Transcript | Transitioning a family business

Sarah Widmeyer

Welcome to Conversations on Wealth. A podcast dedicated to helping Canadians navigate the complexities of wealth with a multi-dimensional approach to planning and wealth management. I'm Sarah Widmeyer, Director of Wealth Strategies at Richardson Wealth. And joining me today is Tom Deans author of Every Family's Business and Willing Wisdom. Thanks so much for being here.

Tom Deans

Thanks for having me.

Sarah

So, we're going to have a conversation about family business. And one of the things that you might be interested in now is that I come from a background of family businesses, and some family businesses that didn't do so well. And some that tore up the family, frankly. So that's my background. So, as we go through this conversation, there's, I might inject some personal experiences into this because it is a topic that's near and dear to my family.

Tom

Well, Sarah, I'm not surprised to hear that virtually everyone has a family business story. Whether you've been in one, you know, someone you're living beside someone who's in a family business, 9 out of 10 Farms in Canada, are family owned and controlled. They're everywhere.

Sarah

So let me know a little bit more. And if you wouldn't mind expanding on your own background, and your interest in family businesses?

Tom

Well, I was born into a family business, as was my father, grandfather. I think that is really framed my whole perspective of business, quite frankly. And having probably spent too much time in university, graduated, had a career in banking, then joined the family business, actually quite late age, 37. We were in plastics manufacturing. So, I say late, because most kids often will just finish high school or college university, and then head right into the family business. It's often a strategic mistake that a lot of families make, because the kids then don't know anything but. So it's very difficult a lot, a lot of business owners paint themselves into a corner, right? They invite their family into the business with this expectation that they're going to provide 40 years of employment. And, so they paint themselves into a corner, easy to start a family business tricky to manage, very difficult to exit.

So I was a little bit different. I joined a little bit later at 37, ran our family business manufacturing business for eight years as CEO, and then had a liquidity event. So, I was in my mid-40s, when we when we sold and then I reflected on that I reflect on the fact that we had done this before we had started and sold three prior family businesses. So, I thought, you know, I got to write this book.

I didn't feel like a failure at 45. Having sold, it was a curious moment was a really a great exit for both the buyer and ourselves. So, we sold on February 8, 2007, we're a Canadian manufacturer. Seriously, we're not that smart, really lucky. And we're sorry, I really wrote the book from a place of gratitude to be out of manufacturing at that point in time. But I reflect on the fact that our family is very different. We do not give our businesses to our kids, we simply do not gift these businesses to our kids, we ask them to risk their capital and buy them at full market value, no discounts, no haircuts for the kids. So I got to write this book. And I really didn't write it with this idea that it would turn into a public speaking career and international public speaking career, I just really had something to say that I thought was fresh and unique. That little idea, I swear was waiting. I think business owners all around the world, were waiting for this book, all the other books on family businesses carry with it a completely different message, the opposite message, which is, “It's your job to invite your kids into the business and transition it to the kids. And if you don't, you're somehow diminished, you've somehow failed as a family.”

I thought, man, that has not been our experience. We sell them we start em, we run em and we sell em, we start em, we run em we sell em, we start em, we run em we sell em… I think, wow, we still have our first dollar from 1920. Yeah, so I'm gonna write this book. And that little book took off 1.3 million copies the best selling family business book of all time, and nothing comes close. And no one is more shocked than my first year English literature Professor.

Sarah 

Oh, I doubt that. So prefacing your book, every family's business is the idea that every business is a family business. Tell me about that.

Tom

You know, there's a lot of business owners who think well, I don't think this message applies to me, I'm, I'm the only shareholder. I have no one related by blood or marriage working this business. So, I'm not a family business.

I'm quick to remind those business owners that in the event of their death, and I don't know if you know this, but everyone dies. It's a shocking statistic that I tripped over in my in my deep research. When that business owner dies. In many, many cases, the shares almost always transitioned to the surviving spouse. Guys statistically pre-deceased woman. In many cases, we have firms transitioned to people who don't have the relationship with the employees. They don't have the relationship with lenders, customers, suppliers. And it is just heartbreaking to watch a family business destroy value. And I don't mean in months, I mean in weeks and days. So businesses that were built over the over decades, are unraveling in hours after the death, so a lack of preparation, big problem.

