Should you gift your family business?
Should you gift your family business?
On this episode of the show I am joined by best-selling author Tom Deans Ph.D, we discuss the sometimes controversial subject of whether or not you should gift your family business between generations. Tom’s view is that this should never be the case and we dig into why he feels this way.
He share’s his own story and why he feels that family businesses should be sold at market value to whoever the next owners are going to be, whether that is the next generation or an external buyer.
Tom is a provocateur and makes some impassioned arguments on his views on why you should never gift your family business.
Should you gift your family business to the next generation?
Should you leave the business to your children in your will?
Or, should the next generation be asked to buy the family business at full market value?
When do you start the discussions about these topics and how do you avoid them becoming argumentative and potentially damaging to your family?
About Tom Deans Ph.D
Dr. Tom Deans is the author of, Every Family’s Business — the best-selling family business book of all-time — selected by The New York Times as one of the Top Ten Books Business Owners Should Read. With more than a million copies sold in more than 100 countries, the book provides the framework for his public lectures and seminars. Having delivered more than 1000 speeches in 26 countries – his long-awaited sequel — Willing Wisdom was released to critical acclaim and is already a Globe and Mail and New York Times best-seller.
Both of Tom’s books deal with the intergenerational transition of family wealth. Like his books — his talks are unconventional and contrarian.
Previously, Deans was the CEO of a large multinational family business, has worked in government relations, and has been the president of a railway. Tom has been featured in numerous magazines and journals including Profit, Money Sense, Inc. The wall Street Journal and The New York Times. A frequent guest on CNBC, Money Line and BNN, Tom is a highly sought after international public speaker on succession planning, wealth management and philanthropic giving. With his family selling businesses for more than $100 million, prepare to unlearn everything you thought you knew about business succession planning.
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Should you gift your family business?
Russ Haworth: Hello and welcome to this week’s episode. I hope you’ve had a good week wherever you are and whatever you’ve been doing. Thank you to everyone who has been signing up to the newsletter. it’s good to see that people are interested in what else I have to say beyond the podcast. So thank you very much for that before we get into today’s show, I just thought I’d give a brief introduction to the topic we’re going to be talking about.
So I am speaking to Dr. Tom Deans. He is an author and public speaker, and he speaks very passionately about a subject of why you should never give or gift your family business to the next generation. And so we get into the whats and wherefores of that in this conversation. And as Tom mentions in his own introduction, he is a provocateur.
And the idea behind this particular episode is to provoke some thoughts on the concept or idea of passing a family business between generations, rather than, doing that, as a form of gifting Tom’s argument is that this should be done at full market value. So we cover a lot of that in today’s show.
Will be very interested in your views on it. when you get to the end drop, drop me an email, and, I hope you enjoy the conversation. I’ll now pass over to me and Tom, having a chat about why you should never gift your family business. Well, hello and welcome to this episode of The Family Business Podcast. My guest today is Dr. Tom Deans and Tom and I are going to be talking about why gifting your business is a bad idea, or is it? We will get into that as the conversation flows, but firstly Tom, welcome to the show.
Tom Deans: Russ, it’s great to join you.
I’m really looking forward to our conversation
Russ Haworth: And our listeners won’t be able to, see this, but behind you, there is a window and outside of that window is a huge amount of snowfall. It looks very festive. As we approach the festive season two, to be having the snow for out there is a it’s very good of you to lay that on for us.
Tom Deans: My pleasure. Enjoy it.
Russ Haworth: So, before we get into the details, what we’re going to be discussing on today’s show, could you just give our audience an overview of who you are, what you do and, how you came to be doing that?
Background to Tom Deans Ph.D.
Tom Deans: Yeah, it’s a great way to jump into the subject of, of the dangers or perils of gifting, a family business, because I only write and speak about that, which I have lived.
And so just to let people know right out of the gate, I am not a family business consultant. I am a full-time writer and professional speaker on the subject of family business transitions. And the fact that I am not a consultant. And I like to make that clear because if people hear this and they’re really.
Kind of compelled by what they hear when they want more. I’m really quick to remind people. Don’t call me. That is, that is not what I do. This actually, this is what I do right now, right here. Right now. I am a thought leader in the pure sense of the word. I’m a provocateur. That’s what the French would call me.
I provoke and, and by virtue of not being a consultant, it really frees me to speak my mind. I am not here. I’m not seeking election. and I’m not here necessarily to even make friends. I am here to help business owners, which with a subject that I think is actually the most challenging and vexing problem that they’re going to be confronted with.
An Alternative Perspective on Family Business Exit
And that is not how to grow their business and make more money. They’re pretty good at that. It’s how do I get the hell out? How do I get out of this thing that I created? I’ve invited my family into that business. Now, what I mean, many of them have painted themselves into a corner or certainly feel like they have, and they’re stuck.
And as they turn to podcasts like this, as they turn to the literature, they’re often being confronted with just one perspective, which is. Hey, Mary. Hey Bill. It’s your job to give your business to your kids. And if you don’t, well, guess what, somehow you’re a loser. You failed, you failed as a business owner.
You failed as a father or mother, and that is tragic. And I come along and go. Are you kidding? Are you kidding me? You may transition your business inside your family. And I don’t get me wrong. That is fantastic when it happens the right way. But this idea of blindly giving businesses to kids who don’t want to risk their capital and buy those businesses from their parents at full market value is I think it’s the most dangerous and toxic idea.
