Podcast 7 Transcript: Family firms: Trends & exit strategies

Written by Ian Portsmouth

Ian: Welcome to the Business Coach Podcast, an advice-oriented series for Canadian entrepreneurs. I’m Ian Portsmouth, Editor of Profit Magazine and I’ll be your host as we tackle the hot issues and opportunities facing Canada’s small businesses. We’ve developed this podcast in cooperation with BMO Bank of Montreal. Over the course of the series I’ll be drawing on experts in a number of fields including some BMO experts in order to provide the credible information and prescription you need to run your small business better.

All businesses face similar challenges such as retaining good employees, financing growth and innovating to meet the demands of a changing marketplace. But family businesses have an added dimension, namely, the mix of mission, tradition, expectation and shared DNA. This unique aspect of family business can be a source of strength or a nagging weakness depending of course on how well it is managed. A little later on in this episode of the Business Coach we’ll discuss the financial aspects of family business. But here now to assist us with the day to day management of family businesses is Lawrence Barnes, CEO of the Canadian Association of Family Enterprise who joins us today from CAFE’s national head office in Oakville, Ontario. Welcome to the Business Coach Lawrence.

Lawrence: Thank you and I’m very pleased to be with you today.

Ian: I’ve heard some staggering numbers about the size or the population of the family business segment in Canada. How big is family business in Canada?

Lawrence: Well I should firstly say and statistics are a little difficult to come by because Stats Can doesn’t use family business as a category it covers. However, the best research would say about 80% of Canadian business is family owned. That represents about 150 billion in sales. Somewhere around 50% of Canadian GDP and on new job creation around 70% of the new jobs currently being created in the Canadian economy.

Ian: That’s absolutely incredible. How do you define family business?

Lawrence: From a CAFE perspective we basically say that if any two members of the family are in business together, so that can be cousin, husband and wife, siblings and that’s not necessarily active in the business because one may be in an ownership role financially supporting the business but once two family members are there we would classify that as a family business.

Ian: And what are some of the unique characteristics of family run companies from a management perspective?

Lawrence: Well I know we don’t have time to cover all of these because obviously when you put the dynamic of family into a business we all know each of our families have a pretty distinctive and unique dynamic. The reality is obviously, from our perspective, it’s the relational issues, it’s the, what I call “the soft tissue issues” that come into it. It’s not as straightforward as a, you know, “How are we doing against our business plan and our budget?” because of course you’re talking people and personalities and that adds a very different dimension.

Ian: And one of the myths around family run businesses is that because of that family dynamic, that shared DNA family businesses tend to have a lot more trouble expanding, being profitable than your average owner-managed business. But the fact is that the family dynamic can actually strengthen a business is that correct?

Lawrence: I think that’s absolutely correct. I mean the common statistics thrown around a lot talks about only 10% succeeding to the third generation which came out in the Deloitte study in the mid-90s. However that was flawed because there wasn’t a control group and we don’t ask non-family businesses the same question. The other real issue I have with that (statistic) is that if a family divested itself of an entity but stayed in business under a second entity that was classified a failure but obviously we believed that often the vision of the next generation may be to do something different and you know they don’t necessarily want to run mom or dad’s business the way mom or dad ran it. However, if you look at some of our strongest and most established brands in Canada and lets take the Molson family, obviously that’s been a family run business for over 200 years now and continues to go for strength for strength and in fact with Coors in the U.S. they selected a business partner who also really is a family business of origin.

Ian: So in a case like Molson it seems to have benefited by being run by a family. What are some of the advantages of a business that’s run by a family? I would presume that the cultural alignment is something that’s there in a family business whereas its something that kind of has to be manufactured in the traditional business sector.

Lawrence: I think that’s exactly right in fact we had Jeff Molson whose, one of the, I guess the next generation that will come into leadership in the Molson family at our Regina chapter not long ago and I was chatting with him and you know basically they have this family ethos that goes back to John as the founder, you know, talking about a good brew makes its own friends and the brew Molson’s have all grown up in that environment. So absolutely that DNA as a family, whilst it makes a good press when there are disagreements it can also be a very cohesive force within the business.

