Your Choice - Advisor.ca

your
choice
sometimes blood isn’t thicker than water.
know how to make the family business your business.
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11/16/2007 11:46:11 AM
felix wedgwood
by heidi staseson,
associate editor of Advisor’s Edge.
[email protected]
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 Vancouverbased 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?’ ”
continued on page 15
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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 vicepresident, 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
r o b e r t k a r pa
continued from page 13
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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 thirdgeneration member of the
prominent Bentall real estate
empire, whose eponymous
Bentall Buildings in downDavid C. Bentall, president and
town Vancouver house many
founder, Next Step Advisors, Vancouver
of Lotus Land’s corporate
executives including financial advisors.
surprising answers from a 72-year-old
That puts him in good stead to cruise
billionaire client about his relationship
through some of the more contentious
with his gay son; and his thoughts about
issues that wealthy business-owner clithat child one day succeeding him in the
ents experience.
family steel plant.
Says Stenner: “[David] has a wealth
It’s these types of conversations from
of knowledge from the point of view of
which an advisor can then begin to suss
his own family history. He readily adout where any clouds are forming, and
mits openly—‘I’ve seen successioners
guide a client’s next steps. “It comes back
three times from a very young age, and
to you want to try to anticipate chalI’ve seen it done very poorly; I’ve seen
lenges before they become problems.
it done average and I’ve seen it done
That’s where a true professional can rereasonably well.’ That’s really where the
ally add value,” says Stenner.
real-life experience comes from.”
After the fact-find, Bentall will reBentall aims to teach clients to talk
convene with the family and facilitate
and listen—to help some family memtheir determining the main issues, after
bers “find their voices,” and others to
which they must agree on the top three
“find their ears.” For example, an advior four to be addressed. He’ll also try
sor could ask about recent troubles in
to help them learn new patterns of reparadise, and discuss the implications
lating. Some families, he notes, exhibit
an impending divorce could have on the
patterns of conflict-avoidance or doing
family business—from tax and sharewhatever it takes to keep the peace. Benholding issues to trusts and potential
tall will work with these clients to help
company reorganizations that involve
them learn how to relate to each other
valuation freezes of certain business
as adults and to make collaborative decishares. Dig deeper and you might get
sions—as opposed continued on page 16
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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.
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,
Relative dysfunction
says Latremoille, but it’s almost inSometimes business-owning clients
evitable when you’ve got situations like
don’t seek out an advisor until an exterBecky’s. “What person is going to want
nal event forces their hand, notes Ron
to see someone else walk away with the
Prehogan, a family business consultant
lion’s share when they were bypassed?”
with Equitas Consultants in Ottawa.
she asks. The sense of entitlement that
“Like a death, severe illness, or a child
often accompanies ownership is a mindgoing to Dad and saying, ‘You’ve said for
set that needs to be rethought, she adds.
years that one day this will all be ours.
“To have the right attitude you should
Well, I’m now 43 and I want to know
look at ownership as a responsibility,”
when that day is going to be—and no, I
she says, quoting Muriel Sprague Richardson, the firm’s fifth presiif the [child] manager dent: “To whom much is given, much is also required.” In
is only worth $80,000- other words, Latremoille exa-year salary, plains, “You are responsible
for the caretaking and the
don’t pay him $160,000. well-being of what you’ve
—Susan Latremoille
been entrusted with.”
continued from page 15
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
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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.”
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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.
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“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 continued on page 19
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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.
continued from page 17
“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. continued on page 21
GANONG BROS. LIMITED
Location: St. Stephen, N.B.
Established: 1873
Current President & Patriarch:
David A. Ganong
3 Legs of Business: Chocolate;
Fruit Snacks; Sugar Confectionery
Spawned: the town’s “Chocolate
Museum.’
four generations of ganong
Founders
b.1841 - d.1888
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Gilbert W. Ganong
b.1851 - d.1917
Arthur Ganong
b.1877 - d.1960
R. Whidden Ganong
President of Ganong Bros.,
Limited 1957-1977
chuck brown
James Harvey
David A. Ganong
President of Ganong Bros.,
Limited 1977 - present
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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.
continued from page 19
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. AE
staseson
Little adults
Years back, Bentall used the fair-versusequal 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?
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