I think on the planet, certainly alive and well in most businesses. So how did I come to this place? First of all, I was born into a family business. I was the CEO of a family business and sold the family business. But my really our story starts a hundred years ago. actually in Scotland, my, my great grandfather, had a number of pubs and, and my grandfather worked in those businesses and he didn’t love those that business.
And, they were sold any inheritance. He moved to Canada. And, and he started a, a tyre distribution business. And my, and my wife’s grandfather worked in that business. He didn’t love that business side. It was sold. my father, inherited, he started a plastics company. That’s the business that I joined at the tender age of 37.
That’s the business that I ran for eight years. That’s the business that we sold, I mean, does anyone see a pattern in our, yeah,
Russ Haworth: There’s a, there’s a recurring theme here.
Tom Deans: Exactly. Like chemicals, tire distribution, plastics, manufacturing now publishing I’m a founder now, I have two children, 28 and 26.
Do you want to buy the business at full market value?
I have a recently in our family meeting, asked them whether or not they wanted to purchase my business at full market valuing and Russ shockingly, guess what they said?
Russ Haworth: I’m going to go with no,
Tom Deans: I’m going to go with no, but take the cash. Thank you. There we have it, four generations, we start them. We involve our family.
Don’t get this wrong. It’s not like we think family businesses are toxic and ill conceived as a, as a concept. I quite the opposite. We use them as a training ground to teach our children about entrepreneurship. We teach them about the businesses that we have and then if they don’t want to risk capital.
And we’re going to talk about how they can raise money to buy family businesses and why they should do that later. But if our kids don’t want to do that, then we just, we don’t get all weepy. We sell them. And then in the fullness of time, we transfer our wealth via some really good family meetings, conversations, and estate planning.
So that is my story. I sold my father’s family business. The one that he founded, the plastic manufacturing business we sold on February 8th, 2007. Which cast your mind back is about 15 minutes before the world blew up in the great, the great recession started. We are incredibly fortunate. 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 six months of my life, but that being said, I served my time and, then they asked me to go home. I actually had a one-year contract, but after six months, really, there was really no need for me. and I’ll talk about that idea in a second as well.
They sent me home, I golfed every day for two weeks and did not move my handicap a single stroke. So I had to let go of the dream of joining the seniors tour. And I found myself sitting down one morning and writing like really early in the morning and around 11 o’clock in the morning, my, my wife popped her head into my home office and she said, what are you doing?
Every Family’s Business
And I said, “I think I’m writing a book” and I continued to type all afternoon, right? Till about three in the morning, that day 10,000 words. And most of those first 10,000 words made the editorial cut and formed the basis of every family’s business, which has gone on to sell over a million copies and become the best-selling family business book of all time.
And I can tell you that when I was typing that morning, if anyone had said, Hey, this book is going to be ‘the bomb’, I would have said that that’s insane. I’m just, I was really writing that book for my own edification. I really felt like I had something to say to myself, convince myself of, not readers. And, yeah, and the book was published and then I gave a speech which led to another speech and another one and another one and a thousand page speeches in 26 countries later.
Here I am joining you today on this. I think what is clearly undisputedly the world’s best family business podcast.
Russ Haworth: That’s very kind of you to say, so I couldn’t possibly comment, but very kind of you to say. So, there’s a couple of things that I want to pull out of what you’ve just said, prior to delving a little bit deeper into, to the main topic and just interested in when you said you woke up early one morning and went in and just started writing. It sounds as though that wasn’t you, weren’t going to do it. I’m going to, I’m going to write a book. I wonder what I could write about, was it just that there were all these thoughts flying around in your head? I need to get these out.
Tom Deans: Well, no question. First of all, I was really writing from a place of gratitude.
I mean, we had sold our business and so I remember six months after the sale, right. We’re on watching this calamity unfold and I’m thinking. Oh, my goodness, had we not sold, I would have been sitting there trying to run a business, just destroying value, feeling that shame and the guilt that was going along with that, which often goes along with that as family members who succeed and I’m thinking we have dodged a major bullet and I started to kind of really work through while I was writing.
Why it was that. You know, by any definition, we were a failed family business, three generations over and yet I didn’t feel like a failure. I swear to God, we have our first dollar from that pub that was sold, you know, back in the 1920s. And I thought, what do we do differently? Why, how will we been able to monetise these businesses close to the peak of their enterprise value?
but never get them into the hands of the next generation. And not like a failure. And that really was, that continues to this day to be the audacious contrarian and some would argue controversial idea that makes up every family’s business.
Success vs Succession
Russ Haworth: Yeah. And you touched on a really valid point there because there are.
Succession statistics that are thrown around are utilised often to scare family businesses, I think, and to make them think that the definition of success for a family business is its ability to pass from one generation to the next, in terms of ownership. And there are statistics around that, that, you know, 30 odd percent make it from first to second, 13 from second to third and 3% beyond that.
And it’s almost a stick to beat family businesses up with. Yet, what you’re talking about is technically in that successful failure box. Your selling of the business goes in that failure box, but actually as a family, you’re having those discussions about why that isn’t the best thing for you and as individuals, as a family, can you talk us through that process?
Tom Deans: We are having those conversations and the conversation about whether or not we should, this one should continue with family hands. It’s really centring around whether or not the next generation is prepared to continue year after year to borrow money, to buy stock shares voting shares in the family business and nothing votes, honestly, like money. It’s really easy for the next generation to go, Oh, mom and dad, I love this business. It is the best, best I want to continue your legacy. None of that costs them a pound. It doesn’t cost a dollar, so to feign interest, but when kids have to belly up to the bar and go to a bank and borrow money, take their savings, access, even family money, access their own inheritance to buy that business based on a third party valuation, no discounts.
