Does gifting a family business destroy it?

Does gifting a family business destroy it?
With a large number of family businesses operating in North America, the idea that gifting a business to the next generation is mainstream thinking.
At a debate held by the Family Firm Institute in Toronto, Tom Deans was brave enough to contradict the wisdom of the masses. As the son in a second generation business, Tom went through the experience of joining a family firm and working hard to achieve a dream. Tom details the difficulties of conversations not had and questions not asked by family members destroys the family in the long run. In his best selling book, Every Family’s Business, Tom advices that every business should have a plan to sell.
During the debate, Tom explained that if both generations know there is a sale time and what the economic benefit will be for them, the trust will be high.
Trusted advisors need to understand that families shy away from these difficult conversations but that they could help. Using Tom’s 12 questions listed at the back of his book, every trusted advisor could be helping family businesses create the wealth that both generations deserve.

1 comment:

Family Business Book Author said...

The debate at the Family Firm Institute in Toronto was an interesting I listened to my debating opponent explain why pursuing the longevity of a business was a terific idea, it occurred to me that the sub-prime and resulting liquidity crisis is nothing compared to the much bigger bomb ticking away in family businesses big and small.

My prediction is that if the banks don't begin to press harder for evidence of real succession plans, the $10 trillion sitting in the retained earning of North American family businesses will dissappear faster than you can say Lehmann Brothers sell Lollipops by the Sea Shore.

When I say "real succession plans" I mean evidence that gifting the family business to junior isn't the plan. Gifting an operating business to dis-interested, ill-prepared, incapable hands of family is not going to cut it with lenders, shareholders, customers or employees. So if gifting is out selling is in.

But with more sellers than buyers the inclination of throngs of aging business owners will be to wait out this downcyle and sell the business later when they are really ready to retire --you know when they are in their 80's and junior is hitting his prime in his 60's.

Truth be known little in the way of succession planning has ever been done to transfer businesses intelligently. The script usually unfolds with the business owner dying and the stock rolling to the surviving spouse. It's like a bad movie-- it's Friday the 13th but with more family dramma and bloodletting --especially when you roll in some sibling rivalry, add a dash of liquidity crisis family business style when the taxman comes knocking to collect capital gains or estate taxes.

To all the founders reading this --here's my message. Offer to sell your business to your kids. If they don't want to buy it, put in place a compensation package for them to help you sell it to someone else. I know that selling the family business can feel like selling family but nothing could be further than the truth when a founder aligns the economic interest of all family members. I have a sneaky feeling that when parents put in place these compensation plans for their children, the love of pursuing the longevity of their family firm will fizzel and fizzel fast (the bigger the comp package the faster the fizzel).

Founders who gaze upward and utter the phrase "(insert company name)will always be family owned" are either dillusional, narcissistic, or neither and just really get a charge out of messing with the heads of their children who lust for stuff -- free stuff. I think most founders know that the businesses they gift are anything but easy to receive --are anything but easy to operate and sell. The founders who gift buinesses may indeed dish out what junior really deserves. The profile of the spendthrift child with no discernible work ethic is well documented in popular culture and usually on display in Toronto at the Four Seasons in Yorkville most afternoons.

If so many jobs, so much wealth wasn't collateral damage when a family business is gifted, watching them pass to the next generation would continue for some to be the best theatre ticket in town. But lenders and their shareholders aren't laughing as the single largest generational transfer of wealth begins in less than ideal economic circumstances.

If the questions that a family can ask themselves to protect their wealth weren't so simple, the impending destruction of so much wealth wouldn't be so sad. On this point there is no debate -- at least not for me. Having watched three generations of my family start and sell their businesses instead of gifting them, the next generation has always been free to pursue their own great big idea.

Tom Deans
Author, Every Family's Business: 12Common Sense Questions to Protect Your Wealth.