Transitioning a family business to the next generation is one of the ways entrepreneurs can diversify.Getty Images
Les Mandelbaum, owner of Toronto-based housewares company Umbra, said he’s had some “lucky breaks” when it comes to investing, particularly with his real estate holdings. When the pandemic hit, affecting business, he was able to take out small mortgages on warehouses and condos he had purchased over the past few decades. “That saved us”, he said at The Globe and Mail’s “De-risking your family business: Tactics for diversification” webcast on Feb. 15, 2024.
The event, part of a lifecycle of a business series, presented by Richter, delved into strategies for generating liquidity and new investments.
Before making any monetization moves, it’s important for owners to assess their own personal and corporate goals, says Brett Miller, a partner at Richter, an integrated business advisory and family office firm. “The biggest advice we give clients is to start early.”
He noted three main options: keep the business but transition to the next generation; keep the business and get an outside management team; or sell, from a minority stake all the way to 100 per cent of the business.
Any option requires a lot of planning, Mr. Miller said, and starting too late means “it’s often a lot less seamless.”
Different diversification possibilities have ramifications for tax planning and dividend policies, said Leah Tolton, a partner at the law firm Bennett Jones. “There are ways to make it so that the wealth and value created by the existing owners is preserved, and that the people who take over can get the benefit of their efforts to grow the value of the business.”
Mr. Mandelbaum made it clear that he has no plans to sell any time soon. Still, he’s being responsible by entertaining several options for his business in the future. That includes a succession strategy to hand the business over to his children, who aren’t interested just yet, and his plan B where management takes over and he steps back.
To review options, he has tapped outside experts as well as an advisory council, and has regular conversations about the business with his family. “I don’t keep anything secret.”
Discussions about where the business is at, where it’s going, and plans for the family wealth and legacy are complex, and require those sorts of widespread and continuing discussions.
“You want to consider whether the family has a goal of generating wealth beyond this generation,” said Ms. Tolton. “Not every owner is comfortable having that conversation, so having a professional can help facilitate that. In the end, can the people in the plan live with the plan?”
Liquidity opportunities can also come in the form of a deal with a private equity firm, but these, like most sales of this kind, require extensive preparation, Mr. Miller explained.
For him, there is a four-step planning process: financial reporting; a plan for growth (including asking buyers about their plan for the business); evaluating the management team and identifying any gaps that need to be filled; and the structure (like whether this will be a turnkey for the next owners).
“Some of these things you want to think about one to three years before ever going to market,” said Mr. Miller.
Selling a business, whether in part or whole, can give family enterprise owners more options to invest in other areas and generate wealth for future generations. But owners must be ready for this transition.
Mr. Mandelbaum said he is emotionally tied to his business, which is one reason why he’s not ready to let it go. He wants to carefully plan his exit, because he said he has seen other owners his age sell their businesses and have things going sideways. “A lot of them had a lot of regrets, and it scared me a little bit.”