It’s a natural cycle: An entrepreneurial family devotes itself to building a profitable company; eventually they achieve their goals and decide to sell the business and maintain themselves through investment.
“For most business owners, this is a once-in-a-lifetime event,” says KPMG partner Yannick Archambault, national leader of the consultancy’s family office practice. However, he says, his firm’s November 2020 survey of Canadian business owners found that 37 per cent wished they could move away from running the business but are not yet prepared.
The transition takes planning – not merely to negotiate the sale but to reimagine the life that comes afterward.
“The shift is really about identity,” Archambault says. “As a business owner, my identity is in my business. As you prepare for the sale of a business, how will you re-create your identity? For most business owners, it is a very difficult transition.”
Part of that difficulty lies in letting go of the former focus, says Sunil Mistry, partner, enterprise and technology, media and telecommunications, with KPMG.
“I currently have a client running a business for 30 years, and looking at selling it, and cannot get past the idea that someone may change the name of the business,” he says. Owners are often also reluctant to accept changes in the corporate culture they’ve developed, he notes, since they tend to believe that this is what made the business successful in the first place.
Sometimes the buyer of a business will ask the former owner to stay on in a senior role. Then “the business owner realizes that they have gone from being the boss to being an employee of the company,” says Tina Di Vito, a partner and national leader of family office services for the Calgary-based accounting firm MNP LLP.
Former owners may feel that “they’ve lost the family that they leave behind at the shop: the employees,” she says. “One client lost his accountant and his lawyer; he loved his circle, and they all stayed with the business. The family office does replace some of that, being a sounding board for those family members.”
Becoming an investor “is a very different mindset,” says Nancy Marshall, director of strategy and development at Prime Quadrant, a family office based in Toronto. “As an entrepreneur, you understand your business inside and out; you understand your risks and you’re comfortable with them.”
The new investor is now faced with a new set of risks that are less well understood. Success, says Marshall, depends in part on changing from “being a retail investor to becoming an institutional investor,” meaning that “you should be thinking the way big institutions and endowments and pension funds think about it.”
There is no substitute for taking the time to plan ahead before the sale takes place. Archambault estimates that three to five years is a reasonable amount of lead time to make the practical and attitudinal adjustments.
“If you’re cashing out of $50 million or $100 million, you’re going to take time getting that invested,” says Cindy David, president and estate planning advisor for Vancouver-based Cindy David Financial Group Ltd.
“You don’t want to start interviewing portfolio managers at or after the close [of the sale]. There are lots of different places that money can go. You don’t want to be rushed in that, and you don’t want to miss an opportunity, either,” David says.
“It’s taking care of elderly parents, donating to charities, taking care of the wealth and getting it into the next generation’s hands, and setting you up on a paycheque. It’s never quite as easy as just ‘take it from this bank account.’”
Planning not only ensures that the company is in the best possible shape – with all taxation and record-keeping details in order – but also makes it less likely that a significant eventuality may be overlooked. No one can predict a pandemic, but measures can be taken to provide for major expenses, such as home purchases for children or grandchildren, and to smooth over unexpected bumps in the road.
David evokes the cautionary tale of five siblings who were sued by the buyer of their family business almost three years after the fact, and to the tune of $1 million each, over expected receivables that never materialized, and another case that saw the new owner bankrupt the business before making the final payment for the purchase.
But what endures far beyond the nuts-and-bolts details of the transaction is the new way of life that the family members negotiate for themselves when they are no longer working in the service of the company that once united them. The determining factor for a good result, the experts say, is a shared vision.
“We want to make sure that families have good communications, that they trust one another; it’s very important that they create rules and have a process for decision-making,” Di Vito says. “We work with our families to start looking forward into the future to clarify their values. Once they get clear on their values – what is their purpose for the money? – it becomes easier for them to think about what is next in their life: a life that has meaning beyond running the business.”
“When you’ve really got a vision and articulated values, so there’s an understanding of what you’re trying to accomplish as a family, that’s how you’re going to preserve wealth across generations,” says Marshall. “That exercise of actually articulating vision and values, it’s amazing what it can do for families to really bring generations together.”
No matter how much capital is realized from the sale of the business, “the wealth will create opportunities for your family, but wealth also brings complexity, creates challenges and creates friction,” says Archambault. “It’s better to prepare for the challenges and complexities.”