{"id":1742,"date":"2024-06-27T23:57:16","date_gmt":"2024-06-27T23:57:16","guid":{"rendered":"https:\/\/financeify.ca\/?p=1742"},"modified":"2024-06-27T23:57:16","modified_gmt":"2024-06-27T23:57:16","slug":"business-and-investment-advice-for-a-wealthy-vancouver-couple","status":"publish","type":"post","link":"https:\/\/financeify.ca\/index.php\/2024\/06\/27\/business-and-investment-advice-for-a-wealthy-vancouver-couple\/","title":{"rendered":"Business and investment advice for a wealthy Vancouver couple"},"content":{"rendered":"

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Client profile<\/h2>\n

Vancouver-based couple owns multiple businesses and holding companies but needs advice on restructuring, as well as guidance on long-term estate and financial planning.<\/p>\n

*These are hypothetical clients. Any resemblance to real persons, living or dead, is purely coincidental.<\/p>\n

The situation<\/h2>\n

Vancouverites Teresa Lin and Lyla Wong* (45 and 47, respectively) have started a series of businesses in the 20 years they\u2019ve been together. And, because they\u2019re not always related businesses (their empire spans everything from import\/export to software development and specialty retail), they have a series of holding and operating companies grouping business lines that are, at least, similar.<\/p>\n

Since 1994, Teresa and Lyla have started six businesses and placed them in three holdcos. One holds technology ventures (two software developers\u2014one specializes in list-management systems for medium-sized publishers, and another that develops computer-aided design software for engineering firms\u2014and a failing web security firm that the two have discussed shutting down due to low sales).<\/p>\n

The second is dedicated to retail businesses (it holds a high-end men\u2019s shaving goods retailer with locations in Vancouver, Calgary, Edmonton and Toronto and a group of mid-priced jewelry shops with eight locations in western provinces).<\/p>\n

The third is keyed to import-export, and currently holds a Vancouver-based Asian specialty foods importer.<\/p>\n

Also, Lyla and Teresa each started their own companies before they met, and each maintains separate and whole ownership. Each company\u2014Lyla owns a group of three fashion boutiques, and Teresa a Hong Kong-based electronics exporter\u2014has its own opco, but has never been shifted into any of the holdcos.<\/p>\n

Their net worth, exclusive of a $2-million restored Arts and Crafts bungalow near Trout Lake Park, is $45 million. Most of it is tied up in their businesses, but Teresa and Lyla both have rudimentary, largely neglected investment portfolios, which consist of balanced mutual funds and GICs purchased through the bank branch where they have business accounts. They realize it\u2019s time to revamp, expand and consolidate their investments with a dedicated advisor.<\/p>\n

The couple has adopted one daughter, Cara, who at 14 has already shown keen business acumen and a head for finance. Teresa\u2019s 38-year-old sister, Emily, has provided accounting services to all their businesses (even the ones that are separately owned) for 12 years.<\/p>\n

She is currently on salary, but Lyla and Teresa have thought about bringing her into the partnership. Emily\u2019s spent the last few years earning an MBA, and understands the businesses\u2019 operations intimately. However, these discussions have never been formalized. Lyla is estranged from her four siblings. Neither partner has health issues, but the pair think they\u2019ve over-segregated their businesses and want to clean things up before bringing Emily, and ultimately their daughter, into the family businesses.<\/p>\n

Succession planning: the big picture<\/h2>\n<\/p>\n

Jennifer Poon<\/h3>\n

Director, Advanced Planning \u2013 Wealth, Sun Life Financial, discusses how you can help business owners create their succession plan.
\nRead More<\/a><\/p>\n

The experts<\/h2>\n

\"Ian<\/p>\n

Ian Black<\/h3>\n

RFP, TEP, financial advisor, Macdonald Shymko & Co. Ltd., Vancouver, B.C.
\n\"Adam<\/p>\n