Sarah

When I was asking the question, what I was thinking, or where I was thinking you might go with it is talking about it from a family emotional perspective. So I know that, you know, in my uncle in the case, he had a black top, asphalt paving business, very lucrative business. The family deeply resented the business, because it took up all his time, all his emotion, his weekends, his dad time. And so they weren't interested in the business, and the business ultimately was sold. But it became another seat at the kitchen table was the business. So that's where when I was asking the question, that's kind of where my head was going, that it really even if it's not envisioned to be transitioned, it takes up a lot of family space.

Tom 

Yeah, being an entrepreneur has always been hard, there's really only one well worn path to creating significant wealth in this country. And that is by owning your own business. And I think people, you know, often miss the chapter of the early years of an entrepreneur that were just grinding, grinding, hugely consuming, all consuming, not just, you know, hours, but you know, mental attention not devoted to the family. And it is a good explanation why a lot of business owners actually view their business as their baby, they use the language of family to describe their, their business. And they often view their business as their greatest work of art, their legacy. And if there's one contrarian, and difficult idea for business owners to hear when I'm speaking about the book, it said, in fact, a business is not a legacy. In fact, the data is very clear businesses don't last.

Let me ask you a question, sir. Let me interview you. Hey, who is the founder of Coca Cola?

Sarah

I don’t know. Mr Coca Cola.

Tom

Mr. Coca? You know, when I'm doing a speech in front of a large convention, 5,000 people, I can ask that question, I know exactly what the response is going to be.

Sarah

No one knows.

Tom

No one knows, just like you. No one knows. No one cares. No one even Google's that. That is the third most valuable consumer brand in the world. No one knows who the founder is. It is a, it is a quick way of reminding business owners in my audience that I know you're very proud of what you've created and built and you beat the odds, and you've risked your capital, and you've sacrificed so much. But dude, understand this. No one is going to remember you for your business. So that begs the question, if the business is not the legacy, what is? It's their family. It's their family relationships, the very things that you correctly cited as the first casualty of most businesses.

Sarah

Right. Right. So as business owners then think about transitioning, either transitioning to the next gen, or as you quite rightly said, just exiting. How do people get started in that? And I'm really curious in how long before you actually transition it? Are you thinking about it? Is it I think it's probably like 10 years, maybe, maybe even longer? Where you're starting to think about it? Okay, how am I going to transition? What am I going to transition to? It's not something that's done at the spur of a moment.

Tom 

So, I think you're absolutely right. I think, in fact, I would argue that if a business owner doesn't know what comes after the sale, whether it's an internal sale or to family member or to a key employee or sale to a third party, if they can answer the question, What will I be? Where will I go? What will I do? Who will you know, how will I be perceived? After that transaction? They'll never leave. They just die at their desk. Yeah. I mean, the reality is that most business owners aren't thinking about their transition, they leave it way too late. And I think they completely underestimate how difficult it is to sell and exit how emotional it is. They're often shocked at what buyers place a value on it's often not their brand or their culture, or their community reputation. I mean, none of that stuff is on an income statement or a balance sheet. What people are buying your free is free cash flow and that to diminish a business owners entire life work to EBITA or a multiple EBITA is disheartening. It's why a lot of business owners simply do this. Nothing. Zippo.

So I mean, I believe I believe that silence is actually the great destroyer of Canadian family businesses. It's not families that talk about this. It's not families that lean on their advisors to have facilitated family meetings. It's actually business owners who are so overwhelmed by the complexity, emotional and otherwise, that they do absolutely nothing. And the silence grinds on the family relationships, people wondering how it's going to go down. But no one really having the courage to engage in the conversation. And the business fails. The business owner dies, and the business transitions to a surviving spouse. I tell you right now, Sarah, I get more phone calls from elderly women, who’s business owner husbands, guys, pre deceased, who have died. And you know what, you know what those women tell me? They want to bring their husband back from the dead and kill them themselves. They don't want… they're stuck with it. They're stuck trying to run a business they don't understand. And of course, competitors come along and pick it off for pennies on the dollar. And, you know, it's my life's work really to help business owners understand, look down the road and say, is this how you want to be remembered, is the dude who couldn't do the last deal that left your family to figure this stuff out? Because you couldn't? Yeah, that's not a gift. It's the opposite. It's the opposite of a legacy. It's, chaos.

