We’re moving on to the second set of questions from Thomas Deans’ book, Every Family’s Business, where he shares 12 questions that help families determine exit strategies for their business.

These questions are around understanding succession and the thoughts that people have about the opportunity to be a successor. As much about the opportunity, the questions are about protecting the wealth that you do have tied up in your family business. Or, if it’s not family, your successor as the business owner.

There are no wrong answers to these questions. You’re just looking for greater clarity between the generations and how and when the business will be sold.

If you’re considering gifting the operating business to a child or children, there is great value in hearing whether or not the succeeding generation is prepared to risk their capital today to actually purchase the business.

If they’re not interested in risking capital to purchase the business, that’s great to have that discussion now, rather than further down the track.

Remember these questions can be for a parent/child situation or, if you’re a business owner without a family member, these can be for a key employee or manager you might be considering as the successor.

Question #4: Do you understand and agree that, in the interest of maximising shareholder value, the business can be sold to a third party at any time?

This question is for both parent and child.

I have found in my discussions with many clients that they don’t necessarily address this issue. It’s a simple question to answer… Yes or no?

If somebody came along and wanted to purchase the business, you accept and understand that it will be, in fact, sold. In many cases, I’ve seen that, no matter how good and big the business is, the way to maximize cash out of the business means selling it to a third party.
This is definitely true if it’s the case of asset rich and cash poor, even though you may have developed a great lifestyle out of the business.

So, yes… Do you understand and agree that should a buyer come along, you could in fact sell the business to a third party at any time?

Question #5: I agree that, within the next 60 days, I will put in place a special compensation formula for the child’s name in the event that the business is sold in the next five years.

This question is for the business owner, the parent.

So let’s say, for instance, you have one of your children working in the family business and they’ve been a key person, instrumental in growing the business and making sure it’s thriving. That means, if you are going to sell the business in the next five years, they need to be taken care of and rewarded.

In fact, you want to take care of them and reward them.

Especially in the case of not just one but maybe several family members or key people working in your business. It’s very important to consider how they will react if they are thinking that they are going to own the business and you sell it off to a third party. You want to put in place some sort of compensation plan for them.

Question #6: As a fundamental principle, I understand that from time to time we will receive unsolicited offers from third parties to acquire the business. These offers will be considered and accepted at the discretion of the controlling shareholder and supported by the child, whoever that might be, the child’s name.

This question is for both parent and child.

It is really bringing to the surface the fact that you will consider third party offers from time to time and that the controlling shareholder is the final arbiter but will be supported by the child or family member or key person in the business you may be having this discussion with.

It’s incredibly important that you have a good discussion so there is some understanding around the situation and you can come to an agreement to consider an offer very seriously.

Next time, we’ll look at questions 7-9!