That’s a completely different conversation. There’s a lot of family members who like their jobs, but they’re confusing and conflating ownership with employment. And it’s a big problem all around the world. It’s a big problem.
Russ Haworth: But there will be family business owners or people in the next generation who will be looking at this or listening and saying, but my mum or dad didn’t have to pay for the business.
So why should I have to?
My Parent’s didn’t have to buy it, why should I?
Tom Deans: Yes, exactly. And there’ll be mother and fathers who have, who have inherited or been gifted businesses who had just bristle at the idea of taking money from their children. In other words, let me, let me ask you, or kind of a rhetorical question. Have you ever inherited something from a grandparent and it doesn’t have to be a Rembrandt?
It doesn’t even have to be valuable, a watch, something, something of value. Yeah, I’ll bet you Russ, you didn’t take that thing down to the local pawn shop and sell it. What do we do with inherited items?
Russ Haworth: We treasure them.
Tom Deans: We treasure them. We clean them up. We put them in a safe place. We B we become stewards of those gifts.
We don’t change. We don’t pay debt. We don’t change the wristband on a watch. We keep it exactly the same way we got it for free. Now, let’s take that watch and call it a family business. When it’s been, when it’s been gifted, how do you sell a gift? If you’ve got a generation who is inherited a business from their parents, how do you sell a gift?
You don’t, you know what you do, you do? What family systems theorists say. You just continue to repeat family patterns. We give it, we gift the gift. And that is, that is why the poor survival rate of family businesses, because we often use these gifting strategies as an economic incentive to distort the true, the true, authentic desires of the next generation.
It is a perversion. It is a perversion of their true talents and their true desires.
Russ Haworth: If I’m listening to this as somebody who’s in the next gen, I might be thinking, I hope my parents don’t hear this because I was under the impression that yes, there would be complication. Yes. There would be a process to go through in order to take this business on.
But, but at the end of that, I would own the business that has been owned by my parents or my grandparents, whoever it is that’s gone before me, I would, would own that and continue that tradition. And now someone saying that, hold on a minute, you’ve got to dip your hand in your pocket.
Who Invited this Idiot?
Tom Deans: Yes. Now, here is the, you’re absolutely right when I’m giving a live speech and I’m I’m at this point in my speech, you can see the next gens in the audience are saying who invited this idiot.
And I hope my parents aren’t listening, but listen very carefully Russ, I am, and it’s in my book, I am a huge proponent. And you heard my story. So this lines up, I am a huge proponent of families transitioning cash. You’ve heard me say that when we didn’t want to buy our parents’ business, they were sold and then they transitioned cash.
They transitioned wealth and they actually transitioned well before they died. Like we don’t hoard our wealth through the years and die in our eighties and then open up the flood gates when people don’t need the money, we’re actually transitioning wealth all along. So when I’m, when I’m being asked by my parents, Hey, do you want to risk your capital to buy our family business?
Our plastics business? You have to remember. They’re also transitioning cash. They’re also, right. So they know that I’m in the bill. So the question really is rested. Do I want to return cash that I’ve been, that I’ve received as a living gift. Do I want to return that to my parents in exchange for voting shares, you see they’re taking money out of their operating business, either as a salary, dividend, a bonus, and they’re giving it.
To her, to my brother and myself. And then they’re saying now, do you want to buy the family business? And don’t tell us you don’t have money because we just gave you some. Listen, follow the money. The money never lies. That’s the kind of the, the, the great thing of, there’s a lot of challenging concepts around money, but that is not one of them money doesn’t want, don’t want to even risk the living gifts that they’re receiving from parents to purchase their business.
Guess what? They don’t want it. Why not find out now? Why do we have to find out that children really don’t want their parents’ business until after their parents have actually died? Why not find out now? Aren’t you curious?
Money has no Value until you swap it for something
Russ Haworth: Yeah. my background prior, prior to the work I now do with families, I was in the, financial planning and wealth management space.
And one of the conversations I used to have with people is that money has no value until you swap it for something. So your dollar or your pound in your pocket doesn’t actually have any value until you swap that for something. And so money then becomes an enabler and liquid cash, I guess, is what you’re saying.
Liquid cash is far more of an effective enabler than the value that’s tied up within a family business, because it’s easier to spend liquid cash and it is to spend the family business. So when you’re looking at what you want to get out of life, seeing your family business and your family wealth, your cash, whatever it is, as enablers to achieve what you want to achieve, you’ve got to look at, which is going to be the best at doing that.
Would that be a fair assumption on that?
Tom Deans: No, I think it really is Russ, so I think it’s a really great expression of what wealth is and what a family businesses. I mean, it’s often, we’re often led to believe, but can read. I mean, the vast majority of family business books, we’re led to believe that the real value and is, is the intrinsic value of a family business.
And that’s the legacy. And I come along and go no business owner. Your business is not your legacy. And imagine hearing that as a basil. I come along. I don’t know who they are. And I say your business, isn’t a legacy. That’s not who, what you’re going to be remembered for. I mean, let me ask to demonstrate that point.
So let me ask you a question. I’m going to put you on the spot.
Russ Haworth: I’m ready.
Tom Deans: Who was the founder of Coca-Cola?
Russ Haworth: I don’t know.