Sarah 

So it really is the value of conversations, right? Like and how much doesn't happen in the family in terms of the conversation. We leave it until after we're gone for people to figure it out and pick up the pieces. And we do our families such a disservice by not having those conversations while we're still around.

Tom

Right, I just got back from doing a large farm convention out west. And it was really interesting to hear the number of family members who are actually staying on the farm. And when I say farm, I mean, I'm not talking about a little tractor and 100 acres. I mean, these are big farming, agricultural operations. You have family members who are sticking around hanging around the farming operation, because to leave is to run the risk of being disinherited. I mean, what an awful reason to stay and commit to a sector or an industry or a career.

Sarah

You have no interest, zero interest. Yeah, yeah. Wow.

Sarah 

So, when should you start to transition to the next generation?

Tom

The answer to that question would, might shock you, the moment you incorporate. And I would expand that to when should you be thinking about your exit plan? So whether it's transition to the next generation, or to a key employee or to a competitor, strategic buyer, that the answer to that question is the day you incorporate you should be building a business with the end in mind. It's actually one of Covey's seven habits. It's one of I think it's my favorite. I practice that I do everything I start the day with the end in mind, what's the end of this day look like? What would have made this day an amazing day? And when we do that, especially as business owners, we say, what's my last day in my office look like? I'm walking out the front door. And I know, this is my last day, and I've picked the day, I picked the buyer, I picked the price, I picked the terms. And I drove towards that day, not out of fear, but with intentionality. Now, that is exit planning. That's a great transition.

Sarah

That's amazing.

Tom

So too often we're led to believe that the seller is the vanquished and the buyer is the victor. Right? If you've sold you've failed. Okay, we were one of the largest employers in our particular town, where we had our main manufacturing operations. We sell our business, we make the front page of our local newspaper. I'm coming out of our local bank, and I'm stopped by an acquaintance. And you know, what he what his first question is? He says, are you going to be okay? Really? And I'm thinking, Wow, it's February 8, 2007. We've just sold this business, all cash, no, earnout. It's a phenomenal deal for them. It's a great deal for us, two really great parties to come together their strategic buyer, they're number three in market share, they buy us and become the new number one, win, win.

Sarah

I'm thinking congratulations.

Tom

Yeah, that's but that's not what people think you've sold, something must have been wrong. There must have been something. There's got to be more the story, like why do you sell? Why would a business owner sell a profitable business that's growing? Talk to people in the M&A industry, you know what they'll tell you? They get offers from business owners to sell their business when one of two things have happened. One, there's been a major health event. Yeah, the business owner has suffered some kind of catastrophic health event and maybe gets a little bit better, but get scared, because I've hoarded their wealth in one illiquid stock with no transition plan. Or they've had three or four or five really challenging years, and they're just exhausted. And the M&A person looks at that company and goes, dude, where were you five years ago? I could have sold that business. That story. This is going to be super hard.

Sarah

Wow. That's amazing. So only 30% of family businesses survive through to the second generation This is Deloitte study. 12% survive the third generation and 3% beyond that, I would say my family's living case study at that. What are some key considerations for passing the family business to the next generation to ensure its longevity?

Tom

Well, I think if you want to improve on those statistics, I think at the core of the wealth destruction, I mean, what you just described is a 3% chance of a founder of a business, 3% chance that their grandchildren will own and operate their business. I tell business owners all the time, you know, if you love to gamble, save your effort, you don't need to go to Vegas, just get up in the morning and hop on your tractor. Or go to your office, you're in the biggest casino of your life. You've, you've made money, you've put money back into their business year after year after year habitually hoarding your wealth in one company one stock with no plan, it's now not a bad strategy. When you're in your 20s. You can argue it's a decent strategy in your 30s to concentrate your wealth to double down on a stock and, and that's really how we make money. And that gets a little dubious in your 40s downright dangerous in your 50s and 60s and 70s and 80s, you have 90% of your wealth in one stock. Could you imagine a financial adviser saying we want to we have a new plan for you, Mr. 85 year old we'd love you to sell everything and just buy one stock. Do you see how, insane that sounds?

Sarah

What a great analogy. What a great analogy.

