Nobody needs reminding about our aging population and its impact on the financial landscape. However, relatively little attention has been paid to the amount of wealth which has been accrued within private businesses, and the implications of an individual's need or desire to realize upon that body of wealth. With more than 2.5 million owners of medium-sized businesses in Canada beginning to retire, an estimated $1.2 trillion in business assets are poised to change hands – the largest turnover of economic control in generations.

Despite the old cliché about a home being your biggest investment, where a private business exists it is often this asset which dominates the personal balance sheet. These businesses represent a tremendous opportunity to build wealth but can also present an enormous risk to an investment portfolio.

Adverse events (such as the loss of key clients or employees, health issues, or an economic downturn) happen more frequently than many owners like to think, and can have an extremely detrimental impact on both the value of their business and the owner's financial stability.

These risks can be managed where owners have sufficient time and energy to recover, but they become more problematic when an individual has a relatively short investment horizon.

Addressing this issue is an extremely challenging component of any advisor's job, and touches upon personal issues which require the advisor to sometimes act more as a personal therapist than a financial analyst.

In my experience, the assistance typically sought by these clients includes:

  1. Assessing risk tolerance. By comparing a client's net worth with their anticipated financial liabilities an advisor can develop a better sense of their risk tolerance, and whether their current investment portfolio reflects that appetite for risk.
  2. Identifying and evaluating options for liquidity. These options can include introducing new debt or equity, a partial or total sale of the existing shares and/or assets, and a staged transfer of ownership to family members or the management team.
  3. Estimating the most likely outcome. This is an essential step in determining whether pursuing a particular course of action will meet the client's future financial and lifestyle goals. It is important to estimate not only the proceeds of a transaction but also the degree and duration of personal involvement that would be required afterwards.
  4. Evaluating timing. Liquidity events are often driven by a combination of internal and external factors. Investment advisors are uniquely positioned to understand both the personal and market-driven factors at play, and can objectively assess the relative merits of a transaction's timing.
  5. Pre-transaction planning. Many opportunities exist to minimize, defer, or eliminate the income taxes owing upon the transition of a private company. Aside from putting these tax strategies in place, a number of other opportunities exist to significantly enhance the value of an enterprise through diligent preparations. For example, corporate structuring (e.g. family trusts), enhancing management teams, and implementing various "window dressing" strategies (like a modernized website) can yield tremendous results.
  6. Assembling the team. Where supplemental advisory services are deemed necessary, the investment advisor is often a trusted source of advice regarding the most effective professionals for the job. Lawyers, tax experts, investment bankers, management consultants, and even personal counselors can all play a role depending on the nature of the transaction involved.
  7. Lifestyle concerns. When the owner is expected to play a reduced role in the daily operations of their business post-transaction, the biggest hurdle is often grappling with the loss of personal identity and purpose which that employment provided. In my experience, this represents the single largest barrier to effective succession planning. If a client does not have a clear understanding of how their time will be spent in a productive and fulfilling manner post-transaction there is little chance of successfully effecting a transition, regardless of any seemingly apparent reasons for doing so.

Expert advice on each of these matters is an indispensible asset to Canada's business owners. Those advisors who are able to address these complex issues will be sure to stand out from the crowd and more effectively protect the financial wellbeing of their clients.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.