Tom Deans: Okay. Don’t feel bad when I’m in front of 500 business owners. You know what? I hear nothing. Crickets, no one knows no one even Googles it, but that’s not just, a company that is the third, most valuable consumer brand in the world.
And no one knows no one cares who the founder is. No one knows. I mean, it is a way of making the point. Now let’s imagine people listening to this have a restaurant. They’re a business owner. They’ve got a manufacturing company. I mean, they should listen. They should feel very proud of what they’ve created, but understand this.
This is not your legacy. Your legacy is your family. It’s your relationships. It’s, it’s the freedom and the space and the set of values of a love of commerce and a love of entrepreneurship and a love of risk-taking all of those stories that you pass on to the next generation. With the permission that they can go off and find the thing that they’re truly passionate about.
And it may be the family business, in which case they will buy it at full market value and pay out their brothers and sisters in real time. Right. Not have to go and lawyer up and fight in an open Court over these things. Right. I mean, I think the great legacies are the way in which we leave our assets, our businesses, our family homes, our cash.
And I think when we set up families to work well, when we’re not here, that is a legacy. It’s not a business.
Russ Haworth: Got it. And, what you’re saying makes sense from a logical perspective, because if you looked at it from, if this was somebody else telling somebody else what to do with their business, they would, well, of course you would sell it, but it’s different for my business because it’s my family business, its all the history, it’s all the emotion that’s tied up in the blood, sweat, and tears that have come to that and to ask my children to then buy that off me.
Doesn’t sit right. Is there a way that families can, presumably this isn’t a one-off conversation, it’s not, you know, parents sitting down and going, right. Either you buy it or we’re selling it tomorrow. This is a progression towards these types of outcomes. what did you do in your family that allowed those to become easier conversations?
Because we know that family businesses are full of emotion because of you’re in business with your family.
Tom Deans: Right. And I think if there’s one thing, if I look back into our own family culture and our repetitive use of family meetings, we had annual family meetings where we were, we, we looked at this issue and how it was going to transition.
Buying Shares in the Family Business
And just to give you an insight on how odd our family is, I was actually buying shares in my father’s plastic manufacturing business seven years before I joined as an employee. So the family meeting, he opened up his, his books and he said, look, this is, this is a really great investment. I’m getting an 18% return on invested capital.
Do you want to, do you want to buy in it? And here’s the, the current valuation I went, absolutely borrow some money, access some family money, bank money, traditional find some savings, bought some shares. The year later he issued a dividend. I took the dividend plus more savings, more bank debt, more act, more access, family money bought Marsha and Marsha.
After five consecutive years of buying shares in the family business and getting a great return. He put me on the board, my father put me on the board of directors. Two years later, he hired me as CEO. So think of it in our family. I’m a shareholder first. I’m a director. Second, I’m an employee. Third. We do it all backwards.
But what it’s doing is setting the stage that when I walk into that business, as the CEO, do you think I’m thinking, well, this is just the Tom Dean’s legacy project. All I got to do is kind of be a little bit underworked and overpaid for 20 years until my kids are old enough, because even the unborn in our family, we’ll be making plastics because that’s who we are.
We’re a plastic family. Are you kidding me? We are the antithesis of that. That’s my job to continue to create value in that business to continue to risk capital, to acquire 51% of the voting shares. At which point I would have definitive control. I would, then I was taught, be able to change the dividend policy, drain the retained earnings and retire my personal debt.
He taught me that. He taught me that. But in 2002, we pivoted, we could see that China was becoming a bigger challenge. We could see that in order for us to be a, I think a global company, we would have to raise hundreds of millions of dollars and to really scale. So the industry, not just our company, but the industry was at an inflection point, whether we had to get really big or sell.
And it was very clear. What, what, where the opportunity for me was, so I pivoted and I no longer wanted to buy shares in the family business. And at which point my father pivoted and said, well, I’m not going to sell to you. We’re going to sell to someone else. And it took us. So my father and I worked collaboratively, closely to really clean up that business to harvest and maximise the enterprise value.
So it took us five years. We sold on February 8, 2007.
The Importance of Family Meetings
Russ Haworth: And a takeaway from that from, from my perspective is. The fact that you were having deliberate meetings to have discussions about this. It wasn’t just something that was discussed around the table, you know, Thanksgiving or Christmas or whatever the occasion might be.
It was something where you’d set the time aside. And you were agreeing that those discussions were to be had, which again can remove some of the emotion and the directness out of those conversations because you don’t, you’re not being put on the spot and saying, Hey, do you fancy buying the business?
And you go, well, hang on “where’s this come from, we’ve never had this discussion before”.
Tom Deans: Oh, absolutely. I mean, I think time is a business owner’s best friend when it comes to succession planning, exit planning, transition planning, call it what you want, finding the end before the end finds you, call it what you want.
Every business owner, no one gets a free pass. Every single business owner on the planet who has built something and has value is going to have to figure out where it goes and to leave that conversation too late. To spring it on family. when they’re, when the business is big and everyone’s old and it’s, and they’ve not had those conversations, I mean, that’s just nearly impossible, but can you imagine the thousands of business owners, the thousands of business owners who died today around the world at their desk?
Okay. Without ever having these conversations, leaving, leaving a family to figure out whether or not they should continue to run a business or to sell it, to sell the legacy, to sell the honor to sell there. I mean, full of shame and disapproval, and a sense of public acknowledgement that they’ve failed.
That is, that is the opposite of legacy. I tell business all the time, if you don’t want to have this conversation, you will be remembered. Just not fondly. You will not be forgotten.
