Chosen one

Early last month, eating sushi in Yorkville, a young friend I’ll call Becky confided in me she was going through a personal crisis. Her usually tight-knit family was in shambles. At issue was the fact her mom wanted out of the successful family business that she and her husband started from the ground up 30 years ago. Their marriage was in crisis and now, potentially, so was the thriving manufacturing company. Like many power couples, they’d found it tough to balance the dual roles of husband and wife with president and CEO.

Becky’s older sibling, who ran the out-of-country arm of the business, had been muttering to their dad about his desire to receive full shares in the company once a succession took place. He felt none of the other five siblings ought to be handed an ownership stake, as their roles in the business were tied to blood alone — minus the sweat and tears.

Fair? Becky thinks not. She says her brother is being big-headed, manipulative, and possesses an over-reaching sense of entitlement. He tries to curry favour with Dad, while Mom wants all her beloved babies to receive an equitable boon. It’s just the beginning of familial anxieties festering and foaming, and a good deal of he-said-she-saids all balled up in a sticky batter of affliction that has yet to be kneaded and rolled.

Becky’s story is hardly an anomaly. For centuries business-owning families have had to deal with reconciling the centrifugal forces that pull upon the diverse needs and wants of owners and offspring: fairness; security; and often a hearty dose of greed. Infamous rifts among business behemoths bring to mind the McCains or the Molsons; the Sumner Redstones, Jay Pritzkers or even “sugar poppa” J. Howard Marshall and brood.

But just because complex and thorny issues exist among such business pedigree doesn’t mean all roads lead to a train wreck. There’s tremendous opportunity for advisors with business-family clients to get right in, smooth down the snags and help avoid dust-ups with attorneys, big bucks, and divided family units. Planners who get aboard by leading family members down a collaborative track will reap the rewards of superior practice offerings, more referrals, and the simple satisfaction that comes with knowing they’ve helped a family avoid catastrophe. They may even have carved out a comfy spot to work with this unique set through subsequent generations.

Opening the vault

Thane Stenner is a managing director, Stenner Investment Partners, GMP, and senior investment advisor for GMP Private Client LP, a Vancouver based private family office. He says “there are precise steps advisors must take to steer these families in the right direction.” First, you have to understand where everybody in the family is coming from. “Right out of the gate it’s important to know what everybody’s agendas are, so you can then say, ‘Okay, what are the possible solutions?’ ” Start with an inventory check by asking smart questions to help you find out what the “brewing issues” are.

Perhaps they’re about taking a family company public, or they’re geared to ascertain feelings about a liquidity event should the owner sell. Whatever they are, they spell O-P-P-O-R-T-U-N-I-T-Y.

Some clients might find it particularly hard to open up, says Stenner: It can be a generational thing where a client in his 70s or 80s is used to being private, muddling along and not wanting to air an issue. Or they could just be naysayers, adds Peter Creaghan, insurance advisor with Creaghan McConnell Group Inc. “The biggest roadblock to this kind of success is the inertia of thinking there’s just not any way to handle the problems — too sticky, too convoluted, foreign territory. So they remain in what you might call a bit of a denial space,” he says. It’s tough to open floodgates when emotion and human dynamics are involved, says Susan Latremoille, first vice president, wealth advisor at Richardson Partners Financial Limited. “Most business owners don’t know how to think about the problems. To them it’s just one big morass of money, family dynamics, ego, fear and greed.”

Yet she says it’s often the worries that uncover the clarity. “Once you hear the frustrations, then you can ask about the financial implications of what they want to do. And that’s where the money part of it creeps in.”

If you can get them to loosen their lips creatively, all the better. But some advisors, like Stenner, are more adept at things like finding third-party money managers for clients rather than flying solo to get at the juicy bits. So, depending on your style and strengths, you might choose to bring in other professionals such as a skilled facilitator to handle the dishing-out process. “It’s a skill set that is very unique; it’s not necessarily just an accountant, or a lawyer; it’s somebody that’s helping to facilitate and bring families together on navigating some of the tough emotional issues that come up,” says Stenner.

Clients on the couch

Enter David Bentall, president of Next Step Advisors, a succession coaching consultancy in Vancouver, and third generation member of the prominent Bentall real estate empire, whose eponymous Bentall Buildings in downtown Vancouver house many of Lotus Land’s corporate executives including financial advisors. That puts him in good stead to cruise through some of the more contentious issues that wealthy business-owner clients experience.

