Podcast: Every Business Should Be Sold, an Interview with Tom Deans
Why every business should be sold rather than simply passed on to the next generation.
About the Host
Ryan is an entrepreneur, podcast host of the show Life After Business and the co-owner of Solidity Financial. Having personally experienced the hazards of selling a business, he joined up with his friend Brandon Wood to educate others on the process. Through their business (Solidity Financial), they provide a platform for entrepreneurs called Growth and Exit Planning that helps in exit planning, value building and financial management.
About the Guest
Tom Deans Ph.D. is the author of Every Family's Business: 12 Common Sense Questions to Protect Your Wealth, selected by the New York Times as one of the Top Ten Books Business Owners Should Read.
His research and thought leadership on the subjects of wealth transfers, preparing heirs and family dynamics has made him an in-demand speaker. Since the release of his first book in 2008, Tom has delivered more than 1000 paid speeches in 20 countries. He has also provided advanced training to advisors employed by the world's largest financial institutions, law firms, and accounting firms.
Dr. Deans is also the Founder of the Willing Wisdom IndexTM a new digital client engagement tool for advisors to use with prospects and clients to answer the question: "How Prepared is Your Family to Inherit?"
The Willing Wisdom Index is offered as a subscription service to advisors who want to build a bridge to the next generation of inheritors. It is also used by advisors as a sales wedge to pry HNW clients from advisors who offer no estate planning support. For more information on the Willing Wisdom IndexTM, visit www.WillingWisdomIndex.com
If you listen, you will learn:
- Tom’s professional background.
- Why the book is considered controversial.
- The 2 camps that have the strongest resistance to Tom’s message.
- The typical family business story and what’s wrong with it.
- Why Tom joined his family business.
- The importance of family meetings and open conversations.
- Tom’s goal for the book.
- How to redefine the term “legacy."
- Lessons all aging founders need to take away from Tom’s book.
- How to discourage family animosity and misunderstanding.
- Tom’s second book, Willing Wisdom.
- The conversations every family needs to have regarding the business.
- How to run a family meeting.
- Give your family the freedom to be themselves.
Tom Deans: You got to have a transition. You've got to sell your business to someone, sell it inside the family, settled outside of the family. I don't care, but always sell your business. You know your last deal is your hardest deal, but it must be done. That's the greatest gift you can give your family is that clarity and that's simplicity, but then I really did have to answer the question, how do families talk about the division of wealth? When do you leave wealth to your children? How much is enough? How much is too much?
Announcer: Welcome to Life After Business, the podcast where your host Ryan Tansom brings you all the information you need to exit your company and explore what life can be like on the other side.
Ryan Tansom: Welcome back to the Life After Business podcast. This is episode 121 and if you have been following our episodes and this show for awhile, you've started to realize and get some exposure to the GEXP Collaborative five principles in the process and we're going to start talking about a little bit more as we're actually ramping up for our book launch a mid next year and we've got some other cool events that are coming down, but I really want to start giving the frame work that how the these episodes fit into the five principles in the process. So all your listeners that are not aware of the principles. The first one is what is your vision for the business? Second one is what are all your financial targets? What are the light, what's the lifetime income that you need, and what is your valuation of the business and how does that valuation fit into your financial net worth and your needs of the liquidity.
Ryan Tansom: The third principle is what are all your exit options that are available to you in order to meet all those needs? And then the fourth one is how to maximize the value of your company. In light of your exit options and financial targets and goals, and then the fifth one is how do you hire the team of advisors to help accomplish the goals and the plans that you put into place. And today's guest is a very, very interesting one and how it relates to our five principles. Tom Dean's wrote a book called Every Family's Business and he has sold over a million copies of this in the last decade since he and his family, he sold the third family business. Each generation sold the business. The first generation founders sold it, so they've never actually transferred a business. And his argument is that every family business should be sold.
Ryan Tansom: Which is interesting because family transitions are one of the exit options that might accomplish your goals. So we had this great dialogue about when and how a family business should be sold for what type of value, how does that intertwine to the gifting in the estate and from the different siblings in the family and the. You know, the big thing that I think needs to be taken away from this episode is that if you understand that if you're the co founder or the founder and you understand what's important to you and you have a clear vision of your legacy, your vision, and how you're going to quantify that, then you understand your financial targets of when and how your money comes into your estate. Is it tied up in your business? Is it tied up into outside assets and how does that roll to your family's understanding?
Ryan Tansom: Then what makes sense? Should you give the business to the kids? How do you actually determine what that value is? And Tom has a really good argument that every single family business should sell for market rates. Whether it's internal, external, third party. It doesn't matter. It should be sold for market rates and he describes why that's even important in light of the tax consequences. Really, really good arguments are very, very strong opinions and I think he's got a lot of validity to the things that he's been saying. So I really believe that this is a must listen, and if you're a family business or if you touch a family of business anywhere, whether you're an employee, a third party, or a family member, a spouse, anywhere in or around the family business, this is a good episode to listen to so you can start asking really important questions to everybody that has a stake in the outcome of what that family businesses and where it will eventually transitioned to.
Ryan Tansom: So if you have more thoughts, more questions, go to the GEXP Collaborative's website where we have to ultimate guides on all of your internal exit options, the pros and cons, your external exit options, pros and cons, and a very, very deep intense guide about all the different ways to value a business and how to determine whether you need that money and when and how you can get that. So if you are in a family business and have questions around that, go there, get more information. Otherwise go get Tom's book. It's a fantastic in short read. But other than that, I will leave you to the episode with Tom. So without further ado, here's my episode with Tom Dean's.
Announcer: This episode of Life After Business is sponsored by GEXP Collaborative. Their proven process gives you clarity on all of your exit options and how those options impact your financial success, timing and future happiness. Sell your company on your timeframe to the buyer of your choice at the price you want.
