A staggering 90% of all US and Canadian businesses are family owned and according to the US Federal Reserve, over the next 30 years an unprecedented number of these 22 million family businesses worth more than $10 trillion will transfer when the owners retire or die. According to a recent government report, 70% of Business owners intend to retire in the next 10 years. But there is a catch and the stakes are high. [1]
The last 20 years has produced smaller families and better educated children who followed their passions outside of the family business. How will these factors conspire to affect the $10 trillion dollars of family business wealth that will transfer? The answer lies in how many business owners will have the wisdom, introspection and self awareness, supported similarly by their advisors, to pass wealth instead of an operating business to their family? The business succession landscape has changed dramatically over the last decade and clever business owners understand that the traditional estate freeze will seldom work long term to keep businesses moving forward in their family’s hands. Mounting evidence of the perils of gifting an operating business to family –which is precisely what takes place in a tradi-tional estate freeze -- is the subject of increasing business owner antipathy.
In my bestselling book Every Family’s Business I have developed a simple tool – 12 straight forward question for business owners to kick start their own thinking and conversation with their family to help plan the future of the business. The book was born out of my own experience working in and ultimately selling our large family owned manufacturing company. The questions are the ones adopted by three generations of my family who have founded and sold three businesses for more than $100 million. My family lineage is made up of three generations of serial entrepreneurs who have used the questions to find the end of our businesses before the end finds us – something inevitable in every business. The legacy we pass to the succeeding generation is never an operating business -- we pass wealth, opportunity, knowledge and values. But most of all we pass a love of business, a love of commerce -- it is a somewhat counter-intuitive approach to building a legacy.
I wrote the book because I believe business owners don’t always get balanced advice from the professionals that touch and shape an owner’s thoughts on succession. The hard-wired instinct of a business founder to preserve and perpetuate a business in family hands has always aligned itself nicely with professionals happy to facilitate continuity of ownership through maneuvers like estate freezes. But so much has changed -- too many business owners have gathered their own anecdotal evidence pointing to the perils of gifting an operating business. The evidence of succession planning gone awry is on the main street of every town, in every industrial park and in the country club chatter about another failed family business. The penny dropped about decade ago when business owners in increasing numbers began to see that with globalization the next generation ought to love taking risk and parting with the past because nothing short of a revolutionary remake of the business, its products and ways of selling could keep it afloat.
We know it’s increasingly tough to find family members working inside businesses and the ones that are, often struggle to think and act like owners. That is to say think and act like real owners – individuals who are willing to risk their own capital to authenticate their ownership in the family business –you know the old-fashioned way like founders did and do every day in this country by going to a financial institution and offering personal collateral in return for financing. Every business owner confronted with their dwindling succession options, dwindling retirement funds outside their business, are desperate to hear from their advisors that it is not only okay to sell their business, but that selling is the key to protecting wealth and family relationships. The sale option includes selling to family – includes family enjoying first and last look at all offers for the business. This first and last look at in-coming offers is different from a family member receiving a discount on stock. Whenever market forces are subjugated in the name of perpetuating the family business, the seeds of wealth destruction are planted and watered every day with love. Business owners know the time is right to think about wealth and their life’s work in a profoundly new way.
BEGINNING THE DISCUSSION:
If silence is the great destroyer of business wealth, the question of how and who can get business owners thinking and talking about all of their succession options remains a worthwhile question. Accounting and legal professionals adept an engaging business owners at an emotional level, in a way that informs and pays homage to the powerful pull of legacy, will dominate this rapidly growing market for independent business succession planning advice. Few professionals that advise entrepreneurial firms are better positioned than accountants to offer succession solutions that go beyond the one trick pony of estate freezes. Attempting to design effective tax strategies for business owners who lack an effective methodology to arrive at their own “family-made” succession plan is seldom successful. Only once a family has openly discussed and achieved clarity with respect to whom and when control of the company’s voting stock will transfer, can an informed discussion of the appropriate tax strategy be discussed. Too often the tax cart is put before the ox. Far too often estate freezes are put in place as the holy grail of succession planning and later un-wound at great expense with business owners fuming over the paucity of independent advice that weighed into the decision in the first place.