Says Stenner: “[David] has a wealth of knowledge from the point of view of his own family history. He readily admits openly — ‘I’ve seen successioners three times from a very young age, and I’ve seen it done very poorly; I’ve seen it done average and I’ve seen it done reasonably well.’ That’s really where the real-life experience comes from.”

Bentall aims to teach clients to talk and listen — to help some family members “find their voices,” and others to “find their ears.” For example, an advisor could ask about recent troubles in paradise, and discuss the implications an impending divorce could have on the family business — from tax and shareholding issues to trusts and potential company reorganizations that involve valuation freezes of certain business shares. Dig deeper and you might get surprising answers from a 72-year-old billionaire client about his relationship with his gay son; and his thoughts about that child one day succeeding him in the family steel plant.

It’s these types of conversations from which an advisor can then begin to suss out where any clouds are forming, and guide a client’s next steps. “It comes back to you want to try to anticipate challenges before they become problems. That’s where a true professional can really add value,” says Stenner.

After the fact-find, Bentall will reconvene with the family and facilitate their determining the main issues, after which they must agree on the top three or four to be addressed. He’ll also try to help them learn new patterns of relating. Some families, he notes, exhibit patterns of conflict-avoidance or doing whatever it takes to keep the peace. Bentall will work with these clients to help them learn how to relate to each other as adults and to make collaborative decisions — as opposed to doing things the way they’ve always been done, such as continuing to address Dad as the “Roost Ruler” he’s always been.

Advisors can also benefit by re-thinking their behaviour with clients, especially if they’re the type to fall back on telling owners what they want to hear rather than what’s in their best interests. Risk the relationship, says Stenner, author of True Wealth: An Expert Guide to High-Net-Worth Individuals (and their Advisors). “Feel secure in yourself and tell your client ‘maybe you’re going down the wrong path,’ or ‘you’re not treating a certain family member fairly.’ That’s how you become a trusted advisor,” he explains.

Relative dysfunction

Sometimes business-owning clients don’t seek out an advisor until an external event forces their hand, notes Ron Prehogan, a family business consultant with Equitas Consultants in Ottawa. “Like a death, severe illness, or a child going to Dad and saying, ‘You’ve said for years that one day this will all be ours. Well, I’m now 43 and I want to know when that day is going to be — and no, I don’t want to wait until I’m 53.'”

Remember Becky? Initially she didn’t think it was fair for her older brother to snap up the family business during his succession, leaving her and the other siblings essentially “shar-e-stranged.” And recall how none of the other siblings worked for the family business, or as yet had any plans to: Should that alone preclude them from being somehow financially rewarded by their parents — while the brother gets the kit and caboodle?

What would a good advisor tell Becky?

“It’s a common situation where one child thinks he should get it all,” says Prehogan. These types of offspring crises are all about perception, he says. “So the brother’s point of view would be: ‘If it weren’t for me, this business would have no value at all,’ and from your friend’s point of view — ‘If it weren’t for Mom and Dad he wouldn’t have had the opportunity in the first place as there was [already] some value there — even before he walked in the door,'” he explains.

Sibling resentment can be abysmal, says Latremoille, but it’s almost inevitable when you’ve got situations like Becky’s. “What person is going to want to see someone else walk away with the lion’s share when they were bypassed?” she asks. The sense of entitlement that often accompanies ownership is a mindset that needs to be rethought, she adds. “To have the right attitude you should look at ownership as a responsibility,” she says, quoting Muriel Sprague Richardson, the firm’s fifth president: “To whom much is given, much is also required.” In other words, Latremoille explains, “You are responsible for the caretaking and the well-being of what you’ve been entrusted with.”

Role play

Establishing proper governance structures for both the enterprise and the owner-family is another way advisors can step in, says Bentall.

These can include having regular family meetings where they can make decisions about anything from children’s chores to philanthropic endeavours and determining who will be the next head of the company.

He’ll also assist families in developing boards of directors that can provide objective advice on business decisions. For example, is that next-generation member ready to take over part of the company? And should Mom or Dad be stepping back a little more?

Knowing one’s role in the family business also means understanding that employment and ownership are two separate issues, and salaries for working in the business should reflect the market. “If the [child] manager is only worth $80,000-a-year salary, don’t pay him $160,000,” says Latremoille. Bentall adds the ownership structure can incorporate other financial rewards. Perhaps that employee owns company shares or is given market bonuses for doing a good job and achieving her objectives. “If they help increase the value of the business, they should receive some form of stock incentive or compensation for increasing that value,” he explains.