Tom

Why do business owners do that? Because they've had a phenomenal run. And they often think that they're exempt from the very rules in the marketplace. And it's an unrelenting market, free markets are unrelenting. They never sleep. And the amount of wealth destruction in the modern economy is so poorly understand. And often people don't want to hear about it. Right? We want to hear those entrepreneurial stories, right, that guy came to Canada from Italy with $20 in his pocket and built a billion dollar plastics company, like we love those stories. What we don't really do is follow through that story into the next generation and understand how much wealth is destroyed. Of the 100 largest firms in America in the year 1900. Only 16 were in business 100 years later. 16. Yeah. Now that's not a random list of 100 firms in America. That's their biggest, that's their biggest and best in breed, with arguably America's greatest century of wealth creation in front of them. Businesses do not last. So I say to the business owner, get over yourself. It's not about you. It's not about your legacy. The really smart money knows how to start a business, how to scale a business grow a business, they but they also intuitively know how to get out. Yeah, yeah. And that's where the big money is made.

Sarah

And as you're talking, I'm thinking it's emotional for people, it's part of their identity. It's who they are. So to have the self awareness and the outside of yourself thinking that says no, it's time we need to figure out how to exit. Yeah, I guess this is scarcity. I guess that's a real scarcity.

So in an effort to avoid family turmoil, especially if there are multiple successors, what are some strategies that business owners can use to reduce negative family experiences around the business succession?

Tom 

Well, I believe that we have seen a lot of wealth destroyed in family businesses by confusing the concept of equal and fair. Right. So the temptation is to die. Not that we want to be tempted by that. But we do. And the shares go to mom. Guys die first, statistically, mom dies a couple years later. And then we do this crazy thing in this country, the shares come down to the kids in equal amounts. Maybe one, only one child is in the business, or maybe there's two, but two are outside the business. And we thrust them into business together as equal shareholder. In many cases there. There's no liquidity. These kids are getting letters from CRA that say something like this. We're sorry to hear about your loss. I'm just kidding, Sarah. It does not say that. It says you kids who just got that free business that was just give gifted to you. You owe us this. And this is the difference between the original Share Value $1 for the founder shares, fast forward 30 years. There's huge capital gains, the kids don't have the liquidity, they return to the company for free cash flow to pay their personal tax bill. It's not there, and the business fails. Hence the 30% that survived to the second, second generation. And then we all rush to judgment and we say you know that second generation, man, are they losers? They're lazy spendthrift. They had no respect for that free business that they were given no respect for their parent’s legacy and we rush to judgment. It is that judgment that drives me crazy. It was designed not by the kids. That plan for failure was actually designed by the parents who are gone.

Sarah

Yeah. Wow. Do you have any closing thoughts?

Tom

I think the first step for a lot of business owners is go to third party valuation, really find out what your business is worth. And once you've got a real number, you can then sit down with your advisors work on a transition plan when kids can actually purchase those family businesses at full market value in a way, and using third party money to do that, it's a great way to protect your wealth and transition the business into the hands of someone who actually wants it if kids don't want to risk their capital, newsflash, they don't want it. Who's gonna say no to a free business? That's why it's the gifting that is at the core of the wealth destruction of most family businesses.

Sarah

Yeah, fascinating. So allow yourself the time to establish your plan and take the proper steps towards business succession. This is what I'm hearing loud and clearly, an objective voice like that of an advisor or other professionals, a business evaluator, as you say, can help you navigate the many possible scenarios of business succession, and help you nail down which path may be the most suitable for your situation. If you'd like to learn more, please get a copy of Tom's book, Every Family's Business, Tom, where can listeners find that?

Tom

Well, Every Family's Business is available at that website, everyfamilysbusiness.com. And I did mentioned Sarah, that shipping is free, and we may even throw in a bamboo steamer.

Sarah

…and a laugh or two. You can also visit our website for articles and videos or speak to your advisor for more information. And remember to follow us on LinkedIn for a broad range of information on wealth strategies. Conversations on Wealth is available wherever you get your podcasts. Thank you all for listening and join me again next time.
 

The opinions expressed are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson Wealth Limited or its affiliates. Past performance may not be repeated. Richardson Wealth Limited is a member of Canadian Investor Protection Fund. Richardson Wealth is a trademark of James Richardson & Sons, Limited used under license.