No-one will remember that business owner for the hard work and the risk-taking the beautiful business that they, that they built.
Russ Haworth: I guess as well, that the situation that can create is if you inherit the business with no plan with, with no discussion around it is too taboo, it’s too difficult to talk about what might happen on death or passing this business on or selling it, whatever those options might be. It’s the generation below the current, owners feel their options are restricted because they think, well, it was obvious.
They didn’t want to sell the business. Otherwise they would have done it. Therefore we’ve got to keep it going because it’s what they would have wanted, but they’re kind of guessing it could be that they didn’t want to have the conversation of, I really just think we should sell this thing and use the money to do something else.
And it’s that second guessing that creates a lot of challenges as well.
Tom Deans: Well, I think most people would be shocked at how quickly a family business will devalue itself. When it is left at the estate to children who are full of, of indifference. I mean, it doesn’t take years to destroy these businesses. It doesn’t take months.
It takes weeks because you know what happens after the death of a founder key employees look around and go “this is going to be a complete disaster” they leave key employees, leave key shareholders leave, minority shareholders leave, customers leave, suppliers get nervous. I mean, you want to know that, you know, a little insight on that tragic succession planning statistic, we all heard right.
Silence is the Great Destroyer of Family Businesses
30% survive to the second generation. 3% survive to the third point that’s what’s behind this is. Listen, I have the favourite. My favourite line in the, in the book is silence is the great destroyer of family businesses. It’s not families that talk. Its families that wrap the, the transition of the voting shares in total and utter silence.
Right or what they confuse succession planning with. They go business owners. Tell me all the time. Oh, I’m doing lots of succession planning. My children who were in the business, I started them off in, in the, in the warehouse and now I moved them into sales and next, next year on moving them into administration and then into a leadership, I’m going, what, what, what are you talking about?
That’s called management succession planning. That’s that’s not that’s that’s easy about who gets your voting shares. When, how all at once, a little bit at a time, are you going to sell to your kids or are you going to sell to your, to your employees? Are you going to sell it to a strategic buyer? Are you going to sell to a private equity firm?
There’s no, there’s no one is inventing new ways to exit the business. There’s only a limited number of options. And I think that really smart business owners, family business owners understand that it’s their job to find the end of their business before the end finds them. And, and to really harvest the wealth from the business and transition it to family.
I mean, Russ, have you ever met a family member who inherited cash? Who’s been disappointed?
Cash is the ultimate expression of trust. We don’t leave cash to random strangers. We leave it to the people we trust the most who are going to deploy that cash and do something interesting and productive with it.
So while we don’t leave cash and we leave, I don’t know, an operating family business without any prior discussion of what that looks like. That is not a legacy. That is the opposite of freedom and trust and respect. That is, that is someone trying to control their family from the grave, someone trying to manage their, the perpetuity of their so-called legacy from the grave.
It doesn’t work.
Building Trust Across Generations
Russ Haworth: What you’ve just said there though, that there will be, again, there may be people that are listening to this at the moment they might be in a position where they don’t necessarily trust their children with what to do with cash, if it was cash that was generated. and I think I know the answer to this, but I’ll present the question anyway, in the sense of.
What should those people be doing? If they don’t feel like there is a level of trust there to just be able to pass this cash on. But because it, there is easier not to do anything. And there’s two reasons why one is it can create conflict. And if people don’t like that conflict, then that they’ll avoid it.
And two business owners are immortal. So it’s not something they have to deal with now because they’re going to live forever until they don’t. And so it’s something that it’s too difficult and there’s, there’s a misconception that there’s loads of time to, to deal with it. So if they’re in that situation, what would you suggest they do?
Tom Deans: Well, I think the very first thing they should understand is that a dollar is a dollar is a dollar that sits in a corporation has retained earnings as equity. Versus a dollar that they take out as a, as a salary or bonus or dividend and give to their child. It’s still the dollar. I don’t understand why some people go, ah, I’m very reluctant to give our children cash.
I think I’ll just leave them a beautiful operating business instead. It’s the same dollar, except one comes with a lot of explosion. Like a lot of explosive material wrapped around it. I mean, a lot of people think, well, I feel more comfortable leaving my operating business cause the kids are going to have to get out of bed in the morning.
They have to go to a place of business and work. Well, that is a poor reason, you know, and I know that what the, what, the element that creates wealth and successful businesses is drive, ambition. You know, someone has got their own ideas, lust for change and innovation. I mean, that’s what propels businesses.
Multi-generational businesses forward. Not legacy. The idea that’s my job. My father was a butcher, you know, grandfather was a butcher. I’m going to be a boy or even the unborn in our family will be butchers. That’s all we’ll ever be are butchers. Like what a dispiriting suffocating idea.
Separating Ownership from Employment
Russ Haworth: I guess what, we’re not saying that if that is what drives you that there’s, there’s no reason to, to stop doing that. But, but again, I think one of the things we’ve touched on, there’s two things I want to go back to that, that you’ve mentioned so far. One is separating out ownership and employment. And I think that is really, really important because they are two very different, distinct things.
They come with different responsibilities, they come with different benefits. And so separating that out is a really important task when we’re having these conversations. The second point then linked to that was when you started buying shares in your family business. Was that only ever an ownership decision rather than, well, that’s my route into an employment role?
What were the two linked or did that come at a different time?
