Wealth Building? Check out Every Family’s Business…

As a business owner, are you in business to create wealth or are you trying to create some kind of family legacy?

Far too many businesses, especially family businesses get bogged down with the idea that their business MUST span generations and be a legacy for younger generations. The reality is that very few businesses pass onto to a 2nd generation and even fewer make it beyond that.  The real opportunity for a family legacy is the wealth you can create with a successful business – and a successful business exit (sell at peak value rather than artificially hold on for future generations).

That’s one of the key points of Thomas Dean’s book – Every Family’s Business. A great (and quick) read that illustrates some of the major challenges faced especially by family Businesses.

 

Every Family’s Business – quick summary

The book is written as a business fable that starts with two men on a flight to Barbados. One is the son of a successful multi-generational family business that just sold.  The other is a founder (and father) of another multi-generational business that also just sold.  Both sales were successful, at least on the surface, generating large payouts for the owners.  However, that’s where the similarities between the two men end.  It turns out they had very different approaches and philosophies when it came to operating and selling their business and how the family was involved.   The older man – John – had viewed his business as a legacy for his eldest son, even though it turned out that son didn’t even particularly want to be in the business.  John ended up with a sale (at a reduced value because of family issues) at the expense of alienating both of his children and causing a lot of problems with his spouse.

By contrast, William, the younger man on the flight, had a very different relationship with his father – the founder of their business.  They worked together to sell the business, maximizing the value and with both getting exactly what they wanted out of the transaction.  This wasn’t just luck – William’s family had been doing this for several generations across multiple businesses and had developed a simple process of using 12 questions every year to help determine where their business should be heading.

Those 12 questions – and more importantly the annual process of having a candid and insightful conversation every year ensured that William and his father were on the same page and working together.  That, along with the philosophy that a business is an asset built for wealth creation and not some sort of family legacy, enabled them to rationally steer towards a very lucrative exit without any regrets.

 

The 12 Questions…

The 12 questions are actually very simple (which is part of their power) but they will drive the important conversations that are needed to make sure everyone is on the same page.  They are designed for a multi-generational family setting, but they could be equally effective with partnerships or any other business where multiple people have a stake in the business.

Here are a few of the questions that stood out to me:

Question #1 (for both parent and child) – Where do you see the business in 5 years?

This isn’t intended to be a long, complicated answer – it should be directional.  As an example, the parent might answer – I see the business sold within 5 years.  And the child might answer – I see steady growth year over year and the opportunity to purchase a competitor.  Obviously, that difference in opinion will lead to a discussion and with the input from the other questions, help to drive where things should go in the coming year.

Question #2 (For all equity holders) – Are you interested in selling your stock?  Is so, to whom?

Which pairs directly with the next question.

Question #3 (Child) – Are you interested in buying stock and taking control?

These 2 questions will help drive clarity into what is typically an emotional issue.  The author recommends creating a culture where everyone involved in the business (or in the family) recognizes the business as an asset that could be sold on the open market at any time if the price is right (Question #4, 5 and 6).  These questions will help determine if there’s a viable succession plan… or if there’s a need to actively start packaging for sale.

Question #8 – (both) – List at least 3 items in each of the following four categories that could affect the health of the business over the next 5 years: Strength, Weakness, Opportunity, and Threat?

This is a standard SWOT analysis and a great reminder that it’s important to take the time every year to think strategically.  This exercise ties in with the next question that’s really a vote of confidence on whether the owners believe they can grow the business (and want to) or if it’s time to find an exit.

Finally – the last 2 questions are a reminder (and a commitment) from the founder/parent that they will follow through on performance reviews and updated job descriptions and expectations for all family members in the business.  These are activities that corporations tend to do as a matter of course, but often get overlooked in family businesses.

The end result of the annual exercise leaves the family with a clear, updated blueprint of the business and at least a high-level strategic direction of where they want to focus (growth, expansion, sale, etc.).  It’s a simple exercise that will have a huge impact on any business if it’s done consistently.

Have you read Every Family’s Business?  I would highly recommend it, especially for any business that has or might have a multi-generational aspect to it.  What do you think? We’d love to hear your thoughts in the comments below.

Shawn Kinkade   Kansas City Business Coach