Every family’s business is something that we haven’t talked about a great deal in many of my blogs, and I think the time is right now to consider it very seriously, simply because of the age of transition that’s occurring with our baby boomer business owners.
Even if you’re not a baby boomer, even if you’re younger than that and you’re considering succession, it’s very much more around “not stuffing it up” as a headline said that I saw earlier today.
The transfer of wealth over the next 10 years or so is estimated to be around 3.5 trillion dollars. Trillion dollars. So there’s an awful lot at stake here.
I would like you to consider 12 common sense questions that are around protecting your wealth and exiting your family business successfully. These questions have been developed by Thomas Deans, PhD, who has spent a lot of time working with family businesses and has written a best-selling book on the subject.
If you’re a parent and contemplating the gifting of your operating business to a child or to children, you’ve got to find value in hearing about whether the succeeding generation is prepared to risk their capital today to actually purchase the business.
These questions are really good, definitely worthwhile, and I suggest you need to involve not only yourself but also your successor, whether that’s a child or a key employee in the business. If you have no relatives working in the business, just use the “parent” questions for the business owner and the “child” questions for the key employee.
There are no right or wrong answers to any of these questions — the only purpose is to create greater clarity between the generations and how and when the business will be sold or moved on.
Question #1: What does our business look like in five years?
This question is for both the parent and the child.
What does the parent think the business is going to look like in five years? And what’s the view of the child?
You need to have a pretty rigorous discussion around this, just to see whether you share the same views. Will you be providing the same sorts of services and products? What’s the growth of the business going to look like? How will the business actually grow over that period of time? What will the growth depend on? Are there contracts that need to be maintained? Are there staff that need to be maintained?
As the successor or key employee or child, what do you think? Do you have the same opinions as the parent? As the business owner?
Question #2: Are you interested in selling your shares?
So whoever has shares in the business, are you interested in selling those? And if you are, to whom?
Sometimes businesses have shareholders who are not in the business. Sometimes you might be a shareholder who has control, but you don’t want to sell down all your shares — you may wish to only partially sell those shares.
Consider what the structure is of your business. Are you worried that this is for both parent and child? Or that it’s for business owner and successor to answer? Are you sure of the structure? Are you considering what debt might be involved if you were to purchase the shares? Would you like to give some other employee or family member a start and perhaps provide the opportunity to get involved in the business?
Question #3: Are you interested in buying shares and acquiring control?
This question is for the successor or the child.
I’ve seen several businesses where the assumption has been made that the successor would want to be the successor. Sounds strange, doesn’t it? But it really means whether or not you want to buy the stock and take control.
Especially in a family business, it could be that the person who is having that discussion is not the one who really wants to take over the business. It’s very important to take on board these questions with every key person or relative who’s involved in the business and has an interest in being a successor down the track.
Next blog, we’ll tackle questions 4-6!
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.
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!
This is part three of a series in which we’re exploring 12 questions which were developed by Thomas Deans, PhD, to make sure family business develop successful exit strategies
Question #7: In preparation for the annual update of the business 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 that estate taxes will not impair the ability of this company to function after my death.
This question is for the parent.
This is a very deep question, considering what happens with your estate planning. Depending on where you are located, there will be different legal and other implications, particularly from a taxation perspective. It’s the same for valuation, which is definitely another subject that I will discuss in another blog.
It takes some time to go through this, and this question is simply a reminder to update this information annually, so you can keep up with whatever changes may be taking place.
Question #8: List at least three items in each of these four categories that will affect the health of the business over the next five years.
This is for both the parent and the child or successor.
This question is really a SWOT analysis. You’re going to look at the Strengths, Weaknesses, Opportunities and Threats and think seriously about at least three items that might affect you in each of those areas.
That’s three items in strength, three items in weaknesses, three items in opportunities and three items in threats. This will take some time to complete, especially getting the perspective from both the parent and the child.
Question #9: To secure our future prosperity together we should either A) continue to run our business and invest more of our money in our company, or B) proactively pursue the sale of our company.
This is for the parent and the child.
You’re looking for simple yes/no answers from the parent and the child to see if you’re on the same page.
We’re down to the last three commonsense questions that have been developed by Thomas Deans, PhD, which are all around protecting your wealth and determining a solid exit strategy for your family business.
So, just to recap, these are questions to conduct between the business owner or parent and the child or successor in the family. Ideally, if you have more than one child in the family, it would be good to conduct these questions one at a time with each child, not as a group.
If you don’t have any relatives in the business, then you can use these questions with key employees, in which case the parent questions are for the business owner and the child questions are for the key employees. There are no wrong or right answers – these questions are simply about getting greater clarity between the generations and how and when the business will be sold.
Question #10: Within 60 days of completing the business blueprint, we will complete a salary and a bonus compensation review for whichever, child or successor.
This is for the parent.
I’ve found that, particularly in family businesses, the children in the business seem to be left behind — they’re not always treated in the same way as other employees who would have a regular review process. So addressing this question makes that happen, so that children don’t miss out on the normal course of business.
Question #11: I agree to conduct an annual performance review of the child’s name. This review will measure performance against mutually agreed on and achievable goals and objectives. New goals and objectives will be set for the coming year.
This question is for the parent.
As I mentioned for the previous question, children who are in a family business tend to miss out on regular business practices, or the parents find it difficult to be able to conduct a performance review for their blood relatives.
It’s a very useful question that ensures a review actually happens and that the performance measurements are all agreed upon by the particular family member involved.
So the answer to this question is basically yes, you agree to it, or no, you don’t. But it’s also very important to have your thoughts and discussion notes recorded and there to be a contribution from the relative involved in the business.
Question 12: Within 60 days of completing this blueprint, I will present up to date job descriptions to all family members working in the business that clearly describe their duties and responsibilities. I will include an up to date organizational chart and family members working in the company will adhere to the company’s policies and procedures.
This final question is for the parent.
Once again, many family businesses tend to “go with the flow,” so this question is about instilling a process and a blueprint by which everyone will operate, rather than having family members just be let loose or not conduct themselves in the way you really want them to. This is about taking out any ambiguity and uncertainty that might be at play.
So those are the 12 questions.
Just to sum up, this is not something you will do once. You will complete this every year with the key employees or family members that are involved in your business. These questions form a blueprint that will help you tackle some of the curly issues or the elephants in the room or the areas that don’t normally get discussed in a family situation.
This is about not leaving issues to slide under the carpet; it’s about bringing them to the surface and understanding where everyone’s aspirations are, finding out if everybody is really on the same page, and thinking about what might happen in the future.
I’d like to say “thank you” to Thomas Deans for creating these 12 questions and, if you want to get a hold of his book, you can go to his website and order a copy at www.everyfamilysbusiness.com
In the meanwhile, if you’d like a copy of the key questions from the book, you can find them here.