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Succession planning is crucial for success

02 June 2014 Tom Deans, Detente Financial Corp

We all have that one friend, the friend who cruised through school not worrying too much about their studies because they knew that they would have a job at the family business when they left. To them, this business was their Roman Empire, a legacy that would stand the test of time. However, even the mighty Roman Empire saw its end.

Family businesses do not always last forever, and we must not burden our children with a
cumbersome business they are not keen to get involved in.

Businesses and financial advisers should both plan with the end in mind, according to Tom Deans, President of Détente Financial Corporation in Canada. Deans was speaking at the Discovery Financial Planning Summit in Sandton.

“Most small and medium businesses will transition without a plan,” he said. “Over 125 million American adults have no legal will. Intestacy rates are around 50% in virtually every country I have ever travelled in,” he said.

Take ownership of your future

Intestacy is not only a consequence of poverty and poor education, he said. Four US presidents died without a will, and to top it, two of them were lawyers. “Wills are about taking care of people when you can’t.” Family ownership is the most predominant business form, with around 90% of companies falling into this category. “Dozens of family business books are written each year, and they all have the same narrative – that the successful family business is an old business. And that is a dangerous narrative,” he said.

Founders frequently spent more time on their business than with their family, and passing on the business to the next generation felt like the most important thing. The majority of their wealth was tied up in the business, yet they were paralysed by planning and pushed away thoughts of ageing or death.

Statistics showed that only 3% of family businesses would survive to the third generation, with a 70% failure rate in the second generation. “You’ve got the idea that your legacy will be your business, and that it is the greatest thing you can pass on. There is no more dangerous idea,” he said.

A new conversation

It is time for a new conversation around asset protection. Few advisers talked about protecting wealth, transition planning, wills, and liquidising assets, yet this was where they could earn the most trust from their clients.

Deans drew on his family’s experience of starting businesses, leading them, and selling those over three generations to illustrate how succession planning and effective transitions can empower business owners and heirs.

His family had founded, operated and sold their businesses for a combined value which exceeded $100 million, and held annual family meetings where they discussed their operating businesses, their share performance, and their succession plans. Deans himself attended his first family meeting at the age of five, and received a will for his eighteenth birthday. He pleaded with advisers to write similar wills, share similar wills, and discuss what they contained in their own businesses as well as with their clients.

Learn to let go and not gift

Family businesses should never be gifted. Instead, founders should ask their children whether they were interested in buying into the business, perhaps with a loan from the company. If the response was negative, the business should be sold and the wealth transferred in the will.

“Wealth will release potential or accelerate demise. But wealth never equivocates,” he said.

Businesses are not built to last. They are temporary and frail and change from year to year. While every entrepreneur thought they would weather the fluctuations of the market, every industry experienced revolutions. From the beginning, founders should consider selling – perhaps to a relative or an associate – and make plans for the transition. “Start with the end in mind,” he said.

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