How to Thrive in a Family Business with Tom Deans
On this show, Ed had an opportunity to visit Tom Deans who is a wealth of knowledge.Tom Deans is the author of Willing Wisdom and Every Family’s Business. Tom is probably the foremost thought leader on family businesses and the unique dynamic associated with it. Having a podcast is one of those things where you get an opportunity to visit with people that are way over your pay grade and Tom was one of those guys to Ed as he has been following his work for a long time.Tom has so many good value nuggets to share in this episode.
Enjoy this conversation with Tom Deans!
1:15 – Who is Dr. Tom Deans?
2:28 – Can you tell the audience how you got into family business?
5:33 – Why do you think there are low survivability rates when a business passes to the next generation?
8:05 – How many business owners are using their kids as their retirement and amplifying the value in order to maintain the lifestyle?
10:55 – How do you have a conversation with successive generations about their investment in the family business?
14:49 – Does your framework work regardless of how many commas you have in value?
16:50 – How does a business owner reconcile that maybe my kid not such a good idea for the business?
18:25 – If I’m a kid, how do I get mom and dad to start talking about what it is that you want to do with the business?
21:05 – When you have multiple family members, and you’re constructing this roadmap to succession, how do you determine what’s fair and equal?
24:17 – How does the kid evaluate whether or not they are a potential candidate to have the level of success that mom and dad did?
27:47 – Is there a different conversation between the different levels of age brackets of next generation successors?
30:10 – Is converting your company into an ESOP a good idea?
31:44 – What’s your opinion on family offices?
32:55 – If you had one piece of advice that you could give the listeners that would have the most impact on their business, what would it be?
Who is Dr. Tom Deans?
He’s the author of two of the best books on family business and the dynamics that accompany it. Willing Wisdom and Every Family’s Business are both New York Times bestsellers and should be required reading for any family member that is thinking about being in a family business.
Previously, Dr. Deans’s was CEO of a large multinational family business, has worked in banking 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. He’s also a frequent guest on CNBC Moneyline and CNN. 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.
Can you tell the audience how you got into family business?
The journey was, quite frankly, odd. I was born into a family business as is my father, my grandfather and great grandfather, and at 37, I joined our family businesses as president CEO and ran that business for eight years and then sold it. And as I was driving out of our building down the road, looking in my rear-view mirror for the one last time, I realized that we had never successfully transitioned a business into the next generation, we always sell them. And I thought, I think I’m going to write that book. It’s going to be a weird book because every single book on family businesses that I read said, “Oh, no, you measure the success of a family business in generations, a fifth generation family business, clearly more successful than a fourth, and a fourth, well, clearly more successful than a third and a second.” And so here I was having never transitioned fully successfully to the next generation.
And all the literature was saying that we were a failed family business and I’m thinking, we have just sold our business all cash, and I’m not feeling like a loser. In fact, this is feeling like pretty much the best day of my life. So what the hell is going on? Like, why are these books peddling this other message? And it occurred to me that business owners are turning to their most trusted advisors on the subject of transition, succession planning and exit planning. You need to give this business to your children. As soon as I looked at the data, it was pretty clear that only 30% of family businesses survive to the second generation. People got a 3% chance of their grandchildren owning and operating their business.
Why do you think there are low survivability rates when a business passes to the next generation?
I know very, very, very few family members, next gens who want to pay full market value for their parents business. That remaining 18%, they’re hanging around because they’re waiting for someone to die, they’re waiting to get a free business.
So we create these economic incentives in our estate plans, either through trusts or in our wills and that’s what entrepreneurs do. They hoard their personal net worth inside their business with no plan. So the kids are left thinking, well, if that’s where the family money is, and if I leave, I’m probably not going to get this piece. So you know what, “I love this business”. We create economic incentives and we lure people in and we retain family members in businesses that truly don’t want to be there.
How many business owners are using their kids as their retirement and amplifying the value in order to maintain the lifestyle?
There are a whole bunch of family members who are buying and overpaying, and then at the other end, there’s just a huge number of businesses being gifted. But here’s what happens in that gifting scenario. Mom and Dad retire from the family business and draw a salary while their kids are running the business. And eventually, this gets old because we’re not dying at 72, we’re not dying at 82, we’re dying at 92. You got children in their 60s waiting for their parents to die in order to really run the business the way they want to, because no one knows how to start the conversation around the logical, calm, rational, transparent transition of the equity, people leave it alone. And so there’s a lot of exploit exploitation. I’ve watched parents literally give their business to their kids like the equity and then a couple of years later, watch their children’s sell all that at full market value These are crazy scenarios, exploitation going both ways.
How do you have a conversation with successive generations about their investment in the family business?
It’s super counterintuitive. What I’m imploring in my book is for the next generation to risk their capital, buy their parents business at full market value, no shortcuts, no discounts for the family. That point is crucial, if we start discounting the value of the family business, we start creating economic incentives to keep people in businesses for all the wrong reasons. A family business is a set of values. We are in business as a family to create capital and to transition wisely.
Does your framework work regardless of how many commas you have in value?
The quick answer is no. In fact, what I would say is the older the firm and the bigger it is, the harder it falls and the faster it falls. When I see big old family businesses, man, do I get nervous. There were about 100 largest firms in America in the year 1900, but only 16 of them were still in business in the year 2000. That’s a ridiculous amount of wealth destruction in the modern economy. People do not understand how temporary and fragile businesses are. Businesses just don’t last.