Ryan Tansom: Good Morning Tom. How you doing? Ryan? Ryan. Fantastic. Thanks for having me on. So this is going to be fun because we have lots of family and businesses to talk about today. I think, um, with your crazy amount of exposure and experience into this field and my personal experience in my other clients that we've talked with and through, I think, I think this is going to be a fun episode for the listeners, but for some of the listeners who might not be familiar with you, your book, your background, why don't you just kind of give us the, the expedited version of where you came from, how you got to where you are, and then why, why I ended up writing the book.
Tom Deans: Well, okay. So, uh, I'm going to forewarn you, cut me off because everyone who has worked in a family business has got a very long story, but I'm going to try to keep it relative to work. I joined our family business. We are in plastics manufacturing. I joined that after a career in banking at the tender age of 37, which as you know, it's quite late in the world of family businesses. Ran that business for eight years as CEO and then sold. We had an unsolicited offer from a competitor. So we sold to a strategic buyer and we closed that deal on February 8th, 2007 plastics manufacturing. Two Thousand and seven. We got out just before our industry melted down. And I got to tell you, Ryan, we're not that smart. We were incredibly lucky to have found our exit at the time that we did.
Tom Deans: I, uh, I worked for the new owners for about six months to six months sentence for a crime I didn't commit. That was brutal, brutal, brutal period of my life as anyone who has run a business. And that has to stay in, watch someone else run your business knows. Uh, and then, um, they asked me to go home because I can tell you, family business owners make terrible employees. We just don't ask me to go home. I did and I took two weeks off. I, I played golf every day. Didn't move my handicap, a single stroke. I found myself typing away at my computer and that was about 7:30 in the morning, around 11:00 in the morning. My wife popped her head into my, into my office and she said, what are you doing? I said, I think I'm writing a book. And I typed all day and all night I stopped typing that day at about three in the morning and I type 10,000 words of what became a 40,000 word book.
Tom Deans: Most of those ten first 10,000 words made the editorial cuts and 30 days later I had A. I had a first draft of what a is now. Every family's business which was listed by the New York Times is the top 10 books for business owners to read. It is just phenomenal little book that carries with it a profoundly a different message for business owners and I think it's because of that controversial message, that contrary and message that really propelled the book, uh, to uh, sell, as I said, just over a million copies. So it's, it's been an incredible journey. I, uh, that, that book actually tongue me into a professional speaker and not the other way around. It kind of took me all around the globe. I've spoken than 25 countries over a thousand paid speeches. I do large conventions. It's just been the most incredible journey sharing this incredible perspective, which by the way, a lot of people disagree with completely okay with that. So that's, uh, that's too, Tom Deans' is, that's how we came to write a book and then follow that up with a sequel. We'll talk about that later. But that's, that's who I am and that's what I do.
Ryan Tansom: And yeah, like there's not just a shortage of things to talk about here. So I, uh, so first of all, let's just start with what, you know, for the people who haven't listened or read the book, why is it contrary to, why is it, you know, against the grain from the normal because we can dive in and unpack the 12 questions and actually the part of the book, because I think that probably there's a lot of where your learnings came from too because I want to also hear how that, how that actually was applied and you experienced it in your, in your journey, but why is it against the grain? Like what, what's the premise there?
Tom Deans: Well, you know, anyone who writes a book is trying to convince themselves of an idea they're not really trying to convince the readers have an idea but themselves, I mean, so there's good books have internal conflict in them as do I, as much as the book is quite deliberate and definitive in its perspective. You can feel the confusion and the tension in my own logic, uh, on the pages of the book as I'm driving out of our driveway on the very last day. So we sold the business. I've worked there for six months. I've asked me to go home, I'm driving out and I go, in my mind, I'm looking in the rear view mirror, we're looking at the building and I go, this is unbelievable. This is the. This is the third time we've done this as a family business. We have never transitioned the business into the next generation's hands.
Tom Deans: My great grandfather was entire distribution business. My, my grandfather had a chemical manufacturing business. My father had the plastic business. That's the business that I ran and help sell. So there was again, like start it and run it, sell it. We've never gifted our businesses to our kids and if like if our kids want our businesses, they need to go to a bank and borrow money and buy it. And I was actually in the process of doing that and I'll talk about that later, but I thought, isn't that interesting? So I thought, I think I got... I think at some point I got to write that story because all of the family business books that I read carried the same old narrative founder, starts a business and bites their kids in there, read these books. The books say, have lots of family meetings, lots of communicating into the hands of the kids.
Tom Deans: The kids will love you. You will love your kids. You'll make lots of money. It will be fantastic and everyone will remember you as the great founder of the great family business and the older your businesses, the more successful your family will be in built to last and oldest. Good. I'm like, I guess. Well, I guess we're a loser family because we never ever get those businesses transition and I gotta tell you we didn't feel like a loser. We sold that business for 10 multiple of EBITDA, all cash like, you know, earn out. It was an amazing deal. I thought, you know what? I got, I got to write this book. I got to write this book. I got to offer business owners a different narrative, a different set of goals, and I got to tell you, the day that we sold our business to this day was the best day of my life.
Tom Deans: It was an incredible moment watching someone slide a check across a table and pay you, not just for, I don't know, your sales, but for your brand, your technology, the goodwill, the innovation, all of that was reflected in the price that we were able to get for our business. And I thought that's got to be a goal for more homework people. So that's a, that was the genesis of the book, was the impetus for writing it. And, and quite frankly, it's the best thing. I think the most successful thing and certainly the most satisfying thing I've ever done.
Ryan Tansom: So why do people disagree with that? Uh, that strategy then what? Like what are the, what's the main objectives that you hear from the family and the business industry?