Tom Deans: Oh, they were good. That decision to buy that those, those shares was always about making money. Got it. Oh yeah. No, that was no. If there’s one thing we do really, really well in our, in our family is to separate out the idea. Like I knew that even when I was joining that business, after having bought shares for seven consecutive years, I knew that that business was actually in play and for sale on the open market.
Even though that I was buying the shares and moving towards 51% definitive control, it was still, in fact, if I deferred, the more I ran the risk that it would actually be sold to someone else. So it was actually, you know, in our family, it’s all about keeping, you know, keeping the owner’s feet to the fire.
I mean, if I really wanted it, the only way to take that business off the market was to get to 51%. So now really it was not a path. It was not a path to employment. what I would say is that there is something that I often see alive and well, and it happens really innocently early on in family businesses.
Often children are the first unpaid employees working in a family business. When that gets old, they often complain about their salary or their compensation. And, and then the parents often make a critical mistake. They say, Oh, relax, don’t worry, one day all this will be yours. You see what just happened? The owners, the founder conflated employment income with, with equity.
What is Sweat Equity?
Oh, we know that you’re working much harder than other non-family employees and doing things that they would never do. And you’re, and, but you know what, that’s, you’re building sweat equity in the business. Really? Do you know, any accountant who can offer a good legal definition of what sweat equity is?
It is, it is a manmade artificial fantasy concept. It does not exist in the real world when people are paid with sweat equity. I hear that all the time. my parents should give me the business because I have earned sweat equity,
Russ Haworth: but there will be those that will say, and I completely take on board the argument right around the compensation that they get is affectively deferred. It’s rolled up and it’s rolled up into this corporate entity that one day that they’ll inherit sometimes whether they want to or not, well, I haven’t even got to that bit of that conversation yet, but again, in terms of the alternative to that, what are you saying should be the case?
Because there, I can’t imagine there are many family businesses out there where the kids haven’t worked for free or pocket money for over the summer during the school holidays, during, you know, festive seasons where, where there’s no childcare.
So you have to go and work in the business, what’s the alternative to that sweat equity argument of, well, hang on, I’ve worked from when I was 14, I was sweeping the floors or, doing the admin work in the summer holidays. I’m owed ownership in this business.
Tom Deans: Yeah. So first of all, mom and dad, there should be no free labour.
I mean, if you really want to teach your children about the importance of hard work, then pay them a market wage, pay them what that, what that job deserves. I mean, those kids, even as summer jobs, I worked in our manufacturing operation as a student in the summer, I had a job description and I got paid what the other people doing that work with similar value were paid. So there was no shortcuts. and if mom and dad, you don’t have free cash to pay your children who are working hard, then pay them in stock, pay them in stock that represents the value of that work, but let them know that they’re being paid for their work.
The problem is when we, when we don’t pay our children and we promise them ownership in lieu at some 20, 30, 40 years down the road, when they get there, this is via the estate. The reality is, very seldom are people going to get that calculation? Right? Most families hoard their wealth, their personal net worth in their operating business.
And if not all the children are in that business and the kids outside the business are going to think that the child in the business, this is going to get a jump on the family wealth. Right. We’re setting our family up, not to succeed, but actually deflect because, because we, we broke some golden rules and we treat our family like family and not like other employees and conflate ownership with self. it is a big, big problem.
Do you have a Will?
Now take layer on top of that, the problem, I mean, in the UK, do you know there’s 27 million people in the UK who don’t even have a legal will. Do you know that half of all business owners in the UK don’t have a will?
Russ Haworth: It’s a massive problem. Huge problem.
Tom Deans: It is a massive problem, so when, of course they die, you know, your government has a as a, as a funding amount for dividing family assets, and they’re going to thrust brothers and sisters into business together as equal partners, even though maybe only one is in the business.
Now, how do you think that goes? What do you think the children now I’m and dad just died. What do you think? The children outside the family business want from their brother? Who’s running the family business. I’ll give you one more hint it rhymes with funny.
Russ Haworth: Yeah. And it’s not honey.
Tom Deans: If it is not sweet, it is disastrous and they want quick and they have an inflated idea of what that business is worth.
And if they don’t get the cheque real quick, what do they want? What do they do? They lawyer up, you think divorce is expensive in the UK. You want to see what families fighting over a family business looks like what? Their legally,
Russ Haworth: yeah. But, but that highlights a really interesting point because the parents are in a certain situation.
So if we take that scenario where you’ve got a family business, let’s say, mom and dad are running it and you’ve got two siblings, one within the business, one outside the business. Now the parents might be thinking, well, the best thing to do here is ideally on what we’ve spoken about today is you sell the business to the person who is working within it.
And then you can potentially use some of that cash that you’ve realised from that sale to pass on via estate planning and inheritance planning to the family member. Who’s not within that family business. So that creates that, equity between the two siblings, but the temptation, I think what tends to be the focus for people who are in that situation is we need to find a way to split this business 50:50. That’s going to be quite tough either. We won’t do it or we’ll leave it until we die or whatever. And it just, it perpetuates that situation. But it’s also causing angst for the parents during their lifetime. And then they’re passing the angst down to the children because they then got to deal with it after they’ve passed on anyway.
What is your Legacy?
Tom Deans: Yes, it’s still, the legacy is not the business. The legacy is anxiety. The legacy is, next gens who lacked the confidence to be founders themselves. The legacy is chaos. The legacy is broken families. And I think if you take the flip side of that, which is a family business, mom and dad who meet with their children and their advisors annually, with a formal agenda and work through these issues in a transparent way, sending the signal to the child outside the business affairs that their brother or sister is buying the business at full market value. And that the plan is to have the will divide the assets on death. I mean, that is the child in the business, ultimately is going to get 50% of their money back and the child outside the business is going to get more cash.
