Three ways for family businesses to stay entrepreneurial

The owners of Book City, one of Toronto's independent book chains, announced recently that they would be closing the doors to their flagship store after 40 years. As a final salute, CBC Metro Morning interviewed the store’s third generation owner, who shared the heaviness of that heart wrenching decision.

The reporter reminisced about how stores serve as land marks in our neighbourhoods and Book City was no exception: its iconic yellow logo brand was appreciated by Torontonians.

While in recent years customers have migrated to online book stores, the question remains: is there anything the family business could have done differently? Could succession planning have helped preserve the company’s legacy?

“For the most part it is easier, and generally more fulfilling to work ‘in’ your business than ‘on’ your business, so entrepreneurial families continue to dwell on the day-to-day tasks that come from operating a business,” says David Simpson, founder of the Ivey Business Families Centre. “Planning for future transitions, while always somewhere on the planning horizon, never seem to get done.”

Many first generation - let alone third generation (3G) - business owners have gone the same route. They stick to a dated business model that served them well in the past; after all, change is risky.

Those who step into the family business, may become trapped by a significant and public brand created and developed by generation one and two. They put grandpa on a pedestal, his oil painting is in the boardroom and refuse to refresh the model.

Mr. Simpson agrees: “There may also be a tendency for second generation (or third) to have guilty feelings if the challenging questions that come with considering transitions – including potentially selling a business. This comes in conflict with the feelings of protecting a legacy that was provided by an earlier generation.”

Yet, the entrepreneurial first generation would probably be the first to say “sell the business.”
“I tend to remind this generation that the greatest legacy is to remain as entrepreneurial as the founders, and ensure a strong family tradition that includes knowing when a business doesn’t fit the times,” adds Mr. Simpson.

To help business families remain entrepreneurial, he offers the following advice:

1. Once a year, ask the hard question: “If we were starting out today, would this be the business our family chooses to be in?” This forces a family to remind themselves that a business takes time, energy, talent, capital and most of all relevance. Take out the emotional attachment. If your family was in the buggy whip business as cars were arriving on roads, there would be little point in continuing as is. This question provides the nudge to reinvent the business, perhaps into a travel accessories and suitcase retailer.

2. If we conclude that this is a good business to be in, ask yourself this: “Are we the right ones to manage or steward the business further?” To survive in the global market, growth is vitally necessary. Expansion capital is available for companies over a revenue size threshold, and a family business can bring on board a professional CEO capable of managing a larger enterprise. There is no need to remain stagnant. The skill-fit question forces families to think like owners, and be less concerned about viewing the business as a
source of family jobs. The best leadership of a business will change over time as requirements change, and families need to look to what serves the business best.

3. Let outsiders inside your tent. Mr. Simpson says outside eyes are critical: “Overall, remember that families often view their businesses as their babies, and human parents tend to be ill-equipped to value their babies. We either overestimate the ‘uniqueness’ of our child or are often too hard on our kids and overlook their hidden value as a result.” Yet, so few family businesses take on an advisory board because they believe no one will understand their business as well as they do. Ensure that the business has an outside advisory board, or an active fiduciary board or at least a mentor with skills in the particular field. Engaging an advisory firm early and sharing your hopes and dreams will also ensure that a competent firm with transition experience can give you the hard reality of the day which helps families make decisions.

Jacoline Loewen is a director at Crosbie & Company, which focuses on succession advice for medium-sized enterprises, family businesses and closely held private companies. Crosbie develops customized strategies, particularly in relation to sale of companies, M&A, financing and corporate strategy matters. Ms. Loewen is also the author of Money Magnet: How to Attract Investors to Your Business.

How to make your business more attractive for sale

The dismal financial results for 2009 no longer need to be included in a company’s books. For any business looking to sell, this significant milestone allows for a marked improvement when potential buyers look at the performance of the past three years. The conversation doesn’t have to start with: “We looked at your financial statements. What happened in ’09? Want to talk about that first?” That said, there is still a noticeable gap in valuation expectations between buyers and sellers. “The market downturn stripped out the profits for private companies and the survivors reduced and reinvented their businesses to add to their top line,” says Bob Gorrie, owner of Gorrie Marketing Services. “These owners have put a great deal of sweat equity into their businesses, and unfortunately that extra hard work and planning is not reflected in their financial results.”

But as the markets improve, profits are returning and owners interested in selling are watching their industry cycles like hawks for the upswing, waiting to get the timing right. A more relevant question for these owners is “where is my own business in its life cycle?”

For any business owner contemplating a sale in the next few years, here are a few ways to add to the valuation:

Does your business have solid management?

