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The Secret To Wealth Preservation In Family Businesses

When it comes to wealth preservation, why have some families businesses been so successful while others have failed miserably? In my opinion, the secret boils down to a family ethos that values one thing over all others: capital preservation.

The bear traps of inheriting money without purpose have been well documented in literature, Hollywood and the media.

Thomas Mellon, founder of one of the wealthiest and longest enduring families in America, set up a tacit understanding that while spending was acceptable, it came with the expectation that each generation would become the caretakers of this capital and push it forward to a larger amount than he or she was given. This sense of ownership and responsibility was central to the family’s vision.

But conserving family business wealth isn’t always so straightforward.

Family businesses make up the foundation of the Canadian economy, but not all owners feel adequately prepared for succession, says Saul Plener of PwC. In the annual PwC Family Business Survey, family business respondents tended to fall into the second generation, or ‘Baby Boomer’ category, and are ‘looking for the best opportunity to exit.’ Unfortunately, he points out, a significant number of those surveyed “haven’t put the necessary effort into succession planning and professionalising the business to ensure long term survival.”

One of the reasons why the professionalisation of the family business has become as challenge is because these types of discussions can be difficult. But succession conversations should take place several years before the business changes hands and wealth is passed down to the next generation. Discussions should centre around the financial plan, tax and legal implications, as well as family expectations.

If you run a family business, it’s never too late to start. I also recommend hiring a family business expert to assist these often tricky questions.

To get the conversation started, family members should rate their knowledge on the following question out of ten:

1. I understand the expectations about the transition of the business by the current owners (parents) and also the next generation.

Mr. Plener says that parents often think they know what their children want to do, but they’re not always right. The next generation has seen the stress that their parents handle and don’t necessarily want to take on that level of emotional strain. Founders needs to find out the interests of the next generation as a beginning to the succession process.

One owner was pleasantly surprised to discover his daughter was interested in being on the board of the family business. He had assumed his daughters weren’t interested, but he had not started that conversation.

2. We have discussed the distribution of capital.

Has there been a systematic building of capital in a diversified investment portfolio over the years? Having capital invested outside of the concentrated investment into the business is wise as the optimism of many entrepreneurs has resulted in spectacular belly flops. By systematically taking money out of the business and putting it into a portfolio, the family will be looked in the worst-case scenario.

With the security of a portfolio in place, the family and retirement costs are covered, and then entrepreneur is in a far better position to take the risks required to grow the business. Families can relax and relationships enhanced if everyone knows the strategy around capital.

3. We are on the same page about our long term-family goal(s).

The longer the family has been in the business, the more the business means to its members. In material terms, it usually represents their largest asset and primary source of income. Beyond this, it is also a source of personal wealth and family tradition. Family members are usually proud of being associated with the business, especially if it carries the family name.

After a sale, these families have to look for new means to keep the family together, to continue its legacy and preserve its wealth over generations. This is often the reason to set up a family office to create a platform to manage joint family activities, such as philanthropy, family investments or special projects such as private equity. Capital preservation is recommended as the central family goal which the next generations will need to understand and embrace. The next generation and family can then have the security to reactivate the family’s entrepreneurial spirit and create the next family business endeavour.

About the Author - Jacoline Loewen is director of business development of UBS Bank in

Canada. She is also author of Money Magnet: How to Attract Investors to Your Business.

Article first appeared in The Globe and Mail and has been reproduced with permission.

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