But again, this should take place “as near as possible to mirror or reflect what a non-family member would be paid.” The reasons for this are:

1) Other family members won’t feel that their [relation] is getting an inappropriate compensation if it’s referenced to market; and

2) The working family member won’t feel disadvantaged.

“Some business owners say, ‘My son’s working in the company; he doesn’t need to get a bonus because he’s got shares.’ Well, that’s a disincentive for that person to help grow the value of the business,” explains Bentall. “So having market compensation including bonuses is, in most cases, the appropriate way to go.”

Skull session

Prehogan tackles Becky’s present dilemma using this ownership-and-market distinction. He believes she has a good argument for her brother in the form of “Hey, you were well paid; there’s an ownership stake here that rightly belongs, in time, to the children, whether or not they were active in the company.” Equitable, maybe. But is it really fair?

Other advisors would say no, including Lawrence Barns, CEO of the Canadian Association of Family Enterprise (CAFE), which offers chapters from Victoria to Halifax for business-owner members to share their experiences. Bentall and Latremoille are members, and events are generally open to advisors to get real-world knowledge.

Barns says CAFE uses a teaching DVD called “Fair versus Equal,” that basically takes the premise of a business owner with three kids, each of whom gets one-third of the shares — which, says Barns, is obviously the equal solution, not necessarily the fair one.

Why not? It boils down to mixed passions among the next generation, he notes. In other words, Becky’s brother who’s involved with the family business may have a huge passion for it, whereas the siblings might not have the passion to actually manage to steward it, explains Barns.

Therein, he notes, lies the key to a viable solution: Work out financial arrangements that will leave one or more of the offspring doing what they enjoy — which may be running the family business — while providing some other kind of reward for those children who, while not working for the family, may be eagerly pursuing a respective career passion.

And perhaps Mom and Dad could kick in some early inheritance to help a fledgling entrepreneurial endeavour.

“Fairness means that you don’t exactly cut the pie in three pieces but in the end you come to some fairness, like if I get the cottage then my sibling will have the business,” says Jennifer East, a board member and events co-chair of the Family Firm Institute’s (FFI) Ontario Chapter, a not-for-profit for business family advisors, also affiliated with CAFE.

Adds Barns: “They may be the black sheep in the sense that they don’t fit the mould for that [family] business, but we always say fair and equal are not necessarily the same thing. We’ve been on that bandwagon for a number of years now, saying to people, ‘look, you can make sure your kids are all provided for, but that doesn’t necessarily mean you give them all chunks of the business. That could actually be a disservice.'”

Independent actuary and life insurance advisor Ashley Crozier takes the argument a step further. He says business owners should look beyond the mere passing down of ownership and argues the emphasis should be on passing down the entrepreneurial mentality. “[The family business] is the business of business — not the specific business,” he clarifies.

Just because a family runs a tool and die shop does not mean the patriarch has to pass that particular business to the children, says Crozier. Instead, he can transfer on a spirit of enterprise, which a child could use to successfully start a new business — one that’s more matched to his passions and aptitude, or more appropriate for the times. Maybe it’s an adhesive labelling company to replace the tool and die business that’s run its course. If Pops helps fund it, even better!

Sibling salve

Insurance comes into play in a variety of different ways, says Creaghan. He has two elderly clients who are confident in their two sons’ abilities to take the family business through posterity, yet their daughter is really not part of it. She’s not business-savvy; she’s more creative. “From the parents’ point of view,” says Creaghan, “they want to treat their three kids equally, but they don’t want to leave a third of the business to her because it’s not really going to [add value].

“So the question is how do you settle up?”

Easy, says Creaghan, you buy her out. The company acquired a life insurance policy, with the parents as the insureds. The company pays the premium on the policy, and when it pays off at death, the company uses that money to buy the 1/3 shares that the daughter owns — to the tune of $25 million.

Latremoille, an FFI member, concurs, “You’ve got a buyout structure that’s funded with insurance so you’re not trying to rob Peter to pay Paul.”

Truffles and jujubes

In St. Stephen, N.B., a.k.a. “chocolate town,” life for the Ganong children indeed is like a box of chocolates; they’re not sure just what they’ll come out with. Patriarch David A. Ganong is the fourth owner in the five generations of this prominent family of chocolatiers. Unlike his predecessors, he’s a staunch proponent of the theory that family members who aren’t involved in the management and operations of the business give up all rights to an ownership position.

