How to Vanquish the Odds and Preserve Family Wealth

There’s a pithy saying that galvanizes wealth management professionals and wealthy families: “From shirtsleeves to shirtsleeves in three generations.” It or its variants exist around the globe — from Canada to Scotland to China.

The English-language version paints a perfect image: the first generation rises from poverty – shirtsleeves – to build wealth. The second generation may retain or even grow the nest egg. By the third generation, that wealth has eroded or vanished. The bottom line: While founders often build incredible wealth, subsequent generations excel at losing it.

This week I’d like to bring you the sage words of my colleague Jeff Noble. Jeff has advised hundreds of business families on how they can beat the odds and preserve their wealth to the fourth generation and beyond. I wanted to get his take on beating the three-generation curse.

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We all have a different set of thoughts and feelings on the value of life and wealth. When considering a multi-generational wealth plan that will endure and be the basis of successful and sustainable wealth transition, it is critical to clarify and communicate our values. This is no idle exercise. By sharing our philosophy about wealth creation, wealth management and wealth divestiture — we can increase the chances that the wealth will truly be generational.

Here’s the challenge: The time-honoured statistics on successful wealth transition are not promising. Wealth creators are often painfully aware that at least two-thirds of the time, wealth erodes or even disappears when it gets in the hands of the next generation or the one after that.

Building a wealth philosophy

Defining principles and values and developing a belief system – a philosophy – from those principles and values with your family will significantly increase the opportunities for you and your family to beat the statistics.

As constant and reliable as the true north in navigation tradition, choosing direction and purpose for wealth will define your legacy and help your beneficiaries and their beneficiaries to be best prepared to receive and to give. Some examples:

• Don’t give away the golden eggs. The goal is to teach family how to look after the golden goose.
• Recurring wealth is like gardening. You enjoy the flowers and then nurture the plant with care and attention so you can enjoy even more prolific blooms the next season.
• Your standard of living is not equal to your cost of living. Always live within your means, not to a standard to which you may feel entitled.
• Spend, save, give. Buy the things you need. Set aside money to buy things in the future. Donate money to help people, animals and the environment.
• Leave the word a better place. Some wealthy families make a point of educating their children on this mantra: I have a personal sense of responsibility to leave the world a better place than it was when I got here.

 

The three Cs of wealth preservation

In my experience, families that successfully beat the odds at preserving and even increasing wealth through multiple generations excel at what I call the three Cs: collaboration, communication and common vision. This is what family governance is all about.

When speaking about collaboration, we speak of working with others among generations, between generations and with a group of external advisors to make the best decisions, together.

To do that, positive communication is critical. This will tie right back to family values as to how we treat each ourselves and how we treat others. Understand and learn from history, relationship dynamics, moods and personalities. Use structure and deal in facts. This will create a positive and safe environment for open, honest and productive communication.

Perhaps the most important of the three Cs is a common vision. This is your wealth-strategy true north. With this alignment of purpose, the focus is not on any individual “me.” The focus is on “us.” Adopt a future focus when managing your wealth for the long term.

Introducing a new definition of wealth

This brings me to a new definition of wealth. When we think of wealth, or capital, we naturally default to tangible items like money, stocks, bonds, real estate and the like. This is financial capital.

The other types of capital include human, intellectual, social and spiritual capital:

• Human capital is a family’s greatest wealth. It comprises all the individuals that make up the family.
• Intellectual capital is the sum of all the information that those individuals know.
• Social capital is the quality and quantity of relationships within the family’s network.
• Spiritual capital covers the deepest values that express the nature of the family.

And when you think about it, if we do not look after the human capital and all that means, the financial capital has precious little chance to endure.

Yes, each of us has a different set of thoughts and feelings on the value of life and wealth. Defining your family’s principles and values – the true north that can steer your family through the blips that will no doubt arise – is fundamental to creating alignment for the future and a common vision supported by positive communication and collaborative decision making.

Jeff Noble is a senior consultant and family enterprise advisor in the BDO Advisory Services practice. He can be reached at jnoble@bdo.ca, or by phone at 905-272-6247.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

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BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Dream Job by Richard Peddie – Book Review and Giveaway

Richard Peddie, the former president and CEO of Maple Leaf Sports and Entertainment (“MLSE”), recently released his memoirs in a book titled “Dream Job”. The book weaves together tales and lessons of business, leadership and sports – so if you are a sports fan and business enthusiast, you should thoroughly enjoy this book. I happen to have two autographed copies of the book that I’m prepared to giveaway to you, my readers. If you are interested in a copy, please email lynda@cunninghamca.com and I will draw two winners from a hat on November 18th.