Tom Deans: Well, I, I can tell you right now, I have two horrific groups of people that I speak to. When I, in my professional, I have, I have software developers who when I'm speaking at their conferences, they're flicking their pens and twirling their hair and they're like, is this guy done? Of course, a good gun for more businesses that that want to start ramp up and sell. Right, so there are a tough audience because they're like, are you done? It's done. It's done on a minute. I got it. Then at the other end of the continuum where their business has been gifted to them, there land their businesses under their mail. The dirt under their nails represents their hard work, their legacy, their. They work on the land that they live on. It's all mixed up. It's so emotional and they hear my message as do many business owners in different industries and they go, why would I ever sell this business? It was given to me by my father and his father. This is who we are. Even the unborn, we'll be farming more family and I and they just. They just bristle at the suggestion that every business needs to be sold. Their. Their identity is so wrapped up in the business. The emotional connection to the land or to the business or to their people or to their community is so ingrained that they just, the sale represents a public acknowledgement of failure because they believed that the sale represents a broken family, a broken business. Because we all know Ryan, that you'll only sell broken businesses, right? You sell a business that's in the middle of a hockey stick, right. You know that big ramp up and sales growth peaking you. You wouldn't want to sell a business now.
Ryan Tansom: So in I was watching some of your videos online too, and you, you've got such a strong opinion about this night and we're going to unpack those two, but as I think you even said that there's a lot of narcissism that is in there. And what is the reasoning by saying that and what are, what are the huge challenges that like, I mean you mentioned it but it's all intertwined, but like why do you think it is the way it is?
Tom Deans: Well, I think the founders are, are the biggest problem. The founders who have spent more time on their business literally more hours on their business and they have their family is self-rationalizing, imagine that their greatest work of art, their greatest legacy, the thing that they will remember for the most is, is their business. It's the greatest triumph, and so what do they do? They offer inflated salaries or free shares or discounted shares and they knew or their children onto the farm, into the business, into the manufacturing operations or retail store, whatever it is. They lure them in with this idea that the business owner, the founder will retire, let's call it semi retirement because you and I both know they never leave the building ever. They may go to Florida, play some golf, but they always come back and they always come back with their opinions and their assessments of how the next generation and where's the money? Where's the dudes? Don't. The founder's money is wrapped up in a liquid stock in there, in the retained earnings of that operating business. That's why they never leave the building [inaudible]. Of course, the idea is that they're going to pull a salary in retirement while their kids run the business, but that's the plan, and then they go to mom and mom's gonna have a heart attack because she's running a business. She doesn't love her. Understand.
Ryan Tansom: She'd probably despise it because of all the lost time for... That's been for decades.
Tom Deans: I've got to tell you right now, I get more phone calls from elderly women whose business on her husbands that predecease them and you know what they tell me?
Ryan Tansom: What's that?
Tom Deans: They want to bring their husband back from the dead and killed them themselves. They don't want the business. The business starts to spiral out of control. Competitors pick it off for pennies on the dollar. It's the same old movie playing in local theater right across the country and you're going to see it over and over and over. This is a real problem. Business Succession Planning, exit planning. Big problem now because primarily because business owners are living vastly longer scenario. I just painted where the business owner sending retires. They would die. They would die at 72. They'd have a heart attack right now, the business owner semi retiring at 67, 68 on average. They're having heart attacks at 72 and now they're getting a stent and running for a marathon and these guys are dying in their eighties and nineties and their kids are in their sixties and seventies looking for permission to retire, nevermind buy the. It's not working and the kids are getting fed up, delving businesses, building value in businesses so that they don't own.
Ryan Tansom: Right. And then the end, when I hear it so often, time is like in. I mean I got multiple friends who own family or like our work and they're in this trap where they're just going to grind away and they say, well, we're just not gonna rock the boat and we're just like, you're going to have to buy your own value back. At some point you guys like, it just makes no sense to me.
Tom Deans: So yeah, they're actually working against their own interest.
Ryan Tansom: Right? Right. Yeah. So you're going to double
Tom Deans: the size of the company and then you're gonna have to pay twice as much. So that makes no sense. The kids complain about that scenario and the parents go on, zip it, don't worry one day all this. And there's this comment that don't worry about the price that you have to pay. We just gotta you just gotta hang in here long enough until we die. Death becomes a triggering event for the intergenerational transmission of a family business and it's not happening. It's way too late. So then what, what is, um, what, what maybe we can kind of go into like what is the. Well actually before we didn't do that, I'm curious Thomas. So was it your, I mean you came from the banking side at 37, so you came into your business at a significantly different kind of place and I would say probably most family members come into it.
Tom Deans: So where did your mentality come from and how did you guys get to that point where you said it's the best day of your life and it still was. It is. So how did, how did you get there? Well, I think it, it, it came as a result of our really odd family culture. I was actually buying shares in that business seven years before I joined as an employee and I would go to the bank and borrow money and I would buy shares and the share price was going up every year because the company was was, was doing very well and I bought shares five consecutive years. After doing that, my father put me on the board of directors and then two years later he hired me, a CEO. So thinking about it, right? I'm a shareholder first, a director second, CEO third. We do it all backwards, has exactly backwards.
Tom Deans: We would all backwards. So this idea, so when I'm stepping into that business, so that day one as CEO, I'm not thinking, oh, this is the Tom Dean's legacy show. All I got to do is mail it in, be a little bit overpaid, underworked, maybe do this for 10, 15 years until our kids are old enough we can onto them. That is, that is not our family culture. It is all about being very mindful of the value we're creating inside that business and how it's going to be monetized. It's going to be, it's going to be monetized by someone buying it, family members, buying it, employees buying in strategic buyers, buying someone, buying it. We're not gifting it and I know that like I know that walking in it 37 in 1999, that's my business to continue to buy it at market value or that's my business and here's the catch. It's my business and I can help sell and I can make money in our family doing it. Either way. So often happens in family businesses that they forget the second piece. They forget to have compensation models in place for family members that aligns their economic interest. So often in family businesses, if they get sold, mom and dad get rich in junior loses her job. I don't know what that's like.
