The right counsel and boards can help family-owned businesses maximize their wealth.Getty Images
Fifty years ago, Mohamed Ali walked into a Budget Car Rental franchise in Calgary and he noticed his vehicle had bald tires.
He learned from the owner that the franchise was for sale. He bought it and launched SM2 Capital Partners with his brother, Shiraz. Today, the family-run holding company comprises car and truck rentals, parking lots, hotels and casinos, and commercial real estate, with other investments in residential real estate and senior housing projects.
Mohamed’s son, Naim, serves as CEO of the company, while other members of the next generation fill out the executive-level positions. Independent advisors, a board to guide the company, and a holistic view of allocating capital – operationally and for investments – have been critical steps.
“A big inflection point for the next generation was when we started selecting our own advisors. We’re asking questions about the strategic direction of our companies and the strategic direction of our family,” said Naim Ali at The Globe and Mail’s “wealth creation for business owners” webcast on April 11, 2024.
The event, part of a “lifecycle of a business series,” has explored how multigenerational, family-owned businesses can preserve, scale and manage family wealth.
“A board can bring some discipline and rigour,” said Richard Leblanc, professor of governance, law and ethics at York University.
He described four key areas that boards can help navigate: succession, family dynamics, self-interest (such as conflicts of interest, expenses and compensation) and the family plan (including conditions for working at the company and owning shares).
Governance can increase the odds of long-term success. Mr. Leblanc noted that 60 per cent of family businesses fail to get to the next generation, while 87 per cent and 97 per cent fail to make it to the third and fourth generations, respectively.
“Having a strong board can also provide external perspectives and help with evaluating different opportunities,” said Heidi Wong, counsel in the corporate practice at Osler in Calgary.
Family businesses looking to form boards should seek guidance from those with experience, added Tasso Lagios, managing partner at Richter, an integrated business advisory and family office firm. “Some people try to do it on their own,” he said, but they don’t necessarily know what skills they need around the table or how a board functions best for a family-run business.
For Mr. Ali, independent counsel helped with starting the necessary conversations and mediating the challenging ones. He said the process of selecting independent advisors was a signal that SM2 Capital Partners was moving into its next phase.
“An independent person really engages and brings all the family along for the ride and can flesh out issues – not just business issues, but family issues,” Mr. Ali said. “They’ve been vital in our boardroom, forcing us to have conversations that I was afraid to talk about in that room.”
His company has 500 employees and diverse interests. But until it created a board, meetings about business challenges were held around Mr. Ali’s family dinner table. “That doesn’t become a conducive place to really hash out things,” he said.
When family businesses are seeking qualified directors, Ms. Wong said they should consider individuals that balance existing expertise and also offer new proficiencies, especially if the company is exploring new ventures.
“If you think you’re going to look at projects that require a lot of capital output but you don’t have financing expertise within the family, you may want to look for someone that complements what’s already there and [can] also build out some of those strengths,” Ms. Wong said.
Mr. Lagios, who sits on a number of boards, said families might want to ask their lawyers or accountants for suggestions of good fits for board members. However, he added there’s a small talent pool for this kind of expertise.
“When you find a good person who has not only business knowledge but family enterprise knowledge, it’s powerful,” Mr. Lagios said.
Selecting an independent board member can be complex. Businesses need experts seen as “wise counsel,” advised Mr. Leblanc. He said many companies apply intricate competency and behavioural matrices to the selection process, alongside reference checks and interviews, to help identify what personalities and skills are going to serve the board of a family-run business.
“Exercise incredible care when bringing someone on to a board,” Mr. Leblanc said. “It’s a big step, so take the recruitment aspect seriously.”