Blogs & Comment

5 more points on family businesses

Thomas Deans book, Every Familys Business(see review here) has left me with an interest in family businesses. Since reading it, Ive had conversations with chartered accountants, business owners and others one manifestation being yesterdays columnon succession planning for family-owned businesses.
Im also finding myself re-reading parts of Deans book. It has a deceptively simple format yet a lot of meat to chew on thanks to the authors own experience running a family business and subsequent reading on the topic. To augment yesterdays column, here are five more highlights (from my perspective)from the book.
1. Exploiting family disunity
At times, the book reads almost like a manual on how to buy family businesses cheap. One of Deans theses is that the greatest enemy of family businesses is the family itself, especially when feuds erupt. Deans provides the example of the mother who kept the books of the family business and had the children competing ruinously for her favour — until the business had to be sold at cut rates. Someone with an eye for assessing family dynamics could perhaps run a nice business acquiring, fixing up and selling family businesses.
2. Communication, communication, communication
Communication is central to preserving family wealth and peace. When he gives seminars, Deans says one sentence always elicits an uneasy awkward laugh from his audience: In this room, there are children who believe their parents will gift their business to them and parents who believe their children will purchase their business. He adds: I believe this singular issue lack of clarity over the future ownership of the business is the greatest source of conflict and wealth destruction in a business.
3. Children get the short end in business successions too
In my column, the stories describe how parents got the short end of the transfer of a business to their offspring. But it cuts the other way too. In one case, a father scheduled the share buyback to end just as key patents were expiring, leaving his sons with a business worth much less than purchased. Thats why the annual review of the family blueprint should include a business valuation, advises Deans.
4. When the risks escalate the progeny dilemma
The risks of passing on a business to a child escalate when the parent has most of their net worth, or a lot of retained earnings, in the company. For one thing, it can take awhile for the child to complete the process of buying the parents interest, during which time unexpected events could arise. And owners of such companies tend to hang onto the reins longer to make sure their major asset is safe (the progeny dilemma), creating a succession vacuum that could result in the decline of the company later on. Better to sell for cash to an outside party when conditions are good and leave behind family wealth in a diversified form as a legacy, instead of the business itself as so many families attempt to do.
5. Destroying family wealth through sibling rival and infantilizing
Sibling rivalry in the business can destroy family wealth. So can infantilizing, where the parent never allows their children to feel they anything more than the teenager who wrapped the car around the telephone pole. In one case, a wounded son left the family business to set uphis own shop, with the mission to show his parents how good hewas by putting them out of business which he did.