Mea Culpa – Let’s Get this Over With

For Toronto Maple Leafs fans, Mr. Peddie has been a lightning rod for criticism because of the Maple Leafs lack of success and Stanley Cup drought. In addition, both the Toronto Raptors and Toronto FC soccer team were less than successful during Mr. Peddie’s reign.

To Richard’s credit, he does not hide from his teams records. He states that he may have stayed longer, “but I got tired of losing”. He has “regrets about some of the general managers I hired”, including (in reference to John Ferguson) “our big mistake, you don’t put a rookie GM in charge of the Maple Leafs” and “ in hindsight, what was I thinking hiring a reserved, taciturn coach [sic] for the Toronto market?”. He puts Rob Babcock, the former GM of the Raptors, “among the worst hires of my entire career” and in regard to the Raptors, he states “the record is disappointing, it’s unacceptable and it wore me down”.

Richard says that “as the CEO responsible for the performance of the Leafs between 1996 and 2011, I can assure you that losing caused me the most pain”. Throughout the book Mr. Peddie states that the most ridiculous notion held by fans was that MLSE only cared about money and not how well the team performed. He refutes that notion, saying he and MLSE cared deeply and that the insinuation makes no economic sense (more playoff games means MLSE makes more money).

With the sports teams’ records dealt with, let's look at some of the pearls of business wisdom and sports tidbits in the book.

Business Background and Philosophy

It is interesting to note that Richard loved basketball and always wanted to run a basketball team from the time he was 20. Hockey was not his first sports love.

In the book, Richard takes you through his varied careers with Colgate, Pillsbury, Labatt Communications, The SkyDome and MLSE, which is very interesting reading, if you are interested in the business of business.

Mr. Peddie states that the value of MLSE grew six-fold from a $300 million enterprise value to somewhere close to two-billion while he was CEO. While the reasons for the growth are multi-faceted, a significant reason was that instead of having the Leafs and Raptors at cross purposes, MLSE was able to eventually synergistically combine four teams.

If there is one business takeaway from the book, it is how important Richard feels vision and values are to any leader and their organization and how they must be adhered to and not just be statements on plaques in a company’s reception area.

There are very many insightful quotes; three I found very interesting were the following:

• You earn “respect first, affection second”
• "Management gets the workforce it deserves” – in reference to the Harold Ballard era and the sex scandal at Maple Leaf Gardens
• "The ability of a CEO to remember employee’s names and circumstances matter a great deal”

The Dark Side of the Dream Job

While being the president and CEO of MLSE has significant perks, when the fans’ beloved Maple Leafs are not winning, the job can be outright scary. In chapter two, Mr. Peddie discusses death threats he received, fans wanting to fight him and how someone hired a plane with “Fire Peddie” to fly over the Air Canada Centre ("ACC") and how there were three websites devoted to firing him. 

Interesting tidbits

Although the book provides some very insightful business and leadership tips and food for thought, what I really enjoyed as a sports fan were some of the sports related tidbits. Here are some of the more interesting ones:

Vince Carter was a “mama’s boy” and even after he was traded, his mother assumed she could continue to enter the private lounges at the ACC.

When Ken Thompson, the richest man in Canada, was being shown potential new seats at the ACC (season ticket holders were given a chance to select new seats when the team moved from Maple Leaf Gardens), he selected two great Platinum seats. However, 48 hours later he called back and asked for first row gold seats. These seats were only one row higher and saved him a seat licence and club fee. Rich guys are no fools.

I always hated the popcorn at Maple Leaf Gardens – I now know why. Richard reveals that the popcorn at Maple Leaf Gardens was always stale because it was made weeks ahead as there were not enough machines to pop it freshly.

A very interesting tidbit that touched me personally is when Richard speaks about how he would often give his own personal lower bowl Maple Leaf and Raptor tickets away prior to a Leafs game. He would go up to the purple (highest) section and find a kid with a Leafs or Raptor shirt on and give them his seats. Sort of his own “Campbell’s Van Line move of the game”. Why I found this interesting is that about twelve years ago I was given purple tickets to a Leafs game and took my son, who of course had his Leafs shirt on. A guy in a suit who said he worked for MLSE asked us if we wanted his tickets to move to the lower bowl and gave us his tickets. I do not remember the MLSE executive saying his name, so it may not have been Richard, but we were given the tickets and appreciated the gesture. What is funny about this incident is that my son who was 9 or 10 at the time wanted to stay in the purples since he could see the whole ice and I had to drag him to the great seats in the lower bowl.

