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Made in Germany Deichmann A Family Business
In Germany the name Deichmann is synonymous with affordable footwear for the entire family.
Heinz-Horst Deichmann gave up his orthopedic practice in 1956 to take over the family’s shoe business. Now Europe’s largest shoe retailer, with sales of over $6 billion in 2013, Deichmann-Schuhe SE also owns Rack Room Shoes and the Off Broadway chain in the U.S. Deichmann serves as co-chairman of the company’s administrative board, while his son Heinrich heads the company. The family doesn’t like being recognized as billionaires, because they live a relatively modest existence and think of their fortune as providing a mandate for social responsibility rather than a means for personal benefit. In addition to providing employees with generous benefits, they support various missionary and humanitarian causes including a program to help leprosy victims in India–a country Heinz-Horst has visited frequently. His social and charitable work earned him the Martin-Luther Foundation’s “Luther Rose” award.
The New EBITDA: Emotions Before Interest Taxes and Depreciation by Tom Deans, Ph.D.
Sitting in the departure lounge at LAX, I couldn’t help but overhear a conversation between an investment banker and his younger associate. I learned two things. First (and most business travelers can relate), it is amazing how cavalier people are about discussing confidential details in public places. The second confirmed something I had been thinking about family businesses for some time.
The older of the two bankers was whining about how he thought the slam-dunk deal they had just presented was now probably never going to happen. On and on he grumbled about the time he had spent running the numbers, lining up partners and generally bringing the deal to a crescendo, only to have the business owner change his mind about selling.
The investment banker was completely perplexed about why the offer, the numbers, the multiples that looked so good weren’t enough to entice the owner to do the deal of a lifetime.
It took everything I had to stop myself from leaping into the conversation and selling him a copy of Every Family’s Business (it wouldn’t have been the first time). But I exercised extraordinary restraint and settled back and listened to him talk about the clever structure of the deal, the tax that could have been saved and the instant wealth the owner would have secured if only he had been smart enough to take the deal.
Emotions are Squishy – Not the Stuff of Deal-Makers in Suits
The funny thing about listening in on a conversation is that the longer you listen the harder it is enter the conversation. So I bit my tongue and instead simply wondered how many other business brokers, M&A professionals and investment bankers expend such effort trying to bring deals to fruition only to have sellers back out. I wondered how an entire industry of intermediaries could so badly underestimate the emotional connection that owners have to their businesses, and also fail to understand how these emotions can scupper so much good work and extraordinary planning and lead the owner to ultimately destroy the business’s value.
When really bright finance experts hear the word “emotions” you can so often see their eyes roll back and the calculators shut off. Yet students of the greatest financiers of all time – deal-makers like Warren Buffett – know that these people get deals done by running the numbers and then engaging business owners in the one corner of their life where most number crunchers don’t go – their family. It is the rare rainmaker who has both the left and right brain firing on all cylinders.
Buffett and other great deal-makers know that the sale of a business will typically result in a “liquidity event” that will leave owners with more wealth than they feel comfortable consuming. Most business owners accumulate wealth precisely by denying themselves consumption. Sellers will often kill deals, blaming a low bid price, but there’s almost always much more at play.
Reducing An Owner’s Life Work to a Number is Depressing
Most deal-makers underestimate the guilt and remorse sellers feel when they reduce their life’s work to a single number. It feels so crass and empty and hollow to imagine that decades of risk-taking, relationships and earned status in their community will end the day a check is cut and control is relinquished.
That’s why so many business owners don’t do their last deal. That’s why so many let their death be the event that triggers the transfer of controlling interest of their business to family – typically ill-prepared family members uninterested in continuing the business.
With universities, associations and institutes granting so many awards dedicated to perpetuating family businesses at any cost, it’s the duty of intermediaries to serve family business owners with a counterbalancing narrative that places the preservation of capital at the center of more intelligent estate plans.
Preserved capital from the sale of a family business – capital a former owner can then deploy for philanthropic endeavors and for funding the next generation’s own businesses – and not an operating business that’s well past its shelf life is what pays homage to the most enduring legacy: family and community.
Buffet is Both Psychotherapist and Financier
I really wanted to tell the two guys in the airport that Buffett’s best deals had come after he cemented his own family business succession plan. Buffett can easily look into the eyes of any family business owner and talk with authenticity. He can empathize with a business owner’s struggle and can explain why selling the business is the key to securing their greatest and most enduring legacy – their family and their philanthropy.