At present, two of his children, a man and a woman in their mid-20s and early-30s respectively, are testing their chocolatiering prowess. Each is a minor shareholder, while the controlling interest rests with Dad. “They are both in the position of proving themselves in that regard in learning,” says Ganong, adding that both kids are trying to feel their way, “to see how far they want to go with my business; to test their own capabilities.”

Does he hope his two offspring will mature into the right fit for the future? Absolutely, he says, but until that time when he and other members of management are satisfied they’ve proven themselves, they won’t be calling any shots. Asserts Ganong: “There’s no free lunch here just because you happen to be a Ganong within the business. And the children understand that.”

He adds that ultimately, some or all of those ownership shares could flow in their directions, once either he or others have determined the kids are equipped to carry that responsibility into the future. “I probably would ensure that if one of them was capable and had the interest in doing so, that that individual would end up with personal control of the company — Control is very important in these circumstances,” Ganong says.

Sounds like a simple solution, but that hasn’t always been the case in this candy-rich family. Ganong reveals his predecessors had seen both good times and bad — one particularly bad time came when the company dividends stopped, leading to a very personal battle between an uncle and aunt, with his father caught in the middle.

“The company did not have the resources to pay the dividends and [my aunt] felt that there was an entitlement. [Further,] the previous generation really didn’t have a plan as to what they were going to do until they were faced with two aging individuals and a concern on behalf of management as to where the ownership was going to go, and ultimately, over a two-year period, that precipitated the change in ownership to the active management at that time,” he explains.

The generation before that saw the shares spread among dozens of different people, many of whom were not related to the Ganongs, and so that generation had to accumulate the shares from the several dozen different people who owned them. “They were all over the place,” says Ganong. “So again, each of the generational changes has been done quite differently; there is no pattern. This is my pattern,” he attests.

But Ganong also has a son who lives out West and works in a different field entirely. The father concedes there’s an understanding and, based on Ganong’s successor sentiments, one might deduce that son isn’t entitled to company ownership.

And that’s just fine with Dad. “I don’t believe that I have to leave my shares a third, a third, a third; I don’t think that’s in the best interest of the business itself.

“I don’t think there’s any entitlement just because there’s a bloodline to ownership or to job. It’s very harsh but that’s where I happen to be,” the patriarch proclaims.

Ganong’s right; as owner of the shares he can do whatever he likes. “I could give them to the local orphanage like Hershey’s did,” he jokes, but affirms that if it turns out to be the case whereby his two children are active in the business and get the shares, then so be it. And his family enterprise will do some manoeuvring with assets from the estate, among other liquid assets perhaps, to try to provide some balance. In terms of advice, in the past, Ganong has hired tax specialists to help structure a trust that resulted in an estate freeze, to reduce future tax liability. As Ganong puts it: “Tax liabilities can cause the best-laid plans of mice and men to fall apart!”

He adds: “That’s frozen the tax liabilities to a manageable level. [As for] the trust, if I get hit by a truck tomorrow, somebody else is going to have to make the decisions as to what happens to the shares.”

So when does the Willy Wonka of St. Stephen plan to make his final decision to let go of the reins? “I’d like to slow down [now],” he says.

“But we happen to be in the manufacturing business in Canada, which is struggling to deal with a very high-valued Canadian dollar, so I’m going to be around working the business a little longer than I bargained for.”

Ample time for his kids to choose their favourite colours.

Little adults

Years back, Bentall used the fair-versus equal model as a way to teach his kids financial independence. A fan of the family meeting, Bentall and clan would sit down and engage in open dialogue about how money was to be distributed toward the kids’ respective sporting gear. At first, the Bentalls felt it was fair and equal to pay for whatever sport each child wanted, until they realized their daughter’s soccer-gear costs were quickly trumped by their son’s hockey apparel. Equal in theory but not fair dollar-wise.

The family discussed whether everyone was comfortable with that being the appropriate arrangement — and they were.

But then what to do when a fourth child decides to take up horseback riding? See a man about a horse?

The family talked about how much was appropriate and then put a cap on how much they’d shell out for the youngest’s equestrian hobby. “After that, it became either a deduction from her future inheritance, or she had to pay for it herself,” explains Bentall.

A business woman in the making, Bentall’s 15-year-old surprisingly elected to change schools, from private to public, to save money on tuition so that she could afford to pay for her horse and not have it deducted from her future university education or an eventual mortgage down payment.

See, kids do learn.

This article first appeared in the December 2007 issue of Advisor’s Edge.