Really smart dynastic families understand when to start businesses and they sure as hell know when to get out. And they never let their emotions drive those big decisions. They don’t define themselves by their businesses.
How does a business owner reconcile that maybe my kid not such a good idea for the business?
It’s hard to sell a business, but you can dodge that bullet if you get your kids into the business and then retire, full salary to the day you’re dying. That’s your retirement plan. So they get to avoid having to clean up their balance sheet to reconcile their inventory. And so they get to dodge all that and they just leave their mess for someone else to clean up. And because business owners are living a long time, kids when they move into their 50s, before they would get the business, their parents would die in their 70s, they’re in the 30s and 40s. They got they got time to actually run the business the way they wanted. Now we got business owners in their 90s. You’ve got business owners second gens in their 60s, they’re just packing up and quitting out of total frustration because they can’t get the founder to talk about the transition of the shares.
If I’m a kid, how do I get mom and dad to start talking about what it is that you want to do with the business?
125 million American adults do not have a will. If they don’t have a will, they don’t have a business succession plan. Half of all business owners in America don’t have a will. If they don’t have a will, they don’t have an exit plan. And so a great place to start and if you’re a next gen working in your parents business that you don’t own and you’ve got siblings outside the business, even siblings in the business, and you don’t know if your parents have a will, you’re going to be in a world of hurt. You got a 50% chance that you’re looking at a train wreck. What happens when mom and dad die, and they will, then the state they’re in has a formula for dividing up the family business. And guess what? Now you’re an equal partner with all your brothers and sisters in your parents business. It doesn’t matter if you’re the only one who’s been working in the business. Your brothers and sisters have equal shares.
When you have multiple family members and you’re constructing this roadmap to succession, how do you determine what’s fair and equal?
I’m a big fan of next gen getting their own wills completed and then giving their parents a copy of their will, which sounds bizarre because your parenting your parent. It should be the other way around. I think when kids share their will and say, “Look, in the fullness of time, nothing says we die in order. Here’s my will just so that you know.” And so often parents will reciprocate and it will start the conversation around the transition not just to the business but other family assets. It will also lead this real urgent need for families and business together to create family meetings, at least an annual family meeting where family gather and have these conversations and get out that central question of fair and equal.
I’m seeing a lot of parents who are looking at their business and as they’re moving into their 60s, 70s and 80s, they’re actually taking money out of the business, which they ought to do. I mean, to have 80% of your wealth wrapped up in one illiquid stock, but no transition plan is insane. So they’re pulling some of the wealth out of the family business and they’re actually starting to transition cash to the next generation. And at that same moment, they’re asking all the children in the business in the family, do you want to return that cash that we just gave you in exchange for shares in the family business based on proper third party valuation, yes or no? If the children want cash, and they don’t like the business, they will take the cash and they will deploy it somewhere else, maybe start their own business, maybe invested in a public stock market, whatever, but parents should pay attention to the answers.
How does the kid evaluate whether or not they are a potential candidate to have the level of success that mom and dad did?
I was purchasing my father’s business, and I was not quite at 50% before I pivoted, just because I was buying the business, it never took the business off the market. In fact, I was always reminded that that company was still in play while I was a minority shareholder. He was always entertaining and could maintain other offers and entertain other offers. When family members start to purchase their parents business 1, 5, 3, 8% at a time over time, often families stop thinking and think well, this is the wrong kind of a singular track for succession.
When you get the emotion out of this stuff and you look at what a business is, it’s an instrument of wealth creation. It’s not your path. It’s not your family. It’s not your friend. It’s not your community. It is an instrument of what it goes up in value and it goes down in value. I’m reminding business owners that their business is not their legacy.
Is there a different conversation between the different levels of age brackets of next generation successors?
If you look back 10 years, 30 years, 40 years, every generation wants something that is more intoxicating and valuable than money. When a business founder infantilizes their children by controlling their livelihood, not for 10 years, but for 50 years, it’s twisted and it’s damaging, and it’s pulling apart families from the inside out.
Is converting your company into an ESOP a good idea?
It’s a valid exit strategy for the person trying to get out of their business, but for the folks that are now in business with a lot of their fellow employees, how do they get out? There’s one thing that we know for sure. And that is, people like their business to live on, especially business owners who have taken wealth out of their business and they have more surplus capital that they can spend, you can see how enticing the idea is that their business is their legacy.
What’s your opinion on family offices? I’m seeing more and more family office kind of separating this whole idea is that helping or hurting?
Absolutely helping because very few American families make the leap from operating business to broadly holding company, but that’s what the really successful family businesses do, they get over the idea that they’ve been shoemakers for 50 years, but really what they are is in the business of making money. And so what do they do? They monetize a big chunk of that operating business or all of it and then they move to really hold a lot of different investments in a lot of different currencies across a lot of different asset classes. And now you’re on a trajectory for creating and sustaining dynastic wealth, and they’re teaching the next gen on how to be investors, and how to take risks, and how to mitigate risks. That’s really the goal.
If you had one piece of advice that you could give the listeners that would have the most impact on their business, what would it be?
Get a will and when you get your will and have a family meeting. Actually, before you write your will, be great to have a family meeting and say your mother and I need to update our wills or write a will, and before we do that, we’d like to have a really open, honest, respectful conversation about what you guys want and how you think the wealth should transition and how the business should transition and get into the issues that we’ve just talked about, and bring some clarity to this stuff.
Connect with Tom:
Website – https://everyfamiliesbusiness.com/
Website – https://willingwisdom.com/