I didn’t have the guts to chime in and say, “Fellas, I’ve really been enjoying your conversation but there’s way more to doing deals than running the numbers.” Deals get done based on trust and respect earned by intermediaries paying homage to the things in a business that transcend money. Intermediaries who approach this emotional subject like one more thing to check off on their due diligence list will be outed before the coffee is poured. Business owners can feel the disingenuous long before they actually hear it.
For most owners, the sale of their business represents the end of their professional careers and a major overhaul of who they are and where they fit in. Anticipation of the disappearance of their status as business owner, employer and boss often means the sale never gets completed.
Intermediaries who can honor the risk-taking that has gone into creating a business and connect that risk to something more enduring, like family and philanthropy, will themselves be participating in something that transcends money. A guy like Buffett, who is still driving hard deals while giving away half the wealth earned from those deals, tells you precisely what motivates him and his family.
Wealth with purpose: scoff at this soft, simple idea, diminish its importance in closing deals, and you’ll be the one sitting in an airport lamenting the one that got away.
PS: Most people wearing earphones in airports are only pretending to be listening to music.
Building a Family Business that Lasts
A Family Wired For Perpetual Dependence by Tom Deans, Ph.D.
When the sale of a family business is all about a founder becoming wealthy and their children losing their jobs, you can see why so few ever put themselves in play and sell.
The CEO – the Chief Emotional Officer (Mom, and increasingly Dad) – just can’t stand to see the family pull itself apart. Killing the business with love has always felt like a better plan.
With a wave of aging business owners trying to figure out how they’ll fund their retirement, you can understand the temptation to simply throttle back on their day-to-day involvement and draw a salary while Junior runs the business until the final curtain falls.
Of course, as I’ve discussed in previous articles, with owners living longer, it’s improbable that Junior is going to hang around the business into his or her 70s, when Mom and Dad finally reach their 90s and hand over the reins of control – not operating control, I mean real control, control of the voting stock transferred when the last parent dies.
How About an Exit Where Everyone Makes Money?
But what if an advisor could frame the exit of the controlling shareholder as the day when all family members become wealthy? Far too often, death is the triggering event for the transfer of stock. Few children are offered an opportunity to risk their capital to buy the stock of their parents’ business at an early age. I recommend that when a child is 14, the parents and advisors begin the process of implanting the idea that the family business will be bought, not gifted, and that employment is different from ownership.
For a variety of reasons, the majority of parents signal that there’s no real or pressing need to recycle dollars in the family: “Hang around long enough, Junior, and all this will be yours – for free.”
Of course we know that nothing is ever really free and that while the ownership question is left hanging, there are as many underpaid children working in family businesses, as there are overpaid children. My experience on the speaking circuit is that few overpaid children ever risk their capital to buy out their parents. Why derail the gravy train? Parents who use their business to purchase and control family harmony do more harm than good and always pay the greatest price of all – a family wired for perpetual dependence.
Family Business Math
The dysfunction around the issue of compensation percolates and festers because the stakes have always been high. When Junior complains about low wages, some parents simply say, “If you don’t like what you’re paid, leave.” Emotionally and financially, it’s never been easy for a child to quit a parent’s business.
Child Quitting Over Compensation + Aging Business Owner = Less Inheritance For Junior.
You can see how family business math becomes really interesting when only one child working in the business quits and one or more siblings stay and toe the family line. Trimming the family tree, hacking off a limb, call it what you want, the family business too often becomes the fault line in relationships and turns financially advantaged families into emotionally bankrupt ones.
The equation for this scenario looks like this:
The Value of the Family Business When Child Leaves Over Compensation = More Money for Remaining Children
The Link Between Compensation and Wealth Protection Is Profound
What if the mathematics of a great exit has always been rudimentary? What if advisors could convince clients that all family members, both inside and outside the business, can build a great exit plan collaboratively? What if the key to this plan is asking children to risk capital and perpetuate the business for the right reason – because they think they can grow it and make money? Now there’s a novel idea.
For this to be successful, family members working in a business need to be paid for the value they add. There are significant risks to an owner’s successful exit when compensation for family members is too low or too high. Getting compensation right is one of the pre-conditions for leading a business to be sold to someone, either inside or outside the family – but sold nevertheless.