Now excuse me, how that is a bad, a bad or unfair or on equal solution? The real gift is actually the transparency. The gift is the certainty and the clarity and the transparency that goes with those family meetings.
Because in a family meeting, everyone hears the same thing, at the same time, as opposed to the children, outside the business, making assumptions about their brother or sister, having a front row seat and getting a jump on the money and then moving that are wondering why their kids don’t get along. It’s like, come on.
Russ Haworth: And again, it’s a self, like a, an upward spiral in terms of the, the positiveness that comes from those types of conversations, because let’s assume scenario a) none of those conversations are happening. So what was happening in the relationships between those siblings and those parents is a lot of assumption.
There’s a lot of assumption, a lot of feeling that has been driven off the back of that assumption. And a lot of that can be very uncomfortable. Compared to the conversations that would be happening, where there is clarity. Now it might not be that they like the outcome of that, but at least they are not making assumptions on it.
And it is something to deal with rather than something to ruminate on and make your own mind up on. Is that, is that fair?
Tom Deans: I would agree. I think if you go right back to the, you know, where I started and understand that a business is not a legacy, that the legacy is actually, the next generation, our children who are free thinking competent, hardworking risk-taker entrepreneurs.
Businesses Don’t Last
I mean, that’s a brilliant legacy. I mean, when you sit back and consider that of the 100 largest firms in America in the year 1900, only 16 were still in business in the year 2000. Here’s part of my other message. Businesses don’t last. And there is a small industry that has been set up to perpetuate things that have no, no, no scientific, no clear data to show that they actually will. In fact, they don’t. In fact, you can fly to Vegas and get better odds playing roulette. In fact, the drinks are free.
We’ve got family members who are trying to pursue the wrong metric. It’s not the longevity of a business. The far more interesting question is really sitting down with your children and exploring where your business is in its life cycle.
It’s somewhere. It’s not at the beginning. That was the day you incorporated is that the middle near the end, but every single business on the planet has a beginning, middle and end. And I think if you look at the most successful dynastic families, they do a really good job of finding their exit. They know when to start businesses when to scale businesses, but they also know when to get the hell out of Dodge.
They know how to get out and when to get out. And when they do, they don’t get all weepy and, and view themselves as failures. You know what they do. They give each other a pat on the back and go. That was pretty clever. Now what’s next? Maybe not, maybe not horse-drawn buggies, but maybe we should invest in this crazy thing called the automobile.
Do you know Russ? If all we do is imagine that our children should be some kind of version of ourselves, which is often what we’re asking them to be when they continue the family business. We’d never have the Ford motor company because Henry Ford’s father was a farmer. So was Henry Ford and his father a failed family business because he didn’t continue the family farm.
Steve jobs, father ran a restaurant. Yeah, bill Gates father was a lawyer or they failed family firms.
Russ Haworth: I think that the interesting point going back a little bit to something you said around, sweat equity. And the, drawing of money out of the business. If we take two scenarios again, so we’ve got scenario one, somebody is working within that business and they’re not getting paid either the market rate or, or not at all.
And there’s this kind of hope or perhaps promising however many 50 years time at that stage that there might be some equity for you that that’s kind of. Informal, no real structure to it, no real guarantee on any of it that it’s an option, but it’s perhaps what we’re suggesting today is not the best option compared to say, let’s pay them one pound.
And I know that’s below minimum wage and all that kind of stuff, but for the ease of my maths, that’s one pound. So that’s one pound of value. That’s come out of the business and gone into the ownership of that child. And then what I think has been suggested, you had those conversations about what do you want to do with that pound?
You can only Spend a Pound Once
You can only spend that pound once. Do you want to spend that pound back on buying equity within the business, in which case you’ve got value, but it’s caught up within the business or do you want to spend that pound doing something else? And, and that is a conversation that is then repeated. So you’ve not just made a decision once and that’s it done, it’s repeated to make sure it is in everybody’s interest at all times. And that everybody is aware of where everybody is.
Tom Deans: I like it. I could live with all of that, that, that aligns beautifully. I mean, compare and contrast that to the model where, kids working in a family business are paid a salary it’s commensurate with their work and with other employees, and then they get bonuses.
They get given gifted shares by mom and dad. And even they do this to key employees as well. And I challenged business owners all the time. I’m like, why are you doing that? And they go, well, if our children and key employees own shares, they will think and act like owners. And I go, no, they won’t. I’ll tell you what will make them think and act like owners.
It’s the debt associated with those shares. If the debt that will keep them up at night, thinking about how to improve that business, the products or services, if that nine feeling in their stomach, that they won’t be able to repay that debt because the business fails that’s that is, it is not free shares that made people think and act like an owner.
gifting. What’s the title of today’s talk? Gifting is at the core at the center of the wealth destruction at the poor success rate of family businesses give cash all day long to your children and ask them if they want to redeploy it and buy that family from, you know, what happens Russ. Most of them don’t got it.
Most of them have other ideas as well. As well they should. If you look at the life cycle of businesses, most firms simply do not last. So we often have business owners turning to their most trusted advisor, which in the US and Canada is often the accountant or the solicitor. And the reality is, Russ if the family business gets sold and you’re the accountant and you’re the solicitor, what happens to the file,
Russ Haworth: You don’t get it anymore.
