Insights
Periodic insights from our Investment and Private Client Teams on a broad range of investment and advice-related topics
Published by the Private Client Team at KJ Harrison Investors – Philip Zappacosta, Private Client Analyst
If you keep up with financial headlines, you know that we are in the midst of the largest intergenerational wealth transfer in history. As baby boomers age, they are passing along to the next generation a huge amount of wealth. It is estimated that by 2026, the 10-year total wealth transfer in Canada alone will reach $1 trillion—and counting.
It is an unprecedented phenomenon, and it will affect every aspect of Canada’s financial landscape. But the “great wealth transfer” will be particularly impactful for family-owned enterprises, which account for almost half of all private-sector economic activity in the country. As a generation of founders ages out of their businesses, many will sell their companies to monetize their equity and provide for their retirement and for their children, while others will pass along ownership and/or control of their companies to the next generation. Either way, it will have significant implications for families and their financial future.
On the surface, at least, this might look like an extraordinarily happy event. A trillion-dollar windfall! Who wouldn’t welcome that? But the on-the-ground reality for families, especially high-net-worth ones, can be far more complicated. In many cases, managing the complexities and questions that arise can be difficult, even overwhelming.
I have experienced those difficulties first-hand. My family owned a successful multi-generational retail business, and when my parents decided to exit the company, it raised a whole host of questions: How and when would the proceeds of the sale be divided? How would my parents ensure they could achieve their retirement and philanthropic goals? How would the money from this “liquidity event” be managed? How would the family make financial decisions? Who was in charge?
As much as we all had one another’s best interests at heart, those were tough questions, and it took patience, planning and more than a few difficult family meetings to come up with the right answers.
That personal history is a big reason why I have committed myself, as a strategic wealth advisor, to help family business clients manage change, guiding them as they navigate the complex dynamics and financial considerations that the intergenerational transfer of wealth—in the form of capital or of the business itself—can create.
One thing I have learned, both from advising ultra-high-net-worth families and from my own family’s experience, is that planning ahead is critical to a successful outcome. And while the issues are complex, four steps are key:
1. Set clear financial goals.
Many family business founders are so engaged with operating and growing their companies that they put off important long-term considerations about what they want to do with their lives and their money once they exit the business. That is usually a mistake. Planning for a business exit should ideally begin long before the exit occurs, and that process should begin with setting clear financial goals for yourself and for your family.
One aspect of that goal setting is retirement. How do you want to spend it? Is travelling the world on your bucket list? Turning a hobby into a second career? Sharing your experiences and wisdom with younger entrepreneurs as a teacher? Sitting on boards? Getting into venture capital? The retirement you aspire to will determine your financial goals—in short, how much money you will need to sustain you and your loved ones through 20 or 30 years or more of retirement.
Another aspect of goal setting is legacy planning. How much of your wealth do you wish to leave to your children or grandchildren? Do you want to set aside money for their education, for example, or to help them launch their careers or own entrepreneurial ventures? Do you have philanthropic causes you wish to support?
Once you have set those goals, you can consider the how. There are options. Perhaps you need to entirely monetize your business’s equity, or maybe a partial sale will suffice. Or perhaps you could pass along control and partial ownership to your children and meet your financial needs through dividend income. Knowing your goals helps you explore strategies for reaching them.
2. Educate the next generation about your personal values.
When it comes to succession and the transfer of wealth, many founders are rightfully concerned about how their children will manage money and/or the business once they step back. Obviously, the next generation will have their own priorities and goals, but often they find the prospect of inheriting significant wealth disorienting and even a little frightening. Talking to them and educating them about how you think and feel about wealth—your personal values about it—can help ensure that your legacy continues as you want it to. More importantly, it will help them define their own values to guide their financial decisions for the rest of their lives.
Do you consider wealth as a means to better your community and lives of others? Do you see it primarily as a way to ensure the security and comfort of your loved ones? Is it important to you that your children do not just spend away inherited wealth, but rather practise sound stewardship and preserve and grow family wealth for future generations?
Whatever your personal values are, share them with your children. That will empower them to make their own decisions.
3. Establish trust through open communication.
Succession and wealth transfer can lead to complicated and difficult family dynamics. For instance, one child may want to take over the family business, but another child wants to monetize the company and pursue their own career. Or the children may want to take over the family enterprise but lack the skills and experience to do it. The dynamics can become even more complicated and stressful in multigenerational family enterprises, where the desires of children, grandchildren and sometimes even cousins must be considered.
How can you navigate these complexities and competing wishes without causing deep rifts within the family? The foundation of a successful wealth transition is trust, and the foundation of trust is open and honest communication. For many families, structured communications can help—for instance, through family meetings, held before, during and after a transition of wealth, which keep everyone informed and engaged in the process so that they know their concerns and ambitions are being addressed.
4. Get support from a trusted wealth advisor.
The good news is that families do not have to go it alone. An experienced, trusted wealth advisor can not only assist with developing a comprehensive wealth management plan based on your financial goals, but also help families navigate the inevitable challenges and roadblocks that a transition will present. A good advisor can also function as a kind of quarterback, facilitating the process and coordinating the efforts of the family’s legal, tax and accounting professionals to ensure everyone is on the same page and working towards the same goal.
The “great wealth transfer” is a reality, and for high-net-worth families it is presenting both opportunities and challenges. But those challenges will be far less daunting if they set clear financial goals, educate the next generation, and ensure that they are communicating with one another honestly, openly and regularly. And the right support from a trusted advisor can go a long way towards ensuring a successful, satisfying outcome that preserves family harmony.
To learn more or ask questions, contact us.