Dynastic Families Understand This Equation
Business Owner Paid Appropriately + Children in Business Paid Appropriately + All Other Relatives Outside the Business Not Paid at All by the Business = Business Sold, Wealth Protected, Happy Family
It’s simple addition – so simple it’s often overlooked. Treat your family business like a drive-thru ATM and pay family members not involved in the business for work not done, and your exit will be a tad complicated and painful. Keep treating your children as indentured laborers and you’ll get to the same place. If you’re a business owner, all of this can seem difficult. It is, but it’s not impossible and it’s definitely worth getting compensation right.
If you are an advisor, are you really prepared to leave your spreadsheets in your briefcase and talk to clients about important issues like compensating family members appropriately? Can you see the link between compensation and protecting your client’s wealth is an emotional issue? Can you see that the hard emotional issues are where advisors earn client trust?
Tom Deans Understands Family Business Relationships
Lugen Family Office is proud to select Tom Deans as the LFO 2013 Speaker of the Year Award Winner! Congrats Tom and keep up the great work.
Dr. Thomas William Deans is the author of the all-time best-selling family business book, Every Family’s Business: 12 Common Sense Questions to Protect Your Wealth.
He now speaks on the international lecture circuit full time. Having delivered more than 500 speeches, he has built a reputation as a thought leader on the subject of intergenerational wealth transfer.
His lectures and books argue that family has emerged as the greatest economic driver of all time. But the question remains: How can wealth be transferred successfully without destroying the recipient and the wealth itself?
It is a question for the times, as the greatest generation of wealth creators move toward death in record numbers. Deans explores the idea that communication is crucial to the success of that transfer, and indeed to the success of individuals, families and communities.
The idea to write Willing Wisdom came from Tom watching his mother’s parents die. One death – his grandfather’s – was comparatively quick. His grandmother’s was a long and slow ten-year decline. Despite the significant wealth his grandparents left for family and charity, it is the conversations they shared that Tom thought about the most many years later.
In the end, when it came down to their last breaths, only the care provided by Tom’s parents, not money or even the promise of money, could purchase the dignified death each experienced.
Tom is not sure when he first became curious about why our culture has lost its inquisitiveness about death and dying, but he does know, having delivered his keynote speech on transitioning family wealth to tens of thousands of people around the world, that this trend is worsening.
We live in a culture that is in awe of wealth and all that it can provide. We also live in a culture that finds it difficult to talk about and contemplate death. The two are inextricably connected.
Tom starts conversations, but rarely does he finish them, leaving that to readers and their families, friends and trusted advisors.
Willing Wisdom represents a return to the subject of his doctoral research, conducted in the US, Canada and the UK and first published in Charities and Government by Manchester University Press.
Tom lives in a forest in the beautiful Hockley Valley in Ontario, Canada, with his wife, two children and five dogs.
Lessons In Leadership – Episode 2 – Family Businesses
When it comes to family-run businesses, there’s a common saying that the first generation creates a business, the second builds it and the third squanders it away.
Is there any truth to that? Bloomberg TV India’s Mini Menon discusses how best family run businesses survive generations as she speaks to Professor John Davis, Senior Lecturer of Business Administration, Harvard Business School on Lessons In Leadership.
Ivan Lansberg on “Ambidextrous Leadership”
Ivan Lansberg contends that effective leadership of a family enterprise requires a skill set which has not been adequately described in the business literature.
More specifically, he notes that leaders in a family enterprise are required to attend to the leadership needs of both the enterprise and the family. The enterprise needs the leader to lead, for example, the process of succession, while the family needs the leader to lead, for example, the nurturing and development of the next generation, the support of elderly parents, and the planning of family events. Most leaders are better at leading either the enterprise or the family, but few are naturally inclined in both areas. Lansberg calls for family enterprise leaders to become “ambidextrous leaders” — to build their skills in both arenas. This can allow the family enterprise to take advantage of the paradoxes of a family enterprise and turn these potentially confounding ambiguities into strategic advantages.
An Interview with Giuseppe Santoni of Santoni Footwear
Forbes Style Director Joseph DeAcetis interviews Guiseppe Santoni, CEO of Italian Luxury and Eco Friendly Footwear brand Santoni.
“Succession Planning for a Family Business” Part 1 of 3
Michael Gray interviews attorney John Hopkins for Financial Insider Weekly about how to determine which child gets what proportion of your family business and some unique issues that come up when planning for the future of your family business. Part 1 of 3.
Part 2 of 3
Part 3 of 3
Olivier de Richoufftz of the Family Business Network on managing a family business
Family-owned companies need to be run with emotional, as well as professional leadership, experts say. That’s one area where senior family members often have a crucial role to play.