Succession planning for a family business, interview with author Tom Deans, Ph.D. [Podcast]

The Sage Advice Podcast energizes business builders around the world through the imagination of our people and the power of technology. This episode features Tom Deans, Ph.D., award-winning speaker and author of Every Family’s Business and Willing Wisdom. Tom specializes in business succession planning, a difficult subject for many business owners. An edited transcript is below.

The importance of a succession plan

Tom Deans: People know how to get out of bed and make money, but they have no idea how to monetize their largest asset, so they tend to do nothing, and they die at their desks. And, quite frankly, it’s tearing families and businesses apart.

Many business owners hoard their money inside their businesses, so when they make money they don’t pull it out and buy a Porsche, they put their money back into the business. They don’t do it for one year, they do it for 10 years, over and over and over. And they’re concentrating their wealth in one spot, which we all know is just in violation of the first principle of sound investing, which is to spread your risk as you’re getting older.

Business owners may also do the opposite, they hoard their wealth in one stock and then they don’t know how to monetize it, nor how to get out, and so they end up doing what so many business owners do, and that is nothing. They die, the shares transfer to their surviving spouse.

I’m trying to get business owners to ask some questions of their family, of their key employees, to figure out whether or not there’s a buyer in the house, and to explore whether or not someone wants to buy your business before you get sick. And everyone does.

What are some of those questions that should be asked before a health crisis happens?

Tom Deans: In my book, Every Family’s Business, I offer 12 common sense questions that business owners can ask their key employees, and their family members, to determine whether or not there’s a buyer there. And if the answer comes back, “no” … for example, a couple of the early questions really focus on whether or not someone wants to risk their capital to buy your business. There’s a lot of business owners. The elephant in the room is, the business owner looks at their children, they say, “Ah, my kids are gonna buy my business.” And the kids in the room are thinking, “We just have to wait until mom and dad die.” No one knows how to start the conversation, so the conversation is never had, life happens to the family, and then bad things happen to the family. What you often find is that, when parents ultimately die and the kids get the business for free, there is a huge tax liability, there’s no liquidity.

So, the kids reach into the business for cash to pay their personal tax bills, that gets triggered by the last parent dying, and the business fails. And then we all rush to judgment, we say, “There we go again. A perfect example of shirt sleeves to shirt sleeves.” As if all second generation kids are morons, or spendthrifts, or lazy. And the reality is, the person who should be wearing the shame and the blame is the business owner who didn’t do appropriate planning. Part of my message is actually really a hard message directed at business owners to get their act together because if they don’t start asking these questions, and figuring out how to exit their business, if not by selling to their family, then selling to a competitor. If they don’t ask the questions, they don’t put the plan in place, they’re gonna leave a legacy, but just not a proud one.

Want to hear more from the interview with Tom Deans and Ed Kless? Listen to the full podcast interview.