SELLING THE BUSINESS:
For professionals, broaching the question with an owner about selling their business, especially when other family members are working in the business, can often feel like showing up uninvited to a client’s Thanksgiving dinner without a bottle of wine. Yet, accountants and lawyers who can navigate their way through this one tricky question, the question of “future control,” can begin a thoughtful discussion of an array of tax efficient structures. In particular, a discussion can be had of tax strategies that provide sufficient retirement income for an owner after their business has been sold and tax efficient estate transfers to surviving family.
Buy-sell agreements are popular planning tools used by business owners to determine who, when and how much their business will be sold in the event of incapacitation or death or simply on a predetermined date. Increasingly, if succession planning is done well, it is not only an exercise reserved for aging business owners, but a strategic exercise for business owners of all ages to ask the poignant question “in whose hands will my business assets create more value”. It is this new brand of business succession planning that puts wealth protection on an equal footing with wealth accumulation and tax planning. It’s a succession planning approach that puts an end to legacy narrowly defined as the “longevity” of a firm.
CREATIVE DESTRUCTION:
Never has a CEO of a widely held non-family business been compensated for maintaining ownership continuity or longevity– it’s always been about creating shareholder value. But across the street at Family Inc, too many advisors continue to pander to the delicate egos of business founders by peddling the dream of a multi-generational dynasty. It’s old, and business owners know it. Owners are desperate for permission to exercise their intuition that tells them knowing when to exit a business is as important as knowing when to start or invest in one. This permission to sell is especially welcomed where family are working in the business. Too often founders invite their family into a business and paint themselves into a corner –selling the family business is often made to feel like selling the family. The good news is that there is a way out for all –one that protects wealth and keeps relationships on track –a method that celebrates the art of commerce and the power of family to protect hard earned wealth.
This way out involves the controlling shareholder offering the business for sale to family while at the same time putting in place special compensation for family members to help sell the business. When children working in a business can make money either by buying the controlling interest in the business at market value or help sell it to a third party, a family aligns its economic interests and gets everyone pulling in the same direction. The family itself becomes the goal of succession not the business. This is precisely how the great business families have made and protected their wealth – creative destruction trumping the wealth destroying idea of perpetuating a business before it moves past its freshness date.
A MORE COMPELLING VISION OF LEGACY:
Alternatively, effective advisors can become skilled at not providing answers to business owners but rather offering the right questions and in the right order. Leading a business owner and their family through a collaborative process that celebrates the inevitable transfer of control of a business through its sale is the secret. The sale of the business to someone -- if not to family then to someone else, becomes an open discussion item. The “sale” becomes the goal of succession rather than the issue that family dances around or worse, leaves unaddressed, never -discussed. Business owners who plan and execute their last deal will always be remembered for their introspection and love of the only truly sustainable gift -- family. Every business has a beginning middle and end, so why not celebrate the inevitable by planning for the inevitable by driving to the finish line with passion and flare. A business owner’s last deal is usually his biggest deal – her hardest deal – done well it provides the succeeding generation with a reminder that there is a rhythm to business, a rhythm to family. But most of all, selling a business should be a celebration of hard work and risk taking. It should offer a warm reminder that the future of the next family business will be born from the wisdom of great founders who believe in the extraordinary and sustaining power of creative destruction. Founders know the truth about risk and reward. When children are gifted operating businesses they are denied the opportunity to experience that which makes founders truly and authentically great. When children working in or outside a family business refuse to risk their capital to buy the business they are rendering a vote on their capacity to generate earnings and rendering a vote on the business itself to make money. Children can and should evaluate where the business is in its life cycle and answer the most important question any business owner should ask –“in whose hands will these assets create more value”? Skip this questions and all bets are off. This is the exciting new way of celebrating the family in business and it’s bringing peace and good fortune to families around the world.
