“Every Family’s Business”, Written by Thomas William Deans, Ph. D. is on the New York Times: 10 Books Business Owners Should Read
“Only one third of all family businesses make it to the second generation. Only 10% of that one third make it to the third generation. That means that today, if you are a company founder, your grandchildren have about a 3% chance of owning your business.”
“Of the companies making up the Fortune 500 in 1970, a full one-third had vanished just thirteen years later – evidence that size and a good reputation are no guarantee of a legacy.”
Too many family business owners view their business as their legacy, and measure success in terms of how many generations it can be passed on to. This is a mistake, which can ultimately destroy both businesses and families. Family businesses should be viewed for what they are: Tremendously powerful machines for creating wealth. As such, Peter Drucker rightly suggests: “…the first duty — and the continuing responsibility — of the business manager [is]To strive for the best possible economic results from the resources currently employed or available.”
The key to preserving generational wealth is abandoning the longevity of a family business as a fundamental goal. The fundamental goal of any business should be to increase its shareholder value. Every member of the family, whether active in the business or not, whether interested in one day acquiring controlling interest in the business or not, should understand that the family business is an economic machine for creating wealth.
Family members who are active in the business should be compensated based on the fair market value of their contribution. Family members who are interested in acquiring stock in the company, or even in acquiring control interest in the company, should have the opportunity to do so – perhaps over time – at the company’s market value. Cash from the sale of the family business can ultimately be easily and equitably distributed to all family members, regardless of their active participation in the company.
The first seven chapters of the book detail a hypothetical conversation between seat mates on a flight to Barbados, each of whom had recently sold his business. William’s family had followed the above principles through three generations of family owned businesses, each sold when its founder was close to retirement, to the great satisfaction of all concerned. John’s family had focused on passing the business on to the next generation, but ultimately sold the business and in the process achieved much less economic gain than was obviously possible and created great dissatisfaction and disappointment within the family.
In the final chapter, William outlines the Family Blueprint, basically a commitment to an annual conversation between the owner of the business and each family member who might be active in the business, interested in becoming active in the business, interested in acquiring stock in the company, and/or interested in one day acquiring controlling interest in the company.
These annual conversations are focused on each participant’s brief, written answers to the following twelve questions:
1. (Both parent and child) What does the family business look like in five years?
2. (Both parent and child if each holds stock) Are you interested in selling your stock? If yes, to whom?
3. (Child) Are you interested in buying stock and acquiring control?
4. (Both parent and child) Do you understand and agree that in the interest of maximizing shareholder value this business can be sold to a third party at any time? Yes or no.
5. (Parent) I agree that within the next 60 days I will put in place a special compensation formula for my child in the event the business is sold within the next five years. Yes or no.
6. (Both parent and child) As a fundamental principle I understand that from time to time we will receive unsolicited offers from third parties to acquire the business. These offers will be considered and accepted at the discretion of the controlling shareholder and accepted by the child. Yes or no.
7. (Parent) In preparation for the annual update of this blueprint I will arrange for an updated valuation of the business and will calculate whether there is an appropriate amount of insurance in place. I will furnish evidence that this has been done and that estate taxes will not impair the ability of this company to function after my death. Yes or no.
8. (Both parent and child) List at least three items in each of the following four categories that could affect the health of the business over the next five years: Strengths, Opportunities, Weaknesses and Threats.
9. (Both parent and child) To secure our future prosperity together we should either:
a. Continue to run our business and invest our money in our company. Yes or no.
b. Proactively pursue the sale of our company. Yes or no.
10. (Parent) Within 60 days of completing this blueprint we will complete a salary and bonus compensation review for my child. Yes or no.
11. (Parent) I agree to complete an annual performance review of my child. This review will measure performance against mutually agreed on and achievable goals and objectives. New goals and objectives will be set for the coming year. Yes or no.
12. (Parent) Within 60 days of completing this blueprint I will present up-to-date job descriptions to all family members working in the business that clearly describe their duties and responsibilities. I will include an up-to-date organization chart. Family members working in the company will adhere to the company’s policies and procedures. Yes or no.
The author stresses that as soon as there is more than one stockholder, the company needs a well-crafted, buy/sell agreement in place between all of shareholders.
J.Michael Ertel, Managing Director