Selling the family business brings brave new world, profound yet unsettling

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Between the 1870s and the 1970s, Canadians with drive and ambition were starting businesses and laying the foundations for this country’s manufacturing, retail and construction sectors, to name only a few. Now, with the pendulum swing of history, these same families are divesting themselves of their operating businesses and evolving to become stewards of their own wealth.

For some families, moving away from an operating business is a radical shift; for others, it’s a minor adjustment in the details, says Nancy Marshall, head of family office services with Prime Quadrant in Toronto.

“Some families have the mindset – when they have a liquidity event – that they still have a ‘business,’ and that business is as a wealth allocator rather than a wealth creator,” she says.

Other families perceive the situation as a profound change. For instance, they might not feel as united in the original family values and mission. “We often advise families, when they’re making that transition, that their mission and their values as a family should still inform their business as an allocator, but it is a different skillset,” says Marshall.

Nonetheless, the family with an operating business will still place a great deal of emphasis on simply choosing the right family members to lead it. Later, larger issues of family vision and governance in a broader sense will begin to take precedence.

Thus, “when we advise families that have operating businesses, a lot of continuity planning goes into it, especially if the business was created in the first or second generation. The further down the generations you get, the more complex it becomes, and the more parties are involved,” Marshall says. This is the stage when continuity planning in the form of a clear governance model becomes critical, so each family member is able to answer the question, “Am I wearing my business hat or my family member hat?”

Layers of family complexity

Krista Han is the managing partner for New Brunswick with Grant Thornton LLP in Fredericton. She points out that between the family that is still maintaining the operating business and the one that has moved past it, “there’s also this middle piece where the business is still family-owned, but they are passive owners; they have professional management.”

This means in essence that family offices must consider the needs of three different categories of families rather than two.

Furthermore, she says, each family has its own characteristics that add to the complexity.

“That’s not just an addition; I would suggest it’s actually an exponent, a multiplier. The family office advisors really need to understand the mission, the vision, the purpose, the goals, which will be different, depending on the stage the family finds themselves in.”

Han describes “a real change in the risk profile,” with more liquidity for families that are no longer operating a business.

“That change requires a different response, maybe around decision-making. The way they made decisions before may not work any more. They may want to dust off some processes that they haven’t used before, even if they were well established.”

The families themselves will be the best equipped to discern what their new priorities should be, but “there needs to be a process to follow – an exploration to help everyone understand what those strategic priorities will be,” she says.

Family dynamics and liquidity

Families with operating businesses have an added layer of complexity in how the success of their businesses contributes to achieving family goals, says Shannon Walters, Vancouver-based director, family office, with KPMG in Canada.

“Because of the illiquidity inherent in operating a family business, there’s more emphasis on the family dynamics,” she says. “Once a family has had a liquidity event and they have divested their original operating business, their liquidity offers them the flexibility to manage their wealth.”

Therefore, says Walters, for the family stewarding wealth, “you look at different priorities: defining their wealth goals, as well as inheritance planning, financial literacy, helping the children to understand their wealth, co-ordinating a number of wealth advisors and bringing it all together for a client so they can make decisions competently without having to go through multiple investment statements.”

With the families still involved in an operating business, “we’re looking at their family values and their wealth goals,” she says. “We have a robust process for assessing family dynamics, then dig a little deeper with individual interviews.” These interviews cover areas such as shared purpose, governance and succession planning.

Finance education has more of a business focus, she points out. “How do you operate finance statements? How do we help the next generation get into the situation they want to be in, and that the older generation wants to see them in?” Walters says.

When you stop managing a brand

Cyber-security is also more of a priority for families with an operating business.

“What level of protection does the family require? What level does the business require? How can they manage things like their social media?” she says, pointing out that for families that manage wealth, “if they’re not managing a brand, they don’t have to be quite so careful.”

“I think it’s interesting, because you could say that it will be a brave new world for you when you sell the family business and set up a family office,” says Nancy Marshall. Nonetheless, she notes, many practices common to business operations are still relevant after the sale, like “good corporate governance, defined roles and responsibilities and defining how you’re going to communicate.”

And even apart from these major transitions, a family’s needs will morph, says Krista Han. “Divesting of the operating business can be a very emotional process that can create an impetus to re-examine the vision, the mission, the purpose. But we’d be naïve to think there wasn’t also complexity outside those phases.”

Therefore, even apart from dramatic moments like liquidity events, “the family office needs to be nimble,” Han says. “They need to stay on top of things, to be reactive when necessary and to be aware of what resources the family may need at any point on that timeline.”