Ian: Now on the flipside what would be the most important pitfall that family business people need to be aware of?

Lawrence: I think there are a number of pitfalls. I think we certainly at CAFE believe that you can’t communicate too often and I think that is sometimes the pitfall that people think if you take care of the business the family will take care of itself. Or if you take care of the family the business will take care of itself. And the reality is both of those dynamics need specific tools, they need specific planning, they need thought and they need time and effort to make sure that both of those nuclear functions work well both you know in a separate way and when they’re fused together.

Ian: Can you tell us a little bit about the phenomenon of family counsels or family advisory boards?

Lawrence: Yeah the family counsel I think it’s a great name but the reality of it Ian is its really just a family meeting and in some of our smaller businesses we work with sometimes that’s over Sunday lunch and its really just an opportunity for all of the family members to sit down, talk about issues that affect the family and the business and begin that communication. I mean some of our most successful families, you know, their children at fairly young ages are involved in the family counsel. Not necessarily because at that point the decisions being made are going to impact the kids particularly but it does start to grow them into the understanding of the business environment and they just start to learn the issues that concern the business owners at that point day to day and helps them grow into that role for their time as leaders in due course.

Ian: And certainly it does provide that opportunity to have that formal communication.

Lawrence: Absolutely and you know one of the biggest pitfalls that’s really killed a lot of these family businesses that do make the media is the lack of communication. Its very worse Ian, I’ve seen the case of you know when the father’s Will was read the three sons found out who was going to get the job of CEO which is a terrible place to be.

Ian: Absolutely it’s not always good to be the boss. What are a couple of the more important things that an older generation, say a mother or father can do to prepare their sons and daughters to take over the reins?

Lawrence: Well I think again it starts with dialogue so that the parents really understand the aspirations of the children because assumptions of them taking leadership I don’t think are a great place to be and then we recommend the next generation really, whether you want to call it earning their stripes or gains experience outside of the family business if its all possible because what that means Ian is that when they come back in then and take roles of leadership, you know, if they’re a staff and other things its much better if you’ve really got some experience under your belt and are not just seen as taking on a position because of your family heritage and not having the necessary skills.

Ian: Right and is there anything that the younger generation needs to communicate to the parents before they take over the reins or when they’re in a family business situation?

Lawrence: Well I think certainly those aspirations, we’ve had people in CAFE who, you know, spent years really trying to break the news to their parents that they really didn’t want to run the business and that they had different aspirations in life and that can be very difficult because of course the older generation, often Ian, will see the business as their legacy and that’s a concern for them if their legacy is going to in their eyes at least die. And then when you get into the process of the succession I guess one of my consultants that we work with calls it the “take until you get your wrists slapped” syndrome which is, you know, the younger generation often has to be very forthright and on the front for about starting to take responsibility because often parents by their nature never quite think their kids are ready to do it. So the kids often have to kind of take it and really show that they are at that stage now where they’re ready to step up.

Ian: Kind of like asking for the keys to the car for the first time?

Lawrence: There you go.

Ian: Clearly family business ownership is a complicated matter. It’s the kind of thing where you could probably use some outside counsel on occasion and I think that’s what CAFE brings to the table. Can you tell us a little bit about CAFE and why family business owners might be interested in it?

Lawrence: Sure well we’re at heart a peer support organization so we’ve been around, well actually next year’s our 25th anniversary and then we have chapters across the country coast to coast where we deliver services locally. But really our core we run small groups of family business owners where the family businesses come together and they share their experiences and they literally mentor one another so that, you know, someone who maybe sold their business 10 years ago could be sitting in a place with someone who’s just looking at “Do I sell it? Do I bring in non-family management? Do I pass it down to my kids?” and through the practical experience of other business owners we help people through those spaces. And we have as you said got a number of attached outside advisors from all of the professions who we know and who specialize in this field to help the families navigate through both the technical side, you know the legal, the taxation, the financing but equally through the soft tissue issues. So you know if you do have three kids and you want one of them to be CEO what’s the kind of fair way to deal with the other two? Are you going to give them X so that they can you know do something with their careers? Are they going to be owners rather than owner/managers? All those kind of things we have people that can help and give advice and who’ve done it on a regular basis because probably Ian the thing I hear most when a family comes to CAFE for the first time is “Wow its great to realize we aren’t the only people going through this.” And I think if nothing else that’s been the strength of CAFE is to let people know there are lots of people out there that are going through similar struggles.