Tom Deans: So that's why family businesses don't get sold. I gave a speech to um, an m and a conference this summer. I'm like, man, you guys, you have to understand your work and you're talking to all these owners. The vast majority of these businesses will never ever be sold on. Never come to market because you are just missing the forest for the trees. These families need to have these conversations, the dangers of gifting shares, so it's just a very different model in our family. I was very keen to continue to risk capital by the business and then a whole bunch of things shifted and you could see that the real opportunity to make money came from not a buyer or a seller of the stock and so that I pivoted in 2002 and it still took us five years to ready that business for sale and extract the value that we wanted to five years to sell a business. That was, oh my gosh. Wildly successful.
Ryan Tansom: So I want to dive into that and let's plan. I want to plant a sec because I want to come back to the compensation structure and maybe you know, maybe we can do that before we go into the questions because I think the separating of own have ownership and have salaries and the estate, all of that is so important and no one does it correctly. So I want to make sure that we, they would dive into that, but maybe, I don't know if you want to give a quick little rundown of the 12 questions and like, you know, kind of the premise of the book or maybe we do the compensation stuff first and just kind of what it, whatever you think is.
Tom Deans: Let me make a general comment about the question so we don't have enough time to go into all 12. I can tell you that the book has alarmingly few answers for business owners. There are a lot of books that offer up answered and I don't know how they do that seriously. I mean every family, and you know what I'm talking about, your family was different than mine. Your Business is different than mine and yet we're trying to come up with this cookie cutter approach to business succession planning for family. It doesn't work, right? A lot of business owners will turn to their accountants and their lawyers are two most trusted advisors for help on this subject. And of course you and I both know in retrospect, looking back on our own deals, what happens if you're the accountant, you're the lawyer and the business gets sold. Yeah, the town lawyer loses the file. So we're, we have business owners in record numbers. Turning to those professionals and getting really biased advice.
Ryan Tansom: Barely know what it's like to actually be in the thick of it. I mean that they get, they provide lots of good advice, but there's a, I mean you need, it's so difficult to unwind the fact that like you go into the office and you as I like I was talking to this other second generation and like you literally feel trapped because you can't go like of, and I'm kind of going down a rabbit trail here, but it's like, so if I go walk in and I don't like my current situation, don't have clarity of
Tom Deans: where I'm trying to go and how I get compensated for this. But I can't like just throw my resume online because everybody will see it. I'll get ridiculed for it. So you are literally just trapped. So like in, in. That's a way, you know, to have an accountant or an estate attorney, you know, you know, putting things in trusts and this and that, and it's like, well, that's not solving the problem guys. That gets the emotional tension is so high. It just, I mean, it's so difficult to get true empathy, I guess from a, from a lot of the advisors. Absolutely. And often the professionals are looking at the earnings and they're going, why would you sell this business? Look, we're going to get this return from your, you know, 401k or you're never going to get this from your mutual fund. Why would you sell it?
Tom Deans: This has been the best investment of your life. Now they don't. What they don't, they're not risking their capital. They don't know that, you know, the business owner has 80 percent of their personal net worth wrapped up in one illiquid stock. Like they don't know that. They just look at the returns on invested capital or they don't really understand that the next generation, if the business fails, who's going to hire? Who is going to hire me? Who's going to hire me as a, as a president of a family business in the marketplace when they know that I got the job because I shared the surname of the founder. He lacked credibility in the marketplace because because of who we are, it can be the most awesome CEO in the world. We are unemployable. Our value is diminished because of our, because of our DNA. It's so unfair.
Tom Deans: So often family businesses get started. Business owners feel like they painted themselves into a corner because they've got their children in the business. They don't know how to sell a business where their family is deriving a lifestyle and income from that. And children are trapped because they don't really feel like they, they can leave. Um, there's a lot of kids that don't want to leave family businesses because we're afraid of being disinherited, being removed from the will, leaving their parents high and dry.
Ryan Tansom: So how, you know, when you say that there's not a, there's not a lot of answers in your books. So then what was the, what was your main goal with the book and how are you addressing this problem? So I address the book, the book doesn't have answers, but it has 12 really fantastic questions that will start just the most extraordinary conversations inside the family.
Tom Deans: The the questions really are designed to be asked and answered between a parent and uh and the and the next gen or a key employee. So the 12 questions work with both with both groups, but the question is do do presume that someone has control, so some of the questions go to the controlling shareholder and some of the questions go to the family member and these questions can can and should be asked to people who are inside the business or outside the business. It really is about bringing clarity and transparency to the family about their largest asset. We'll transition and as I talk about in the book, if there is no, what I call buyer in the house, if there is no key employee or family member who wants to risk their capital to buy your business, I'm like, dude, that's straight to your left with no financial buyers, private equity or strategic buyers.
Tom Deans: No one's inventing new ways to get your money out of your business. You have to accelerate those and make your business sellable and prepare it for sale because you have no one inside your family inside your building loves your business enough to risk anything, so you better get moving and there's a generation of business owners who will tell you right now they're going to leave so much money on the table because they just don't know what they think. I think they think that someone's gonna no, they're going to meet someone at their industry convention. Is that a big check? And they're going to negotiate some quick deal at the Holiday Inn and it's going to go down and like a mom fantasy.
Ryan Tansom: Yeah.
Tom Deans: It's not going to happen.
Ryan Tansom: So then we tell in our keynote, we talk about like the trade show, the random unsolicited offers, oh my God, someone's gonna give me money. Like, let's do this before everybody forgets. But two different situations. One is when are times when you would recommend in inner generational transfer versus the third party?
Tom Deans: Yeah, that is a really, really good question. I, I think there's a real tension between getting the best price and preserving that thing that we called family legacy. I think the thing that I'm most proud about in the book, every family's businesses, this idea that there is no business that offers itself as a legacy. Often when I'm doing keynotes, I can have an audience with a thousand people and I can ask a rhetorical question like who is the founder of Coca Cola and it's crooked thousand people in a room. No one, no was arguably the most valuable consumer brand in the world or it was up until a couple of years before apple. It's a massive company when massive value and no one knows who the founder is and then I kind of, you know, look to the room that I'm talking to, whether it's auto dealers are funeral home director, whatever franchise association, and I say, who is really going to remember you for your, for your business.