A non-sports related tidbit is that Richard notes in his book that he was not a great student until later in university and if it hadn’t been for a teacher increasing one of his marks, he may never have even gone to university. Why I find this interesting is that I have always felt marks (except for the truly brilliant) were overrated and the intangibles are often of much greater importance (remember that if I ever interview you). Here is a perfect example of a great CEO who very easily could have not even gone to university if not for some luck.

I will stop here so you have something left to read, but I highly suggest you give the Dream Job a read and if you would like the chance to win a free signed copy, send your information to Lynda.

 

Finding a Business Partner

Choosing a business partner is similar to selecting a spouse. You want to get to know the person over time and ensure your values and aspirations are in sync. 
In a best case scenario, the potential business partners work together or have worked together in an employment situation, or in some kind of supplier/vendor relationship. However, even these situations do not always reveal a future business partner’s hidden weaknesses. In less ideal situations, business partners are thrown together as a result of a funding arrangement to take advantage of a business for sale or some other small window of opportunity the marketplace provides.

As an accountant, I have observed many mismatched partners with respect to both skill and personality. These relationships are usually doomed. Today I will discuss some of the issues you need to consider when selecting a business partner.

Complementary Skill Sets

Most businesses will require three skill sets: financial, product/services and sales/marketing. Sometimes you can succeed without the financial skill set if you lean on your accountant, but ultimately, most businesses need a strong numbers person to keep track, plan, forecast and analyze the numbers. In a product-oriented business, you need someone to build the product or run the production side. Sometimes that skill set also includes a financial skill set, but not often. Lastly, you need someone who can sell the product. Often that is an attribute financial and production people don’t have. The reality is that when you are starting a business, at most, you will typically only have two of these skill sets. Thus, one person will have to fill the gap and you may require some professional assistance for the financial or sales side.

In a small business, it is vitally important that partners have complementary skills. If you duplicate skill sets, you may be dooming your business venture from the beginning. Two production or financial guys will often have a very difficult time generating business for a new company.

Roles Within the Business

Defining roles within the company is very much related to ensuring complementary skill sets. Defined roles create clear boundaries and hopefully prevent one partner from sticking his or her nose in the other’s area of responsibility. Defining roles at the beginning of a business partnership essentially ensures you are responsible for your area of expertise.

How Well Do You Know Your Partner?

Whether you have worked with your future partner(s) before or not, it is very important to undertake a background check. I have seen several business partnerships break-up, and when the dust settles it comes to light that one of the partners had similar issues elsewhere. Try to speak to people in your industry who have had contact with your potential partner.

Does Your Partner Have Connections?

Look for a partner that has a strong network or connections within your industry. If your partner has a strong network, he/she may open doors for your new business very quickly. However, it has been my experience that when people tell you they are bringing customers with them, the customers do not necessarily follow immediately. Be wary when a partner promises customers will follow them. It may not be their fault, but clients often want to wait to ensure a new business is stable before changing suppliers, consultants etc. 

Shared Vision and Values

It is vitally important that business partners share the same initial vision and values. When there is not unanimous consent on the initial business vision, the business can fragment and become dysfunctional quickly. That is not to say partners will ultimately continue to have the same vision and agree on everything, but at the outset; there must be consensus. In addition, business partners should have similar core values.

Skin in the Game

There may be cases where you have a silent partner or an angel investor, but in the typical business situation where two or three people join forces, it is important that equal value be contributed to the business either in

the form of cash or technology. Furthermore, it is important that all partners have a minimum level of financial resources available to ensure decisions are always made in the best interest of the business and not because one party is short of money.

Shareholder Agreements and Decision Making

Many new businesses cut costs by skipping the drafting of a shareholders’ agreement; this is risky. If you forgo an initial shareholder agreement for monetary concerns, you must agree with your partner that as soon as the business is on stable footing, you will engage a lawyer to draft a shareholders' agreement.Some key terms you want to consider in a shareholder agreement are noted in this online template agreement.

There are a multitude of other issues to consider when choosing a business partner. However, if you undertake due diligence and cover off most of the issues above with your potential partner(s), you have a much better chance of succeeding together.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.