Adam Dlin<\/h3>\n

lawyer, M&A, private equity, business law, Mogan Daniels Slager LLP, Vancouver, B.C.
\n\"Michael<\/p>\n

Michael Sileika<\/h3>\n

CA, CBV, partner, Valuation and Litigation Support Services, MNP LLP, Vancouver, B.C.<\/p>\n

Pretend you want to sell<\/h2>\n

AD:<\/strong> With a business of any maturity or sophistication, I like to tackle it as if you\u2019re trying to get it ready for a liquidity event, like a sale or IPO. Even if this isn\u2019t on the horizon, and may never be, it\u2019s a good way to view how things ought to be structured.<\/p>\n

MS:<\/strong> I agree. The message I always give clients is to run your business as though you\u2019re preparing to sell. The advantage this couple has is that they\u2019re both relatively young. If they start now, they can take their time, reorganize effectively and still meet their long-term goals.<\/p>\n

AD:<\/strong> I\u2019ve seen people begin restructuring later than they should, and as a result it was much more complicated and costly than it had to be. To get clients to plan early, I like to employ not so much scare tactics, but anecdotes. So I give specific examples, and put a dollar figure on delayed planning. I find that gets their attention. The other approach I sometimes use is to say, \u201cIf you don\u2019t believe me, talk to this person\u201d (see \u201cAnecdotes spur action<\/a>\u201d).<\/p>\n

Teresa and Lyla have a holding company for each line of business, and that\u2019s appropriate. The question is, would it make sense to have a single holding company above those three holdcos that owns all three entities fully, and which in turn is owned by Teresa and Lyla?<\/p>\n

That would probably be desirable if they intend to own everything together. But it becomes problematic if their intention is to own any of the existing businesses separately. I don\u2019t get the sense that\u2019s their intention. It\u2019s critical that there be a shareholders\u2019 agreement. It would deal with the existing operation and governance of the businesses, and things like what happens in the event of death or disability.<\/p>\n

The main problem is there are two businesses outside the holdco structure. So, you have three separate lines of business\u2014technology, retail and import-export\u2014with their own holdcos, but then two other companies, both individually owned, that aren\u2019t under any of the holdcos. These two businesses, if not competing, are in the same categories\u2014retail and import-export\u2014as businesses under the holdcos. If you were trying to monetize the business, it would be cleaner and simpler if everything were siloed within a single holding company, since presumably a buyer would want to purchase all the companies in the same line of business.<\/p>\n

Life goals and valuation<\/h2>\n

MS:<\/strong> How they plan to be involved in their businesses impacts valuation. The first thing I would do is have a conversation with them on where they want to be in 10, 15, 20 years. Do they want to spend the next 15 years expanding their portfolio of businesses, or do they want to start winding down now?<\/p>\n

They could create a situation where they\u2019re earning passive income as shareholders, and Emily takes on a wider role with operations. That would allow them to take a three-month European vacation, for instance, knowing that the businesses are being managed. I would also determine if they are passionate about any of these businesses, or if they just stumbled into some of them. There\u2019s a pretty wide range, so it\u2019s tough to stay focused. They could divest one line of business and keep the others, for instance.<\/p>\n

The value and saleability of the businesses depends on whether they are asset- or goodwill-based businesses. In a goodwill-based business, success is largely dependent on the owners themselves and the relationships they have with clients. For example, the import-export business may rely on specific relationships. The question is whether they can transfer those relationships to, say, a general manager.<\/p>\n

It all comes down to the notion of whether they can take that three-month European vacation. If the electronics exporter is Teresa Electronics Exporter Inc., and she has all the relationships, no one is going to buy it. So, she has to think about how she can transfer those relationships, or structure the business so that people don\u2019t care if she\u2019s there.<\/p>\n

Potential buyers can fairly easily assess data about accounts receivable, accounts payable and quality of inventory, but it\u2019s more difficult to gauge quality of management and how much the business relies on relationships. A buyer would want to interview some of the owners\u2019 clients. If they say they love doing business with Teresa and she\u2019s the only person they want to deal with, you start to put your radar up.<\/p>\n