Tom Deans: Okay. The answer is no one. That's a hard message to deliver to founders who are rightfully proud of the businesses they've created, but they are misdirected by this idea of what their legacy is, so if their business is not their legacy, it does beg the question what is, and in my estimation, it's family. It's not the business, it's your family that is going to remember you. It's the family that is going to be promoting late in life care for you as you age and you know are really out of control. The family that's going to step up and if you've used your business in a really unhealthy way to control relationships and family, you are going to be sorely disappointed and awfully surprised about how there is a lack of care for you when you needed the most. I think that was extremely well said and extremely clear because so many times I see founders use it like you said, to control.
Tom Deans: I mean that's really what it is, is it's a way of inflating prices. You can't get this much out and you know, you know, out in the market you can't. You know you're not going to get your heritage. It's all of those things that are just hanging over and you know when you lose control, you're going to see who doesn't show up to help because it's finally. It's time to pay the pay the Piper for all this stuff that you pulled. Very much so and you can see how the subject is so confusing for business owners because they learn at a very early age that the secret ingredient for making money is exercising control. Like in business, you either at 51 percent or more or you don't you. It is just all about control and so then the subject of business succession planning comes up and all of a sudden it pivots and it's all about relinquishing control.
Tom Deans: Like how do you do something that is so counterintuitive that has served you so well? How all of a sudden be sold on the idea that the best succession plans are the ones where business owners approach the subject from a real place of wisdom and gratitude and they start to ease up and really reach out for help, which is not control. Which is. It's Kinda like raising a white flag and saying I'm out of control, I need help and very few business owners do that and they pay a price that was very well put and it makes so much sense. I mean it's literally just fighting gravity to all the things that made you work very well. So one couple scenarios that we've had some clients that and people that I know, we're just a couple, a couple of different stories and curious on your thoughts on it is one is like okay, so if the owners, if let's say the founders have enough net worth or they don't, they don't need the value from the business to Rivendell and they've got.
Tom Deans: If they've somehow put into some sort of board structure and they've equalize the estate and because right now there's like multiple people call it four or five people all pulling a salary where they enjoy going in and working together and the businesses at least cash flowing and that's aside from the bigger estate and the reality is in. I don't, I'm assuming you've seen a lot of this is a lot of the second generation people, more on my side of the age and your age bracket where there's a lot more of the systems, like this is not an identity like let's systematize this was create value and so there's a lot of these baby boomer in businesses that are actually run like crap and they're not actually transferable, so there's not enough value there where if they were to sell it, you know, in any of the, anybody in that kind of category, if they were to sell it after taxes, after all this, you wouldn't have enough of that wealth to make, you know, could you essentially got called 500 grand of salaries?
Tom Deans: That's, that's getting through. You'd have three kids. It would have to go find a job and they wouldn't get enough money to make it worth it. So does that make sense? I know exactly what you're saying and you're absolutely right. And it was a big problem in a low interest rate environment, right? So you look at a sale and now what are you going to do with that money? What are your return is going to be like the family business with your investments? Yeah. You're not going to replace that income. That's just about the worst reason to keep a business going. I mean, what I'm really talking about is, I mean every single business on the planet has a freshness date. It's got a life cycle. Every single business on this planet has a beginning, a middle and an end and no one wants to talk about the middle.
Tom Deans: No one re, they especially don't want to talk about the end. Business owners are wildly optimistic about how long their business will it last and they're usually out by decade of the 100 largest firms in America in the year. 1,900. Only 16 were in business in the year. 2,000. That's not a random list of 100 firms. That was America's largest firms. The ones that had the healthiest balance sheets, the biggest sales, the best margin, the best people. They were monopolies and oligopolies. They were price setters. They had brands and people talent from Harvard and Yale and only 16. We're standing now, take a random 100. Even fewer are going to survive. This is owners can't see past one generation. So much of an coming back to your comment about narcissism. So many business owners think that their businesses are legacy and a lot of them are there are a little cute by half.
Tom Deans: They really think that, you know, not all the family, we'll figure it out or they have no plan and they know the family won't figure it out. This has really nefarious, but there is. I call them my one percent. It's that business owner who, and there's only one out of 100 that that thinks this way, but they're there and there's still lots of them. They think that because there's no plan, they know that when they die or become incapacitated, the business will fail. When they're gone. People will gather around at their funeral and say, holy smokes. Bill was such a fantastic business owner. He died and so too the business when he was so good, he was the only guy that could run it.
Tom Deans: That's the logic. It's insane. What what bill doesn't understand is that most people are going to stand around and go bills a little bit of an ass. It was all about just about bill, build it and build systems. Bill didn't have recurring revenue. Bill didn't even play a lot of golf. He couldn't even get to the golf course because you know he was. The business was so dependent on bill. Woo, good for you. Right? Not that bright. In fact, it bill even has that moment where he decides he's going to sell the business and m and a guys going to take him out to dinner and you can say, you know what, Bill? I don't want to talk about business tonight. Let's just get to know each other. You know, let's not talk about numbers or how much we're going to pay for your business.
Tom Deans: We don't want to talk about business. We just want them to about bill. Tell me, Bill, what are you to bill goes, well, I like playing golf. That's why I like playing. I like playing golf to bill. Tell me how many rounds do you play and bill goes, why don't you get out of four or five times a year? Play a couple of industry events. That's about it. Bill does not realize that. He just devalued his bill. Has No idea how he just got game bill the right answer for bill as well. That's a great question. I love golf and I play 86 rounds a year. My, my people hardly ever know I'm gone. I mean, I'm just. I'm irrelevant. I mean, I don't have customer relationships. I've got, I've got a... I've got someone who runs my sales department, I got fantastic operations person, I got great systems and processes.