Ian: I think it surprises all entrepreneurs in family businesses or outside of family businesses that there are other people who are experiencing exactly the same thing as them. Lawrence thanks for sharing your expertise with the Business Coach and thanks for telling us a bit about CAFE.

Lawrence: You’re very welcome Ian, have a great day.

Ian: Lawrence Barnes is CEO of the Canadian Association of Family Enterprise. He spoke to us from CAFE’s national head office in Oakville, Ontario

Ian: Its said that entrepreneurs are great at creating entrance strategies but not so great at creating exit strategies. In fact, the majority of Canadian entrepreneurs do not have a formal plan for exiting their business. Now while some will be fortunate enough to sell their businesses at the right time and at the right price, others will be forced to cash out in less than optimal circumstances. When this happens within a family business not only can fortunes be damaged but relationships as well. So what do you need to do to ensure a successful succession in a family business? Here to help answer that question is Martin Guestier, Senior Manager of Structured Succession and Acquisition Financing for BMO Bank of Montreal. Martin welcome to the Business Coach Podcast.

Martin: Oh thank you.

Ian: So Martin let me run a couple of numbers by you. According to one recent survey 92% of entrepreneurs believe that it’s important to have an exit strategy but among family business owners only 44% have one and only 24% have actually chosen a successor for the next generation. What prevents or delays succession planning within family owned businesses?

Martin: Well most of the time business owners like to prepare for the future but sometimes they like to put their objectives down before they do anything and the big challenge with a family business is that you have to put down some objectives that will not only touch the numbers concerning the company but also everything that rotates around the whole environment that goes around the company which is the family, the owners of the company. It might also be family members. You have the business and you have also the employees so this complex situation multiplies the different challenges that the company faces and the business owner.

Ian: So there are a lot of priorities, a lot of objectives to take into consideration. So how should the succession planning process differ within a family business as opposed to other owner managed businesses?

Martin: I would say there’s three main items that would have to be addressed in the succession planning process and one of them is the tax exemption of capital gains. That’s a big one to be looked at because it will affect directly the kind of money that you will have left in your pocket after the transaction. Usually when we have people coming to see us at the bank and they want to address the success issues, the first question they ask is how much is my company worth? So they want to know what the amount of money, the dollars that are going to be coming out of there and the second question is how much of it can I keep in my pocket? So yes, tax is a very important one and there are some items that you have to address when you do family businesses that you wouldn’t normally in a greater and broader entrepreneurial setting. You would also look at greater vendor financing support and the reason for this is because the children usually will have less money to invest in the transaction so that’s the time issue because if you want to generate the money you will have to plan this ahead. And I’d say the third one would be unresolved family issues. Finding the right balance between perception of the treatment among the children and the acknowledgment of everybody’s participation in€¦ the structuring and also the, creating the value of the business will become quite an issue when you start treating these.

Ian: So it sounds like in a family run business succession involves getting a lot of ducks in a row. Many more ducks so to speak than you would see in other owner managed businesses. When we’re looking at the succession planning business in a family situation then how long would that take typically?

Martin: Well typically we recommend to at least address this situation at least five years prior to making a decision and this is not a linear planning, we’re talking about iterations. We usually give a timeline as to what has to be prepared but every time you meet a goal or €¦ a certain time issue you will have to reassess the situation and modify your plan accordingly. So at least five years before making that decision to retire or to sell the company start addressing succession issues.

Ian: Now when we think about succession plans we often think about there being a real document that’s on paper. Is there anything different in this document as compared to other types of business?