The last 20 years has produced smaller families and better educated children who followed their passions outside of the family business. How will these factors conspire to affect the $10 trillion dollars of family business wealth that will transfer? The answer lies in how many business owners will have the wisdom, introspection and self awareness, supported similarly by their advisors, to pass wealth instead of an operating business to their family? The business succession landscape has changed dramatically over the last decade and clever business owners understand that the traditional estate freeze will seldom work long term to keep businesses moving forward in their family’s hands. Mounting evidence of the perils of gifting an operating business to family –which is precisely what takes place in a tradi-tional estate freeze -- is the subject of increasing business owner antipathy.
In my bestselling book Every Family’s Business I have developed a simple tool – 12 straight forward question for business owners to kick start their own thinking and conversation with their family to help plan the future of the business. The book was born out of my own experience working in and ultimately selling our large family owned manufacturing company. The questions are the ones adopted by three generations of my family who have founded and sold three businesses for more than $100 million. My family lineage is made up of three generations of serial entrepreneurs who have used the questions to find the end of our businesses before the end finds us – something inevitable in every business. The legacy we pass to the succeeding generation is never an operating business -- we pass wealth, opportunity, knowledge and values. But most of all we pass a love of business, a love of commerce -- it is a somewhat counter-intuitive approach to building a legacy.
I wrote the book because I believe business owners don’t always get balanced advice from the professionals that touch and shape an owner’s thoughts on succession. The hard-wired instinct of a business founder to preserve and perpetuate a business in family hands has always aligned itself nicely with professionals happy to facilitate continuity of ownership through maneuvers like estate freezes. But so much has changed -- too many business owners have gathered their own anecdotal evidence pointing to the perils of gifting an operating business. The evidence of succession planning gone awry is on the main street of every town, in every industrial park and in the country club chatter about another failed family business. The penny dropped about decade ago when business owners in increasing numbers began to see that with globalization the next generation ought to love taking risk and parting with the past because nothing short of a revolutionary remake of the business, its products and ways of selling could keep it afloat.
We know it’s increasingly tough to find family members working inside businesses and the ones that are, often struggle to think and act like owners. That is to say think and act like real owners – individuals who are willing to risk their own capital to authenticate their ownership in the family business –you know the old-fashioned way like founders did and do every day in this country by going to a financial institution and offering personal collateral in return for financing. Every business owner confronted with their dwindling succession options, dwindling retirement funds outside their business, are desperate to hear from their advisors that it is not only okay to sell their business, but that selling is the key to protecting wealth and family relationships. The sale option includes selling to family – includes family enjoying first and last look at all offers for the business. This first and last look at in-coming offers is different from a family member receiving a discount on stock. Whenever market forces are subjugated in the name of perpetuating the family business, the seeds of wealth destruction are planted and watered every day with love. Business owners know the time is right to think about wealth and their life’s work in a profoundly new way.
BEGINNING THE DISCUSSION:
If silence is the great destroyer of business wealth, the question of how and who can get business owners thinking and talking about all of their succession options remains a worthwhile question. Accounting and legal professionals adept an engaging business owners at an emotional level, in a way that informs and pays homage to the powerful pull of legacy, will dominate this rapidly growing market for independent business succession planning advice. Few professionals that advise entrepreneurial firms are better positioned than accountants to offer succession solutions that go beyond the one trick pony of estate freezes. Attempting to design effective tax strategies for business owners who lack an effective methodology to arrive at their own “family-made” succession plan is seldom successful. Only once a family has openly discussed and achieved clarity with respect to whom and when control of the company’s voting stock will transfer, can an informed discussion of the appropriate tax strategy be discussed. Too often the tax cart is put before the ox. Far too often estate freezes are put in place as the holy grail of succession planning and later un-wound at great expense with business owners fuming over the paucity of independent advice that weighed into the decision in the first place.