Generally, owners should be open about giving client names to potential buyers. On the flip side, any time a company\u2019s going through a transaction, clients get a little anxious. So you don\u2019t want to scare off clients, especially if there\u2019s a chance the transaction may not close.<\/p>\n

AD:<\/strong> I agree. As a buyer, you want to do legal and financial due diligence, but also business due diligence, and an element of that would be trying to access key customers, suppliers, employees and management.<\/p>\n

But, on the sell side, that gets me nervous. I don\u2019t particularly like it when word gets out that a potential transaction is underway, especially when it hasn\u2019t closed or isn\u2019t close to closing. That can obviously have adverse effects on the business. And who\u2019s left holding the bag if there\u2019s a negative consequence? The seller.<\/p>\n

Typically, as a seller, you don\u2019t want employees to find out about a transaction until the day of closing. And we would be very nervous about access to customers. It\u2019s a fine balance, because you\u2019re right, Michael: if you restrict access, you\u2019ve got this red flag that goes up. There are two ways to address this issue. First, it\u2019s very common in acquisitions to have key management stick around for a three-year period, for instance. Often they\u2019ll be required to sign employment agreements specifically directed at transitioning relationships and connections. The other way the issue\u2019s addressed is by conditioning a significant portion of the purchase price on performance of the business after closing.<\/p>\n

MS:<\/strong> A contingent payment. You\u2019ll have a base payment for the business, and then you\u2019ll have a payment that\u2019s contingent on meeting operational or financial goals.<\/p>\n

AD: <\/strong>Typically, the financial metrics are based on bottom-line numbers, such as EBITDA; sometimes it will be based on revenues or some other metric, depending on the industry.<\/p>\n

Also, if the seller says there are 10 key customers and they won\u2019t be affected by the transaction, or by her no longer being directly involved in the business, we\u2019ll make her put this in writing. And, to the extent it\u2019s incorrect, there would be some recourse, at least theoretically, under the purchase agreement.<\/p>\n

MS:<\/strong> A major consideration for the buyer will be risks to future cash flow. Effectively, when you buy a business, you\u2019re buying the right to participate in its future profitability. If you look at an Asian specialty food importer, it may be a competitive market in Vancouver, and your profitability can be fairly well forecasted. But a mid-priced jewelry store, or a men\u2019s shaving goods retailer? There\u2019s less certainty around their future revenue streams. A stable revenue stream would command a higher valuation, whereas something that isn\u2019t as predictable would sell for less.<\/p>\n

Investing for retirement<\/h2>\n

IB:<\/strong> For retirement, I like to have multiple sources of income for clients, rather than just saying everything is going to be saved in the holdco.<\/p>\n

There still should be an RRSP, a TFSA, and other investment accounts that are completely removed from their business operations in case there\u2019s a scorched-earth-type scenario with the business. Say one of them gets a disability and her involvement in the business was required to maintain its value: I would want to have some of their wealth removed from the business beforehand.<\/p>\n

Still, given most of their revenue is generated within companies, it wouldn\u2019t make sense to be drawing $1 million in salary a year. They would probably keep it within the corporate structure to maintain tax deferral.<\/p>\n

Entrepreneurs have a significant amount of risk in their businesses, so I often see them with lower-risk portfolios. Others have higher-risk portfolios\u2014it\u2019s just their personality. I would suggest being more cautious with a lower-risk, more diversified portfolio. It probably would not have a significant private-equity component.<\/p>\n

They\u2019re in their 40s and they\u2019ve accumulated a net worth of $45 million, so they\u2019re probably set for life. If they plan to spend a million dollars a year, then they might be in trouble. But, typically, even very wealthy clients don\u2019t spend that much.<\/p>\n

