Breaking up the family business

From Tony Smit, Austin TX

Thomas William Deans makes some good points, but fails to point out that a lot of small businesses fail due to other circumstances, like different professions or market changes.

Different professions – a medical doctor or dentist cannot easily transfer his business to his non-medical-business children, usually another professional buys into the business to get the equipment and customers.

Market changes – independently-owned and operated gasoline service stations. They have been disappearing from Texas due to the ingress of chain gasoline stations and convenience stores, and due to the greater complexity and reliability of automobiles and their innards – belts, hoses, and tires, and the huge variety of those parts, it is very difficult to provide complex service within one day. Then there are the insurance and overhead costs.

Retail stores have been clobbered by the likes of Wal-Mart, Sams, Costco, Home Depot, Lowes, and other big-box stores – these are warehouses with cash registers at the exits.

But the baby boomers are going to find out that when they are in their 70's, they will not want to walk across huge parking lots and brave arrogant drivers in the hot sun just to get their groceries. Perhaps smaller stores with their own small parking lots will then have a chance of competing again. Small, family-owned businesses again ?

From Thomas William Deans Ph.D.

The tragedy of this scenario is that any combination of three of the four children and or surviving spouse can gain control (each have 20% of the voting stock). The better question is why did the founder leave a legacy of family discord? Gifting wealth works well. Gifting an operating business to ill-prepared, children and/or a spouse reveals the hubris of those who are founders of businesses.

The idea that business owners lack the time to plan for the transfer of what is often by far their largest asset is nonesense. Far too many business owners transfer their business asset to their family through their will knowing full well that it likely won't survive. Won't survive because the family members likely don't know the firm's key employees, customers, suppliers, or the firm's lenders. This indifference to business succession planning often reveals the founder's sub-conscious desire to see the firm fail after their death thereby validating their importance and value to to their own creation. I can think of no other logical explanation why business owners ignore what is almost certain to be a complete destruction of business wealth when business assets are gifted to young ill-prepared children and/or a spouse who lack business knowledge or training.

Extraordinary business leaders understand that a business is a instrument of wealth creation, nothing more nothing less. Had the business founder offered to sell his shares to his children he could have aligned the economic interests of all family memebers instead of setting up the potential for sibling rivalry.

Here's how it could have worked. The founder as part of his business succession plan could have declared the business for sale. If one or both of the children wanted the business, they could have risked their own capital and bought the stock (kids only risk their own money when they love the business and pass judgement on their own skill and capacity to make money with the business). At the death of the founder, a portion of the estate is returned to the purchaser (the child/children).

The key point here is that the children who don't buy the stock get their share of the estate which has come from the stock sale proceeds (be it the sale to a family member at market value or a third party). This is how sibling teams are created. The more successful the business, the larger the estate for distribution to siblings outside the business. When business founders understand that their only sustainable legacy is their family and not their business, paradoxicaly their business is more likely to survive.

When I wrote the best selling book, Every Family's Business, I took a risk and trounced the idea of perpetuating the family business through gifting which we know is often, but not always, the overwhelming bias of accountants and lawyers who love to perpetuate businesses -read perpetuate their firm's business.

If a founder wants to perpetuate his business legacy he can begin by asking their progeny to do exactly what he did — do exacatly what made him successful, which is to understand that business is simply a proposition of risk and reward. Skip this step — gift your business — and the data is clear that it will join the 97% of all businesses that never make it to the third generation.

Asking a child to risk their own money may seem like tough love. But nothing is tougher than watching a business owner through their own narcicism try to thrust a business into the reluctant arms of family. A business owner will be remembered, just not fondly. It takes great courage and introspection for a founder who is emotionally connected to their business to sell — sell to family –sell to a third party. Selling often feels like failure. But when the succeeding generation purchases a business from their parents, ownership is authenticated, economic relationships among family members are aligned and the founder can sit back knowing that their real leagcy is about to take flight — a legacy that has everything and nothing to do with them. The key to business succession planning is not perpetuating a business but rather driving its finality through its sale to family or someone else.The "legacy" is the wealth crystalized, along with the mutual trust and respect "earned" among family members.

This is a contrarian view that brings great relief to every business owner and their family who often feel compelled to adopt the traditional approach of gifting their business to family when they know the last chapter long before it is written.