital, is just the blood. It's the blood of a business. If you're starving a business of capital, it's not going to grow. If a business doesn't grow, here's a shocking newsflash. It's going to shrink.
Tom Deans: Businesses, and I bump into this alarmingly more times than I want to admit. The number of business owners who go, particularly, they're in their 60s, especially in their 70s and 80s, and they think, "I like my business exactly the size that it is."
Jason Pereira: Yeah, that's no. No, no, no, no.
Tom Deans: It's like, "Dude, you-
Jason Pereira: You ever step on a scale? You ever step on a scale? Is it ever the exact same number the next day?
Tom Deans: Never.
Jason Pereira: No, it's not, right? The world changes around you, and it's the old saying, if you're not growing, you're dying.
Tom Deans: Yeah, yeah. If you're not growing ... And it's hard because it doesn't happen often very quickly. It can be a really slow drip, drip to the bottom.
Jason Pereira: Or it's the old joke about bankruptcy. How's it happen? Slowly and then all at once.
Tom Deans: Yes, indeed. Yeah, so you can see this question's just really getting at do you have enough confidence in this business to take profits and put it back into the business, or to take on new debt? If the answer is no, you don't, you do not need a consultant to tell you that you should get your business ready for sale. You have all the information in the world that you need. You have just expressed a lack of confidence to recapitalize your business.
Tom Deans: It's not a public declaration that you failed in business. It says you're a wise person, and you have got the earliest sign that as the definitive controlling shareholder, it's time to leave.
Jason Pereira: Question 10, within 60 days of completing this blueprint, we will complete a salary and bonus compensation review for blank, a child or key employees.
Tom Deans: Yeah, so the issue of salary and bonus reviews for a lot of business owners, they'll do it for everyone but family. It's like, "Oh, my God. This is just going to end badly. We are not going to talk about money." I'll tell you right now, in family businesses, there is a virtually equal percentage of children that are underpaid as overpaid.
Tom Deans: We all think that kids in businesses are just so lucky. Lucky sperm club, overpaid, underworked. Listen, there is a lot of exploitation in family business. There's a lot of kids who are working below-market rates doing work and taking on super responsibilities beyond what they ought to be doing. And no one knows how to talk about it, or if kids actually have the confidence to raise their compensation as a concern with their parents, you know what they're often told? Relax. Don't worry about it.
Jason Pereira: Or, you got to earn it. I know that one.
Tom Deans: Or-
Jason Pereira: It's the I struggled for so long, and you want a cushy job paying you X number of dollars. I encounter this all the time. It's like they've got it in their mind that they struggled to get to a certain point. They don't see their kids struggling the same way, but their kid's doing the work and being underpaid for the market rate.
Jason Pereira: I actually just had this conversation last week with someone in this field, and talk about a crazy situation, the father's even gone so far to the extent of saying that, "Yeah, when you buy this business, you're also going to pay for the business that you helped grow and bring in." It's like, well, wait a second. Why did I help grow and bring it in then? It can be a tricky, tricky subject.
Tom Deans: Right. I just think that often when kids complain to their parents about their salaries, the parents shut that conversation down, and say, "Just relax. Don't worry about it because one day, all this will be yours."
Jason Pereira: Yeah, it's a [crosstalk 00:40:05].
Tom Deans: They conflate income with equity in the most innocent way, quite naïve. Tell me how you're going to reel those words back in and unpromise the free ownership of that business. So my message is kids need salary reviews, and we're going to get into the next couple of questions that are dealing with performance reviews and job descriptions, but they need those things. They need the professionalization of the family business. If they don't have them, they start taking shortcuts with the equity, and it's a disaster.
Jason Pereira: Agree. Question 11, I agree to conduct an annual performance review of blank, child or key employee's name.
Tom Deans: There it is.
Jason Pereira: Yeah, this review will measure performance against mutually agreed and achievable goals and objectives. New goals and objectives will be set every coming year. So basically, a standard performance review and not taking for granted that it's your kid.
Tom Deans: Yeah, so if you're not having performance reviews even for family members, especially for family members, then you're leaving your children in a performance vacuum. What kid is going to go out and borrow money from a bank to buy their parent's business when they feel like a failure in that business because they've never had any feedback on their performance?
Jason Pereira: Exactly, and further to that, how are they to ever believe that they're living up to the expectation of the parent and all these other [inaudible 00:41:10]. The questions around compensation and everything else we just discussed, a lot of them are just linked to feedback mechanisms. You look at any HR survey, and basically, one of the top things that employees want is feedback. That is no different for your own family.
Tom Deans: Yep.
Jason Pereira: Okay, and now onto the final question. Within 60 days of completing this blueprint, I will present an up- to-date job description to all family members/key employees working in the business that clearly describes their duties and responsibilities that will include an up-to-date organizational chart. Family members and key employees working in the company will adhere to the company's policies and procedures.
Tom Deans: Yeah, it's the same thing, job description. You've got a lot of family members who join the family business, and they just take on all of the work, responsibility, legacy of the owner, even though their job is accounts payable or sales, or maybe doing something in the back shop. I don't know. It's weird.