Tom Deans: So bill is just hung himself with his own words. Bill's not that bright. Yeah, I totally agree. And I think there's a, there's a lot of the, the less ego you have and the more you actually realize that this is an investment and I want to make this valuable and I don't want to work that hard. I mean, I think inherent laziness is a good thing because you're going to figure it all the ways to never have to do something twice and you're going to make systems and you're not going to have to work. And so let's go back to then your, your situation even kind of this nice couple of clients that are in these family business that I know that you know. Okay, so the, let's say the company is worth 5 million bucks, you know, you're talking mid-market, small more mainstream, so maybe a million dollars in EBITDA of 5 million bucks, you know, but you'd be paid on taxes, you do all this stuff and there's no chance you can get 500 grand and you can't.
Tom Deans: I mean like the literally the kids will have to go get jobs. So there's a couple different scenarios I see there. One is that the kids get ready, get rewarded for increasing the value of that business over a period of time to actually all move in line to sell together. So that way they make some proceeds or they're able to reinvest. There's got to be like almost a way to give them their running headstart towards whatever venture is next, if there's not enough network to provide for the entire family. So how do you reconcile that whole situation? So we're starting to drift into my second book called willing wisdom where I answered a couple of questions, big questions that we're really glaring as a result of the first book. And so I, you know, I'm a big fan of family meetings and often when second gens here, my message from my first book, which is never gift the business to your children if thing, if they want it, they need to buy it.
Tom Deans: Well, you can imagine if you're a second gen or you're like, Oh, who is this idiot? I don't like that. I don't like that. I like the, uh, you know, just kind of hanging around here, away from my parents to die and get it for free. I like, I like that message. They really think that message. Sure they're gonna be waiting a long time. What I'm saying is to the second gens, I'm not trying to deny you a business. I'm a big fan of business founders transitioning wealth while they're alive, cash while they're alive in the context of a family meeting. If you sat down to kids, one in the business, one outside the business and said, hey, um, hey mary and billy, your mother and I have some surplus capital and we want to start transitioning our wealth now so we can enjoy watching you improve your live start businesses or even transition our business. So your mother and I have $10,000, we'd like to give you each and that could be a thousand. It could be a 100,000, it can be $3 million. The amount is irrelevant, but watch this exercise. So we'd like to give you each $10,000 each. And by the way, Mary and Billy, our business is for sale.
Tom Deans: Now, do you want to take the $10,000 in, return it back to us in exchange for $10,000 worth of stock? Or do you want to take the $10,000 and go buy a car? Go by whatever they want to vacation or make an investment. Whatever you want, you can do it. Any thing you want, Ryan, my messages follow the money. It doesn't lie. If those kids love that business and love and believe in their own talents to take that money and grow that business, they're going to return that $10,000 in exchange for shares. If they don't, that's valuable information.
Ryan Tansom: Well, I think that that's. Yeah, no, that makes a ton of sense and that, that clears up some of the structures that we put together is you know, it's cash bonuses through this, you know, the, the gifting and then there's also, if you actually tie like a compensation plan to EBITDA or value creation or some sort of KPIs, then they can get cash bonuses. Then you discount the business and then they can use that to buy in. But you're like you said, if you give them the option, then they will go buy a car. You just know where their, where their priorities lie. So then one of those things then downward you to say, okay, then we've got a timeline of like a certain valuation that we want to march towards. So that way there's enough time for juniors or whoever they are to get in and get the financial reward that they like. How do you, how do you start lining up? It took you guys five years. What were some of the questions and the conversations that we're having to determine the buyers and the values that everybody was march towards?
Tom Deans: Yeah. So all of those values and timing and valuate, it's all really being driven by the questions. So, and let me just, let me just, for the record, these, these are not my questions. These are questions that my father asked me. I have shamelessly monetizes intellectual property as you get royalties on it. Absolutely not consistent, no associate. He would ask these questions and I knew like when I was joining, I knew that I could join as president and CEO of that business. I knew that business could be sold six months later if someone came along and offered, uh, an outrageous multiple just because I was family and I just joined the business. I never took the business off the market. It was always for sale always to the highest buyer. Really. The only latitude that we extended the family was last look at the deal. That's it.
Ryan Tansom: So then how did you, with those, those conversations or anything like that, did you guys like have the waterfall effect of understanding how inheritance works? How there was like, how did you guys separate estate? I mean, did you guys equalist this estate? Like what's your kind of thoughts and opinions on how to do?
Tom Deans: Oh yeah. So, so part of our family culture is while it's really disciplined and on the surface looked real, like it's really hard on next Gen. this actually really transparent. So I mean I have a copy of my parents. Well they have a copy of my will. Uh, okay. I have two kids, 20 to 25. When our kids turn 18, we buy them wells. I mean they're very disappointed. They're hoping for cars they get will's like we just, we are just, we buttoned down our governance and we share our documents. So. And I can tell you my brother was one of my biggest supporters. He was outside the business. He's older. Okay. But because we have family meetings and we were disclosing the fact that I was purchasing the family business at market value and I was just follow the money, I go to the bank, borrowed the money, buy the shares, buying my parents share. Someone is sitting up at the estate level, we have a copy of my parents. Well, we can see were equal beneficiaries of the estate. So as I'm running and growing the business and buying it at market value, what's my brothers saying?
Ryan Tansom: Thank you.
Tom Deans: Go, Tom, go! Exactly. In family businesses, I'll tell you why, why it happens. It's because the notion of gifting a family business is allowed to percolate inside the family as as part of its culture. It's never addressed. So people are left to make assumptions and the kids outside the business look at the kids in the business and they go, well, that's where all the family dough is. They're going to get more and they're going to get it sooner, and that may be the coolest idea away from the founder or the or the parents. My favorite line in the book is this. Silence is the great destroyer of family business. Well, it's not families that talk about the plans, it's families that leave people guessing the secrecy around the transition of family wealth.
Ryan Tansom: It's interesting. Um, who did I hear recently where they said, um, um, when you have silence or unaddressed think because you know, people deal with this, whereas they're like, you know, marching towards and Exeter or I mean all pretty much all of life. It applies and when there is no answers and no, when there's a void, people make their own shit up. And what is is it's usually 10 times worse than the actual truth. You're absolutely right.