Tom Deans: You don’t get it. So you have no idea bias, built into succession planning all around the world. And I’m not painting a nefarious plot by lawyers and accountants and it’s to destroy families and their wealth. Quite, I mean there are all these professionals are often completely unaware of their biases.
And so what I do, I came along and write this book and go, Oh no, no, no, no, no. Now hang on a second. Hang on a second. What if, what if the real goal of succession planning is to harvest the wealth in your business and to transition wealth to the next generation, along with the responsibility and the accountability to take that inherited wealth and deploy it and start the business that is, that is earlier on in its life cycle and something that is more aligned with their own passion skills.
Russ Haworth: And I think, often as soon as you sort of mentioned, we are a family business, there is an assumption that everybody just wants that to continue. And it, it drives that conversation down that route and nobody really stops and goes. What do you, what do you want to do? I mean, we, we’re going through this process.
We’re spending thousands of pounds or thousands of dollars on a process. That’s coming up with this beautiful structure and this perfectly logical way of doing this, you know, changing ownership and all that kind of stuff. And nobody’s sat down until it’s time to sign a bit of paper and go, is this actually what you want?
What does Ownership mean to you?
Do you want to own this? What does ownership mean to you? Does it mean you can do what you want to do with your life, or is it going to shackle you to something that you don’t really love as much as, as your parents or grandparents will have done?
Tom Deans: I think in the most, I think unhealthy and distorted example a story that I can share a family, a founder actually gifted his shares in his manufacturing business, to his son who was running the business and had been running it for a number of years and no centre didn’t get the shares.
There was an unsolicited offer for that business and the son took it and sold it!
Yeah, there was only one real business owner in the room. And that was the son. I mean, he understood what a business is. It’s not a pet, it’s not a family trinket. So it’s an instrument of wealth creation that goes up in value or down in value. I mean, we’re in the middle of a global pandemic. We only have to look around what’s happening now to see what a business is.
There’s nothing on the balance sheet that says legacy or family or community. It is, this is real life stuff. And I’ll tell you, the business owners that struggled the most with my message are the ones that I’ve had like 10, 20, 30 years of uninterrupted awesomeness. Growth, spitting out all sorts of cash and they think they’re actually magical unicorns that are exempt from the laws and the specifics of the market conditions.
And I say, stick around buddy, stick around because I don’t know what’s going to happen to your business, but something like, I don’t mean fires and floods. I’m talking about pandemics things that come along that we don’t even imagine that just rip the roof and the value out of a family business. That’s pursuing its perpetuity.
It is tragic.
How to avoid the pitfalls of Gifting a Business
Russ Haworth: I’m, I’m conscious of our time and I, I have a feeling you and I could continue to talk about this for, for a lot longer, and I I’m really enjoying the conversation. we we’ve spoken about lots of different pitfalls of certain routes that that families can follow.
And we’ve touched on some of the solutions, but perhaps now focusing a little bit more on what you would see as. A solution to a lot of these difficult conversations and perhaps challenging assumptions and perhaps challenging what they’re being told elsewhere. How would you suggest families go about doing that?
Tom Deans: Well, first of all, I would say, don’t go about doing this on your own. This is not a do it yourself project like renovating your kitchen. this is, there are so many moving parts. So many entrepreneurs listening to this are thinking, well, this is just kind of one more business problem. I’ll just read about it and then set up, set off and go implement my solution.
This is the most challenging issue on the planet, right? Getting out of a business is emotional. It’s technical, it’s rife full of emotion. You need to be persuasive with your family and your key employees. You need to, Oh my gosh. There are so many moving parts. The business owner cannot accomplish this on their own.
So reach out, get some help. Second of all. Understand that the sale of a business to a family member or to an outside party is not a public acknowledgement of failure. It is the high water mark of success. Remember revisit the, the very first idea you had about why you started a business. It wasn’t to make this intangible thing called legacy.
It was actually to make that really tangible thing called money. So just because you have made money doesn’t mean that now you shift you move the goalposts and redefine what a business is. It is always an instrument of create creating wealth, nothing more, nothing less. Don’t forget that, especially when you’re contemplating what your real legacy is.
It’s not your business. It is your family and the relationships that you leave behind, do a good job of it. You’ll be remembered fondly, mess it up or even worse, defer and do nothing. That is, that is what you’ll be remembered for. You. You’ll be remembered for the business owner who couldn’t do his last deal.
Russ Haworth: So, where would the audience, find out more about you, Tom?
Tom Deans: Yeah, absolutely. So the best place to get the book, is, is right up my website because the shipping is free. So, so I’m like Amazon, which are often sold. I just go to the website. Shipping is free there. If you’re an advisor who want to use this book to help business owners, that’s really why, like, you know, I’m not a consultant.
You heard me. but really I wrote this book for practitioners to share with business owners so that they can just start really some of the most fascinating questions, conversations. So go to the website, the title of the book Every Family’s Business and at www.everyfamilysbusiness.com and it’s, it’s there, you can just purchase right off the website, shipping tree.
Russ Haworth: Fantastic. And we will provide links in the show notes, for that. I’m sure there’ll be lots of people who may have had their thoughts provoked on, on this, conversation. I think that was, was always the intention. w when we set out, on this, on this episode, so thank you very much for your time for your insights and, I look forward to speaking to you again soon.
Tom Deans: Well, thanks for having me, Russ. You’re a knowledgeable host and I enjoy your podcast. Thank you.
Russ Haworth: Thank you.