I wouldn\u2019t have them in 80% fixed income, because then you\u2019re taking a lot of risk from not taking very much risk. You\u2019re just going to get beat up by taxes and inflation. So, I would think about 50% to 60% of the portfolio would be in equity ETFs, diversified globally. We would rebalance about four times a year.<\/p>\n

We would also include Mortgage Investment Corporations (MICs). They\u2019re a little higher risk, but you can get 5% to 7% yield.<\/p>\n

You have to do your homework on the MIC, asking: Who are they lending to and is it the first or second mortgage? In some cases, we bring a group of clients together and do syndicated mortgages in the Lower Mainland.<\/p>\n

I would also look at preferred shares as part of the fixed-income side of the portfolio.<\/p>\n

Depending on how they\u2019re held, it might be more tax-efficient to have dividend income from preferred shares, as opposed to interest income.<\/p>\n

Once their daughter Cara is 18, they\u2019ll be able to split some income out to her, either immediately or in the future, through a discretionary trust. The trust would also offer some protection to any shares Cara gets in the corporate reorganization. If she has direct ownership, then gets married at 19 or 20, those assets could be attacked by a divorcing spouse. The trust allows her to benefit from the wealth without having direct ownership.<\/p>\n

<\/a><\/p>\n

Anecdotes spur action<\/h2>\n

Entrepreneurs are often so busy with day-to-day operations that they fail to act promptly on the planning needed to meet their broader objectives.<\/p>\n

Such procrastination can carry a hefty price tag. Adam Dlin, a lawyer at Mogan Daniels Slager LLP, helps clients see the cost of delayed planning with eye-popping anecdotes like this one.<\/p>\n

Five years ago, a client asked him to assist with a corporate reorganization. One of the goals was to make the business more saleable. \u201cThe existing structure was unwieldy, complex, tax-inefficient and otherwise very messy. We knew that the field of potential buyers would be very limited with that structure.\u201d<\/p>\n

He proceeded with the reorganization but, as that was going on, the client was exploring a sale. \u201cIt was too early, because the reorganization had not been completed. And, even when it was completed, we would not have consolidated financials or the benefit of any other historical performance under the new structure,\u201d says Dlin. Still, the client entertained offers, and one serious buyer was willing to pay just under $100 million.<\/p>\n

\u201cUltimately, the deal died,\u201d Dlin notes, \u201cprimarily because the buyer could not get comfortable with the financial due diligence.\u201d After a few years under the new structure, the client again brought the company to market. It sold, but for less than $50 million.<\/p>\n

\u201cThe message here is, while the client recognized the need to reorganize and plan, had he done so even earlier he likely would have realized much higher value. He lost the opportunity to realize more value when market conditions were obviously more favourable.\u201d<\/p>\n

<\/a>
\n_______________________________________________________________________<\/p>\n

\"\" Succession planning: the big picture<\/h2>\n

By Jennifer Poon, Director, Advanced Planning \u2013 Wealth, Sun Life Financial<\/em><\/p>\n

In this scenario, there are a number of issues that I can see. And while ultimately Teresa and Lyla\u2019s main goal is to address their needs for a succession plan, they need to consider taking a step back to look at the big picture.<\/p>\n

As mentioned, they are currently working without an advisor. Finding a team of trusted advisors (legal, tax, financial, investment, etc.) would be their first step. When they have the correct team in place with a financial advisor that can see the overarching plan, they can start to put the pieces together \u2014 looking at their holdings along with their finances.<\/p>\n

The next part would be to address their succession concerns. And in order to identify the plans for their companies, they need to evaluate various considerations. This includes their successors, a buy-sell agreement and stock appreciation rights. Let\u2019s take a more in-depth look at these.<\/p>\n

Separate businesses: where to start? <\/strong><\/h3>\n

The first step would be to understand what would happen to their separate businesses if one or both of them should die. The couple isn\u2019t married, so there are specific legal aspects to consider. However, getting away from the family law discussion, we need to address their organizational structure and what makes sense for them. Given the scope and the number of businesses they own, the couple should consider the following:<\/p>\n