Tom Deans: Especially when it comes to this subject matter.
Ryan Tansom: So then what would you say to the creative estate and tax planners and all those people out there were, you know, okay, if Tom's going to the bank getting fair market, you then pay your parents. Then there's ordinary income, there's cap gains, there's, you know, you're, you're getting, there's double taxation, all that stuff. How do you, how does that reconcile with wealth, wealth preservation, and the estate?
Tom Deans: The most clever tax maneuver in the world is not smart enough. Two, diminish the risk of transitioning a business into the hands of someone. Okay, Juan or risks capital or as not capable of running or growing that business. You can save all the tax in the world, but if you thrust the business into the hands of the wrong person, you are going to destroy everything and that tax game is going to look like the dumbest thing you ever did. It's the tax tail wagging the dog over and over and over. I keep telling business owners, suck it up. Pay Your tax, make really informed decisions around your largest asset and that's your business. No share with you a very, very brief story. I was playing golf recently with a CEO of a search firm executive search firm. I asked him, how do you find a CEO for a company? What he does, he starts with a database, a couple of thousand resumes. They whittle that down to 100. Then they start telephone interviews, whittle that down to 10 candidates face to face interviews. They put a team of three search executives on that file, multiple face to face interviews and then they hire a CEO starting from a pool of 2000 to find the best talent. You tell me what the likelihood, the probability of finding the best CEO from a pool of two kids. And saw where that was going. Yeah. That's why only three percent of family businesses make it to the third because we're saving tax but frosting business into the hands of the wrong people. They don't work. Starting a family business consultant for me.
Ryan Tansom: Yeah. Right. But I mean it is so, it, it's so funny because it makes so much logical sense, Tom, where like it's who was talking to my dad about it recently and we're talking about like the uh, the royal family over, just like what are the chances that the kid is capable of running the entire country. But it's such a ridiculous concept that it's, it, it, it, it is. It's, and it's, it's the very, it's a micro version of the same thing. Right?
Tom Deans: Exactly.
Ryan Tansom: It's so, so what, what's, what's the premise, your second book then?
Tom Deans: The premise with the second book is uh really... So it really presumes that a business has been sold. There's been a liquidity event and I, and I'll make the point and I, I was staggered by this to learn that many business owners will not sell their 10 million, 20 million, 30 million, $500,000,000 business because they don't want to deal with the issue of how to, how to leave and transition caption and other words. So there's a lot of business owners or feel more comfortable leaving an operating business to their children where they feel that they'll have a, an obligation or a duty to get up in the morning and go somewhere and do something. So this idea of just having a liquidity event and then leaving cash is really, uh, it's really difficult for founders who never had that scenario presented to themselves. So that's what a lot of business owners do.
Tom Deans: What they do, they don't sell. They just die at their desk and then transition operating businesses. So I wrote a book that basically said, lucky you got to have a transition. You've got to sell your business to someone, sell it inside the cell and outside of the family. I don't care, but always sell your business. That's your last deal is your hardest deal, but it must be done. That's the greatest gift you can give your family is that clarity and that simplicity. But then I really did have to answer the question, how do families talk about the division of, well, when do you leave wealth to your children? How much is enough? How much is too much and willing wisdom really gets into that subject matter. And again, I offer this time seven questions, not 12. Someone has said, if I write a third book, maybe I'll offer some answers, but, but more questions in the second book, but these are again are beautiful questions to start family conversations around the importance of wills, the importance of powers of attorney, health care directives.
Tom Deans: Ryan, do you know that 125 million American adults including half the adults listening to this, to this, this show don't have a will? They're missing the most basic document. If you're a business owner and you don't have a will, do you know that when you die, your business will get chopped up according to the state law that you're in. You know, Iowa, was your business going to get chopped up along with your barbecue and your new. It's going to get divided according to that really rigid formula. What is going on? It's ridiculous, isn't it? It's incentive because because you didn't. You can't talk about death. You can't talk about aging. If you do studies show that if you have a will and you talk about it, you will die immediately. I just made that up. That is something that was great. No, and right. Yeah. If you talking about, yeah, no, it will come to fruition. So how in the. I know, because we've got a short amount of time here. I want to circle back to um, to your, your definition in your experience of family meetings because I think if we were to sum it all
Ryan Tansom: up, you know, talk, talk, talk, talk and start understanding and having clarity. So what, what would you suggest are the baby steps, what would these family meetings look like and how do people have it? And by the way, even before you answer that, I got this one friend who's got a family business that all he's doing is putting his head down, his working his ass off and squirreling away money because his whole family and his sisters and everybody on the, the, the cow taking the milk and he's like the, he's the Sherpa and then there's no one's talking about it. So what do these families meetings, what are these family meetings look like? Who should be there and how do you like what, what's the format?
Tom Deans: Well, I can tell you how to recent. I'm often speaking resource inside family meetings. I come in, I speak for a couple of hours and then I, I get the hell out of dodge. Really? I'm a provocateur. I come in, but I'll tell you what I've seen in some of these family meetings there aren't too that are similar. They're all different. But in a recent one in Chicago, I can tell you that, um, I watched a 15 year old girl chair a meeting. She ran the family eating. They rotate the chair. Now this family is extraordinary. They have invested serious amount of time to prepare the next generation to be inheritors of significant wealth, but they are not, they're not burying their heads in the sand there. They're attacking this issue, uh, you know, full on and resourcing it with, you know, with education and books and speakers.
