Managing for Growth – “What does your exit plan look like?”

Managing for Growth with Dr. Tom Deans –

On May 28th, Hogg, Shain & Scheck Professional Corporation hosted a captivating seminar at the Hilton Suite Markham Conference Centre, which gave the audience an opportunity to engage in an unconventional, yet realistic perspective of family businesses. Dr. Tom Deans, author of “Every Family’s Business,” gave his explicit advice in regards to “finding the end before the end finds you.” His book, which all audience members received, lists twelve common sense questions that should be asked in a family business, when the thought of transferring ownership and responsibilities from one generation to the next arises.

Dr. Deans shared his firsthand experience of successfully selling his father’s business, which he was CEO of for 8 years. Combined with the wealth his father made selling his grandfather’s company, the family has sold their businesses for a value of $100 million. As expected, Deans says that he has not had a single regret doing so.

To start off the evening, Deans asked how society measures the success of a family business, and stated the answer to that being longevity. Since success is measured in years, businesses that are sold are assumed to be in some sort of trouble, which Deans says is an illusion that needs to end. The preconceived notion of gifting your kids with the family business for free is what Deans refers to as a paradox. Inevitably, it ends up destroying the family’s wealth much faster. He says that this wealth destruction takes place when the second generation transfers ownership over to the third generation, due to a number of reasons.

To better explain his point, Deans told the audience that they need to think of their business as a stock. Although we assume that we have full control over our own businesses, no one truly has that power. To explain, he went into detail describing the series of unfortunate events that took place at his family business in 2002. Ranging from the drop in value of the Canadian dollar to a passerby complaining about smells, the business was overwhelmingly attacked, and all for reasons out of the family’s control. Just like the nature of a stock, “you don’t know what you don’t know, and that is the essence of risk.” To stress his point even more, he bluntly told the audience that something can easily go wrong in their own businesses as well, and “that day is coming for you.” According to his research, only 16% of the most successful family businesses remain at the top after ownership is transferred over to the fourth generation. In Deans’ words, “businesses do not last.”

Starting a conversation concerning an exit plan is something that has been very stigmatized, and therefore awkward for families to discuss. The purpose of his book is to provide readers with twelve straightforward questions that should be asked in a family business and the sooner the conversation starts, the better. The questions are summarized as followed. For more depth, you can read Deans’ book “Every Family Business.”

1. Generation 1 and generation 2, what will the family business look like in five years?
2. Generation 1 and generation 2, are you interested in selling your business?
3. Generation 2, are you interested in buying the business and holding control?
4. Generation 1 and generation 2, do you agree that selling this business could be done at any time to maximize shareholder value?
5. Generation 1, will you think of special compensation for generation 2 if the business is to be sold in the next five years?
6. Generation 1 and generation 2, will unsolicited offers be considered and accepted with both generations’ consent?
7. Generation 1, will you prepare an updated evaluation of the business to ensure that an appropriate amount of insurance is placed, and that estate taxes will not get in the way of the business’s functioning after your death?
8. Generation 1 and generation 2, list at least three points that could affect your business in the next five years in each category: strengths, weaknesses, opportunities and threats.
9. Generation 1 and generation 2, should you A. continue to invest money in the business? Or, B. sell the business?
10. Generation 1, will you complete a salary and bonus compensation review for generation 2?
11. Generation 1, will you conduct annual performance reviews of generation 2 to measure mutually agreed on goals and objectives, as well as set new goals and achievements for the coming year?
12. Generation 1, will you give up-to-date and detailed job descriptions to all family members working in the business regarding duties and responsibilities?

Deans strongly stressed that the conversation of forming an exit plan should be started today. He mentioned that most families are underinsured so when the next generation requires money, they will resort to taking from the family business’ funds, which usually does not have much to start. As a result, the next generation in charge of the business wears the blame for its downfall, even though it was out of their control. Even once the business is sold, seller’s remorse is commonly felt, believing the family has been let down. “We are far more obsessed with the continuity of ownership,” than what the best decisions for the family and the business are. Deans says that only in family businesses will there be no thought of getting out, because there is too much concern staying in.

To sum up the evening, Dean told the invitation only audience that the value of a business is not based on your salary, but what you achieve on the way out, and so, it is absolutely crucial to keep in mind how you imagine your last day to be. “A business should always be for sale,” and rather than feeling remorseful about letting it go, it should feel as though something great has been accomplished. With that being said, he stressed the importance of letting the next generation purchase the business themselves at market value. “Don’t gift your business. Sell your business, gift the wealth.” As Deans made note of his book being controversial and far from traditional beliefs and values, he hoped his words would provide a new perspective for the audience. Deans final bit of advice for the night that concluded his presentation was “when you sell, celebrate, it’s not the end, it’s the beginning of something exciting.”