Fire the kids

Do your kids a favor: don’t leave them the family business.

by

From the October 2008 issue of the magazine.

Thomas Deans considers himself the successful heir of a family business. He can draw a straight line between the tire-distribution company his great-grandfather started 70 years ago and the business he runs today in Hockley Valley, Ont.

The thing is, Deans isn’t in the tire business. His family sold that company 50 years ago, and his grandfather used the funds to start a chemical firm. When that company was sold, Deans’ father used the proceeds to launch a plastics business. After working in banking and government relations, Deans joined the family firm in 1999 — and later worked with his father to sell it to outsiders. Today Deans runs a publishing and consulting firm, Détente Financial Press. “I’m a fourth-generation family business,” he says proudly, “but I’m not carrying on anything that represents the family name.”

His attitude is markedly different than that of most business families, who strive to pass their companies to succeeding generations. The problem with that approach is that it’s so hard to do. According to the Canadian Association of Family Enterprise, only 30% of family businesses successfully pass to the second generation — and just 10% make it to the third.

But this dismal record doesn’t stop business owners from trying to pass on their businesses. A plethora of consultants and family business research centres have sprung up to help them beat the odds.

To Deans, this is pure hooey. When the odds are so high against success, he says, why fight them?

The problem, he says, is that most businesses are “gifted,” at least in part, to the next generation. Mom and Pop subsidize the cost because, well, what kind of parents wouldthey be if they charged their kids retail? But such kindness can destroy businesses, says Deans: “Gifting the family business is dangerous to your financial health.”

When you acquire a subsidized business from your parents, the baggage that comes with it can ground a 747. Mom or Dad may expect a continuing say in the business. They can block needed changes, whether it’s firing an underperforming employee, or selling off part of the business. Their “generosity” may force incompatible siblings to work together, compel their children to run a business they don’t want or prevent innovation.

Deans’s solution: the family business should never become more important than the family. It should always be for sale.

Fittingly, that concept was handed down to him by his father and grandfather, who refused to burden their heirs with unwanted businesses. Their “start and sell” approach meant no one was forced to go into a business they didn’t enjoy and no sibling was favoured over another. If adult children wanted the family business, they could buy it on the open market.With this approach, what gets passed on to succeeding generations is not a business that some want more than others, but an even division of cash, and a legacy of business success. In essence, the family is passing on a set of values.

Deans is passing on his own values through a new book, Every Family’s Business, which conveys his controversial message through a simple storyline: a conversation between two family business survivors who meet on a flight to Barbados. It’s a breezy tome that he hopes every member of a business family will read in order to rewire their concept of what makes a family business successful.

How do you put Deans’s philosophy into practice? Here are a few pointers:

• Don’t fall in love with the family business. Plan for your exit. “Start at the end and work backwards.”

• Make sure everyone in the family knows the business is always for sale. Anyone in the family can have it — or no one.

• Be professional. Conduct a SWOT analysis (strengths, weaknesses, opportunities and threats) of your business once a year to understand what needs to change. If family members join the business, conduct formal performance reviews.

• Communicate! The kids must understand the parents’ plans for the company, and the parents must know which kids (if any) want to get involved. “Silence destroys wealth and relationships,” says Deans.

• If an heir wants to buy your business, charge market value. “When all family members understand there is no family discount on shares, there’s nothing to be jealous of.”

• Pull money out of the company. “Get those retained earnings into the hands of wealth managers who can spread the risk around,” says Deans. This also makes the business more affordable for anyone wishing to buy it. m

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