The owner may be leaving but buyers want to know whether there’s a team in place with big goals to drive the business forward with equal determination.

Having a succession plan is critical, but when Crosbie & Co. recently conducted an owners’ survey, it revealed that fewer than 5 per cent have a written document with a strong operator or family member ready to take over. Owner-operators have built their lives around running their businesses and they do not want to let that go. This reluctance may prevent them from seeing the importance of planning for their own exit and they will get dinged on their company sale price for this omission.

Are your key processes institutionalized?

“There is the risk that the company incurs a fatal loss of knowledge and connections upon the exit of the owner,” the president of a manufacturing business told me. “The earn-out helps, but two to three years does not make up for 30 years experience in a company. One way to mitigate this risk is to bring in a guy like me.” Paying a high-quality CEO for a few years will help the owner of a windows manufacturer convert “in the head” knowledge to written processes. “We preserved the knowledge and demonstrated the existence of a reliable management team to a potential buyer,” the president added.

Do you know good buyers?

The sale price of a business is what buyers offer and when a company is in the growth part of its business cycle, there will be multiple offers and phone calls from all sorts of interested parties. “I know the ‘I’m comfortable with my business’ owners where the offers to buy have made great sense,” says succession planning coach Janice Lahiti. “The owners don’t do it because they think their ability to influence a variety of broader agendas will diminish.” As the business hits the mature stage of its life cycle, which often occurs in tandem with the owner’s life cycle, suddenly the pool of multiple bidders dries up and as Janice says: “The owner can no longer command the multiples they want.”

The owner may also miss the opportunity to sell to a buyer who will structure the sale so that the majority of the company is purchased but the owner can keep 20 per cent to 30 per cent with a fixed medium-term buyout schedule. They can also have limited management or board involvement. This structure keeps the owner involved mentally and financially in his or her ‘baby’ while taking some money off the table to free up time to pursue other interests.

What is your opportunity cost, really?

Melanie Kau exited her successful family business, Mobilia, to take on the challenge of running Le Naturiste. “The ‘what next’ after you have worked for 15 to 20 years in a business prevents people from asking themselves the cost of staying where they are because they are comfortable. I know what that feels like because I have just been through it. Therein lies a great deal of value with the experience the entrepreneur has built up: sometimes the business is more like a cage than a platform.”

Jacoline Loewen is a director at  Crosbie, which focuses on succession advice for family businesses and closely held small to medium-sized enterprises. Crosbie develops customized strategies, particularly in relation to M&A, financing and corporate strategy matters. Ms. Loewen is also the author of Money Magnet: How to Attract Investors to Your Business.

Canadian SMEs Snapping up U.S. Companies

JOHN LORINC

December 3, 2013

More than five years after the 2008 credit crisis, Canadian M&A activity stubbornly remains well below its peak 2007 levels. But, while more sluggish than the feeding frenzy of six years ago, it does look as if acquisitions are starting to pick up the pace again according to new data compiled by investment bank Crosbie & Company. Over the past year, Canadian firms have been aggressively snapping up U.S. companies at much faster rates, culminating in 120 takeovers in 2013 worth almost $32 billion.

Crosbie & Company managing director Colin Walker notes that the proportion of Canadian acquisitions of U.S. firms as a total of all foreign acquisitions has fallen by about 10% to 15% in the past decade—proof, he says, that domestic businesses are increasingly operating in a "fundamentally international" market. "It shows that Canadian companies have recognized the need to push beyond [North American] markets over a long period. It's a function of globalization."

Walker says the Canadian M&A market is driven primarily by mid-sized firms with transactions worth less than $150 million. In a typical quarter, he adds, about 40% to 50% of those deals involve cross-border activity.

According to the 2013 Q3 report published in The Financial Post, the number of all year-to-date M&As—which came to an ominous total of 666—is 7% below the same period for 2012 and 11% below the first three quarters of 2011. "Despite weak activity," Crosbie & Company says, "the value of transactions increased by 9.7% to $49 billion in the quarter due to a few large transactions, particularly in the retailing and real estate sectors."

Crosbie also reports that the number of Canadian acquisitions of foreign firms is outpacing foreign takeovers of domestic companies by a ratio of 2.2 to 1.

Over the past decade, says Walker, this "outbound" acquisition activity has been driven by manufacturers looking to move production to low-cost jurisdictions in the southern U.S. or Asia. In other cases, such as Constellation Software, a Toronto firm, companies grow within key market segments by making strategic acquisitions.

In fact, Walker says most Canadian companies aren't just looking to boost their revenues or before-tax profits when they make an international acquisition. "They're buying that company because of the benefits that it brings, such as windows on new markets, new products, new manufacturing capability or some really good people."