Tom Deans: The expectations for family members to take on extra responsibilities and not be compensated or acknowledged for that, it's a big problem. They actually, in many cases, voluntarily take on those responsibilities, and unwittingly, they don't even understand why they're doing it other than they're working for intangibles like family pride and honor and reputation in the community.
Tom Deans: The job description is crucial. It says, "Listen. If we're going to professionalize this family business and treat families like no better or no worse, but with the same kind of rigor and professionalism as any other person, then you need a job description, and here it is."
Jason Pereira: Yeah, excellent. Frankly, this is the thing that a lot of smaller or medium-sized family enterprises end up is often times, sometimes the professional structures that would solve for these types of conflicts, just aren't put in place. You're encouraging them to professionalize their business, and frankly, this is a valuable toolset because when they go to sell that business, guess what? The more professional it looks, the better run it looks, the higher the valuation.
Jason Pereira: It's valuable not just from a succession planning standpoint, but from also, I'd say, a valuation maximization standpoint.
Tom Deans: Well, I can tell you that when I was running our family business, and as we were getting that business ready for sale, I can tell you that the ultimate buyer of that business in the due diligence, some of the things that they're asking for are non-financial. They're looking for organizational charts. They're looking for three years of job descriptions, and three years of performance reviews. And they want them right away, like fax it over.
Jason Pereira: Oh, yeah. But the longer you take, the [crosstalk 00:43:30].
Tom Deans: If you don't have that stuff, you're not going to get a premium. You're not going to get a premium on the multiple of your [inaudible 00:43:34]. You're a crappy, disorganized, unprofessional, family business. If you want top dollar, and really, you and I both know that that's where you make your money in business. It's on the way out. It's not really along the way. It's really getting a multiple of your free cash flow in one moment.
Tom Deans: I think when business owners understand that, then they will have a much better exit. There's some amazing organizations, and I think the premiere organization is the Exit Planning Institute out of Cleveland right now, who are doing an amazing job of certifying advisors to be really great resources to help business owners. It's becoming an industry. It's becoming a profession.
Tom Deans: I'm so heartened to see that because, for so long, we've treated business succession planning as a tax issue. That's 15 minutes of work. It is so easy to do the tax piece. This is a complicated, emotional decision to exit your business, and most business owners feel like it's a very, very solo journey, and it doesn't have to be. They're professionals out there that you need to build a team, and they can help you through the most vexing, challenging issue a business owner will be confronted with, how do I get out.
Jason Pereira: I agree with you on so many points there. The litmus test of if you're not organized by the time you're ready to sell, then all you're doing is showing that someone's going to buy a disorganized company, and really who wants it? No one wants to buy it to create more work for themselves just to clean up a mess that existed prior.
Jason Pereira: Secondly, you're right. We oftentimes treat it as a tax and planning issue, and that's often times because this is always been traditionally led by the accountants and lawyers, who that's what they're there for. But the emotional dynamics of all this, which we touched upon frequently in all this, that's where the rubber hits the road. That's what really determines what direction this is going to go, and success after any planning is done.
Tom Deans: Yeah, if all we expect our children to be is some version of ourself, we would never have the Ford Motor Company. We'd never have the Ford Motor Company. Henry Ford's father was a farmer. Bill Gates' father was a lawyer. We'd never have Microsoft. Steve Jobs' father, at one point, ran a restaurant. If all we ask our kids to do is be some version of us, we are denying them the greatest gift a parent can give a child, which is the freedom and the express permission to go off and explore their own unique talents and ambitions and aspirations. That's the great gift of Every Family's Business.
Jason Pereira: I encourage everybody to pick up the book. It is a good read. I believe it's available everywhere, but tell everybody where they can find you and the books, and your other works.
Tom Deans: Yeah, well, obviously, the fastest way of getting the book and with free shipping is everyfamilysbusiness.com. That's my website. Yeah, and you can also find information on my speaking. I am a convention speaker. Whether you're a plumber, an electrician, making shoes, I've literally spoken to hundreds of industry associations in 26 countries. It's really fun. About being conflicted, I don't have a backend service. I don't sell products, so I really am very passionate about bringing this very different perspective to business owners and their families all around the world.
Jason Pereira: Fantastic. Tom, thank you again for your time today, and I hope this resonates with a lot of people. I hope this leads to further book sales for you, but more so, I hope it leads to action. I hope it leads to various families averting disaster and, hopefully, monetizing and succeeding in their businesses the way they should be.
Tom Deans: The pleasure was mine. Thanks, Jason.
Jason Pereira: That was my interview with Tom Deans, and frankly, we could have gone for another couple hours talking about the trials and tribulations and horror stories of stuff we've seen, and how to, hopefully, get around it. I hope you found it of value, and I encourage you all to pick up a copy of this book if it spoke to you.
Jason Pereira: With that, as always, I'm Jason Pereira. If you enjoyed this podcast, please leave a review. Till next time, take care.
Speaker 1: This podcast was brought to you by Woodgate Financial, an award-winning financial planning firm catering to high-net-worth individuals, business owners, and their families. To learn more, go to woodgate.com.
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