Tom Deans: I mean the next geners so impressive. We often get the next generation that we fear not the ones that we want, the ones that we fear because we don't engage and if there are concerns around the talent than the next generation or there's addiction issues or some other major concern, they don't go away on their own. There's just more Zeros. You're just doubling down by ignoring it longer. Every family meeting is different than some of the common features. They're almost always resourced. So there is a trusted advisor, a facilitator who's running the meeting. There's an agenda. There is, there is someone taking minutes. The agendas are actually very short and very, you know, concise and precise. They tackle one or two issues, a family meeting. I'm seeing a lot of, a lot more transparency, families working on, you know, wills, sharing wills, making sure that everyone has a clear idea of how things are going to go down. There is just so much family litigation right now. The courts in virtually every state are just jam packed full of families fighting. There's never been so much money. $2,000,000,000 will be inherited today in the US. Today, tomorrow and everyday for the next 10 years. It is a tsunami of money. Much of that money sitting in as equity and operating businesses without a will, no will like just a friendship. Everyone lawyering up and grinding down these beautiful, beautiful, beautiful businesses because no one knew how to have a family meeting and start the conversation around logical, transparent transitions. It communication, just communication and relinquishing control. Watching that next generation not run that family meeting like a board meeting where they sit at the head of the board room table and say, okay, I'm going to ask you some questions about you know, about our business and whoever gives me the best answer is going to get the most money. Like the opposite of that, the business founder, the controlling, you know, the matriarch or patriarch making themselves very tiny in those processes, letting the next generation grow up and find their own voice and give them the confidence and the space to be not just as good but to be to be better, not not a business founder who uses a family meeting to suck all the oxygen out of the room and perpetuate their own mythology about how freaking fantastic they are.
Tom Deans: The opposite and those are amazing to watch and sadly those great family meetings go under reported. No one's going to write an article about a great family that meets four times a year with their advisors and have this incredibly articulate, well thought out, well communicated plan. Who wants to read about that? That's just sounds like they're boasting, right? Whether we want to read about, we're going to read about another, you know, aretha Franklin without a will in order to apprentice without a will. You know, we live about celebrities without wills and fighting and litigation and we think, well that's, you know, that's the trajectory that families are on. Make it, hold it, blow it shirtsleeves to shirtsleeves rice patty to rice patty, wherever I traveled, 25 countries as spoken and there's a version of that narrative. It was your favorite one. I think it's clogs to clogs.
Tom Deans: The Dutch influence. Yeah. You start out as a peasant, you build a business, you create value. You no longer working in the, in the fields, next generation, you know, three generations. You're wearing clogs again, you know, it's really interesting in um, and we don't have enough time for us to really dive into this, but I interviewed this gentleman named Daniel Goldstein from and he is running a 134 year old ESOP. It started out as a family business, but they, they did three tranches of an ESOP and there are very large and they've been buying businesses, but he, he actually even broke it down. He said like physically as that business continues to grow at whatever normal growth rate and as every generation multiplies, it's not big enough to sustain everybody, so you're naturally just by pure math going to run into the clogs to clogs in three generations because there's not enough liquidity and like there's not a market for it so you just physically can't necessarily do it unless it's just one child as her one child and that's it.
Tom Deans: And not only that, but if all you do is, you know, don't just gift an equal number of shares to your progeny and progeny. It only takes three generations to get up to 60 shareholders, ex wives, everyone with an equal amount of shares and no definitive control. We've addressed controlled, well controlled. That's how they make money. Someone in control and you can see, you can see the paradox, right? Businesses out or non family businesses and yet they don't last as long as non family businesses and I'm fascinated by that inflection point and when this awesome moneymaking machine actually turns on itself and becomes a wealth destroying machine and it's different for every family.
Ryan Tansom: So we got to wrap up here because you've got to go, um, what is the, you know, if, because we've talked about a lot, you've got thousands of presentations you've done over the last decade of listening to or listening to all the people that have read your book. If there's one thing that we've talked about that you want to highlight or if there's one thing that we've missed and there's a big takeaway for the listeners, what would it be?
Tom Deans: The greatest gift that any business owner can give their children is the freedom and the flexibility and the resources to grow up and be the people they were meant to be. To be authentic and not some version of the business owner themselves. The greatest gifts is freedom. We know that living in democratic countries, we know that freedom is so valued, so cherished, and we forget that concept and that principle when it comes to our businesses.
Ryan Tansom: So if the listeners want to get more of your information, the book, all the. You get blogs, all this stuff on. What's the best way to get in touch with you?
Tom Deans: Best way is a, it's just the title of the book. Every family's business.com. You can find the book. The fastest way to order it is right off the website. Shipping is free and if people send me a nice email, we'll even throw in some steak knives.
Ryan Tansom: Ooo, Cutco?
Tom Deans: We don't mess around, here. I'm self published, the books come right away and uh, and I guarantee it's an entertaining read. I also do a net. I also do an audio book and I narrate that audio book.
Ryan Tansom: It's pretty good. Yup. Yup. I enjoyed it. I love it. Well, thanks so much for coming on
Tom Deans: Alright, Ryan. Thanks. Thanks for having me. Appreciate it.
Ryan Tansom: I'm sure there was a little bit of controversy and some inner conflict going on. If you're in a family business and listening to Tom's opinions, but I think if there's a one main takeaway is sit down with your family members in, have a conversation yet a facilitator in a start talking about the things that actually matter within your family, the money, the business, the estate, the relationships, the work, who's going to buy it, have those questions because this needs to be answered because dying in the corner office and leaving everybody with a big pile of mess is not what you want to be known for. So I really, really challenge you to sit down and have these conversations. If you want more information, go onto a start. Leveling up your education on how businesses are valued, all your different exit options so you're not just having these conversations in the dark. We're providing as many resources as you possibly can to give yourself some freedom to have these conversations and know that you're just not flying in the dark or relying on advisors that are potentially in it for some gain that you don't know that everybody in your family read Tom's book and start the dialogue. So if you enjoyed this episode, go onto itunes, give me a rating, share it with anybody that's got a family of business and I will see you next week.
Written by Ryan Tansom
Ryan runs industry-specific podcasts on his website which pertain to mergers and acquisitions, and all the life lessons he wish he had known then. He strives to bring this knowledge to his listeners in a way that is effective and engaging by providing new material each week from industry experts.