Martin: Well what goes around an actual succession plan is more than just one document. When we start looking at this we start also looking at the drivers that drive the value of the company. So when we look at succession its not limited to the actual succession process, we’re looking at finding out the drivers and you’re going to have to identify those. There might be some issues as to value of the company. The owner might have expected higher value for his company and thought that he would be getting his money faster and because of the family transfer he will be waiting a little longer and the amount of money will be lower. So if you planned this ahead of time enough its possible to identify the drivers and modify the value of the company over time. So to make everyone happy you will also look at estate planning, that’s another one. You will have to make every piece of paper and document that goes around the succession planning coincide with the different professionals that will be helping you out in this process.

Ian: Now I suppose one thing that family business owners should remember is that their only exit is not necessarily a transition within the family. They could actually sell to an outside party or they could do a hybrid sale where family takes part of the business and perhaps management or an outsider takes part of the business. Is it helpful for entrepreneurs to look at more options than just selling within the family?

Martin: Well I’ve read articles actually that have said that some family businesses are more ill-prepared than the broader entrepreneurial population of business owners and I would say its not that they’re ill-prepared it’s just that they don’t have as great amount of options. By definition the business has fewer internal successors than if you would go outside the business. So although it’s a wonderful opportunity when done in optimal conditions to sell the family business and transfer it to someone in the family you have a limited choice. So let me explain, when a business owner plans his succession and, well he will evaluate his options and then choose to whom he will sell or transfer the business. If he’s going to be selling to someone from the family that person’s already identified and that’s, that’s the choice. You have one decision to make and that person is the one you can’t go outside to get additional expertise.

Ian: Now let’s get back to that essential, critical second question that people come into the bank and ask and that is, “How do I keep the most possible money in my pocket?” What are some of the things or the most important thing that entrepreneurs need to remember when it comes to preserving their nest egg?

Martin: One of the things that we try to address is of course we’re financing the business. We’re financing the buyer of the business but lets not forget the businesses, the entity that’s going to be generating the cash flow to support all the family members will also generate the money to pay back the debt. So we have to find some kind of balance between that leveraging the assets of the company, determining what the level of cash flow available to service that debt and then getting enough money into the hands of the seller in order to make him comfortable to retire. So that’s the balancing act we have to do as a banker keeping always in sight that we’re trying to preserve the value of the company and preserve the existence of the company.

Ian: And one thing that the owner should remember is that there are different tax exemption rules on capital gains within a family business correct?

Martin: Correct. So, depending on how you sell your company, if you’re going to sell it to a family member the tax exemption on capital gains for a business owner selling to his own family is not as aggressive as it would be for a third party. So that kind of puts the disadvantage on transferring it to your own family member. Then it will have to be addressed eventually on another level in order to put everyone on the same, on the same level.

Ian: Of course if you do lots of advanced planning and maximize the value of your business the hit you’re going to take there on the capital gains tax won’t be as hard.

Martin: Actually it’s a very, it’s a very good point. If you don’t do this in advance a lot of people we meet all of a sudden they’ve gone through some basic planning and they come to a transaction and they’re kind of a little surprised there on the fact that they’re not going to get their tax exemption on that capital gains. So, you know, planning ahead will give you more options. So I always give the illusion of when you’re driving a car and that you have someone in front of you, you have another car ahead of you the greater your distance the more time between your car and the other car the more options you have.

Ian: That’s a great metaphor Martin. Thanks for joining us today on the Business Coach.

Martin: A pleasure, thank you.

Ian: Martin Guestier is Senior Manager of Structured Succession and Acquisition Financing for BMO Bank of Montreal. He spoke to us from his office in Montreal. Thanks for listening to this episode of The Business Coach Podcast. I hope you discovered a few insights that will help you grow your business. Your feedback is always welcome. Drop me a line at Business Coach at feedback@bmo.com. Meanwhile be sure to visit us online at profitguide.com or bmo.com. Until next time I’m Ian Portsmouth Editor of Profit Magazine wishing you continued success.

Originally appeared on PROFITguide.com