SELLING THE BUSINESS:
For professionals, broaching the question with an owner about selling their business, especially when other family members are working in the business, can often feel like showing up uninvited to a client’s Thanksgiving dinner without a bottle of wine. Yet, accountants and lawyers who can navigate their way through this one tricky question, the question of “future control,” can begin a thoughtful discussion of an array of tax efficient structures. In particular, a discussion can be had of tax strategies that provide sufficient retirement income for an owner after their business has been sold and tax efficient estate transfers to surviving family.
Buy-sell agreements are popular planning tools used by business owners to determine who, when and how much their business will be sold in the event of incapacitation or death or simply on a predetermined date. Increasingly, if succession planning is done well, it is not only an exercise reserved for aging business owners, but a strategic exercise for business owners of all ages to ask the poignant question “in whose hands will my business assets create more value”. It is this new brand of business succession planning that puts wealth protection on an equal footing with wealth accumulation and tax planning. It’s a succession planning approach that puts an end to legacy narrowly defined as the “longevity” of a firm.
CREATIVE DESTRUCTION:
Never has a CEO of a widely held non-family business been compensated for maintaining ownership continuity or longevity– it’s always been about creating shareholder value. But across the street at Family Inc, too many advisors continue to pander to the delicate egos of business founders by peddling the dream of a multi-generational dynasty. It’s old, and business owners know it. Owners are desperate for permission to exercise their intuition that tells them knowing when to exit a business is as important as knowing when to start or invest in one. This permission to sell is especially welcomed where family are working in the business. Too often founders invite their family into a business and paint themselves into a corner –selling the family business is often made to feel like selling the family. The good news is that there is a way out for all –one that protects wealth and keeps relationships on track –a method that celebrates the art of commerce and the power of family to protect hard earned wealth.
This way out involves the controlling shareholder offering the business for sale to family while at the same time putting in place special compensation for family members to help sell the business. When children working in a business can make money either by buying the controlling interest in the business at market value or help sell it to a third party, a family aligns its economic interests and gets everyone pulling in the same direction. The family itself becomes the goal of succession not the business. This is precisely how the great business families have made and protected their wealth – creative destruction trumping the wealth destroying idea of perpetuating a business before it moves past its freshness date.
A MORE COMPELLING VISION OF LEGACY:
Alternatively, effective advisors can become skilled at not providing answers to business owners but rather offering the right questions and in the right order. Leading a business owner and their family through a collaborative process that celebrates the inevitable transfer of control of a business through its sale is the secret. The sale of the business to someone -- if not to family then to someone else, becomes an open discussion item. The “sale” becomes the goal of succession rather than the issue that family dances around or worse, leaves unaddressed, never -discussed. Business owners who plan and execute their last deal will always be remembered for their introspection and love of the only truly sustainable gift -- family. Every business has a beginning middle and end, so why not celebrate the inevitable by planning for the inevitable by driving to the finish line with passion and flare. A business owner’s last deal is usually his biggest deal – her hardest deal – done well it provides the succeeding generation with a reminder that there is a rhythm to business, a rhythm to family. But most of all, selling a business should be a celebration of hard work and risk taking. It should offer a warm reminder that the future of the next family business will be born from the wisdom of great founders who believe in the extraordinary and sustaining power of creative destruction. Founders know the truth about risk and reward. When children are gifted operating businesses they are denied the opportunity to experience that which makes founders truly and authentically great. When children working in or outside a family business refuse to risk their capital to buy the business they are rendering a vote on their capacity to generate earnings and rendering a vote on the business itself to make money. Children can and should evaluate where the business is in its life cycle and answer the most important question any business owner should ask –“in whose hands will these assets create more value”? Skip this questions and all bets are off. This is the exciting new way of celebrating the family in business and it’s bringing peace and good fortune to families around the world.
Tom Deans -
Bestselling, International Author: ‘Every Family's Business:
12 Common Sense Questions to Protect Your Wealth.'
www.ProtectingFamilyBusinessWealth.com
[1] Robert Avery, United States Federal Reserve, The Ten Trillion Dollar Question: A Philanthropic Game Plan, Cornell.
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