Financial performance of family-owned companies is superior

Usually family and business blends are developed in countries where there is low trust. As Western countries have law and order to ensure corporations work well, family businesses are less in demand. Those that do work and get passed to the next generation properly, tend to do exceptionally well.

The de Gaspe Beaubien family is a great example where the next Gen. were able to influence the sale of the original business that made the wealth. Now the next Gen. is re-inventing the family business to the next level.

Here are a few excerpts from a Globe article talking about some of the questions to ask to achieve a strong and positive family business:

BRENDA BOUWSPECIAL TO THE GLOBE AND MAILAPRIL 29, 2018

While there’s an old adage that says never go into business with family (or friends), experts say the corporate pairing of relatives can be powerful, if properly handled. A recent​ report ​of 1,000 family-owned firms worldwide​​, including some in Canada,​ showed the financial performance of family-owned companies is superior to that of non-family-owned businesses. Family-owned companies generated a cumulative return of 126 per cent since the start of 2006. Revenue and earning growth (measured by earnings before interest, taxes, depreciation and amortization, or EBITDA) was stronger, EBITDA margins were higher and cash flow returns are better, the report said, adding that family-owned businesses​ have a “longer-term and conservative focus.”​

A well-known example many experts point to is consumer products conglomerate SC Johnson, now being run by the fifth-generation of the Johnson family. It even uses the slogan “A Family Company,” to help boost its brand.

“When an entrepreneurial family gets together to work on something, they care so much more than someone who doesn’t have their name on the building or doesn’t have a stake in the community. To me, that’s a recipe for building a great business,” says David Simpson, head of the Business Families Centre at Western University’s Ivey School of Business. “However, when it goes poorly, it goes poorly doubled down because you’re losing your brother or sister or cousin.”

“There’s an intrinsic conflict that comes with family businesses,” says Mark Barnicutt, co-founder and CEO of HighView Financial Group, which works with high-net-worth families, many of whom are entrepreneurs with their own companies.

“Emotional issues easily come to the surface,” he says. The most successful family businesses recognize that could happen and put in place the proper governance, including family roles and responsibilities, to cover what happens when conflicts arise. “A business isn’t a family and a family isn’t a business. You really need to separate the two,” Mr. Barnicutt says.

Family members in business together should also outline what happens if one person wants out, or there’s a disagreement in direction, Mr. Simpson says.

“It’s unromantic … but a business is an organism that lives, dies and changes,” he says. “Businesses aren’t worth blowing up a family for. A business is just an instrument of economic gain … If you go the nuclear option of suing each other, you’ve hurt both the family and the business.”

Mr. Simpson once ran a business with his younger brother, Craig Simpson, a former National Hockey League player who is now a broadcaster with Hockey Night in Canada. The business relationship ended after his brother retired from hockey and focused more on the company. “We found out that our formerly passive, equal partnership didn’t work as active partners,” Mr. Simpson says. “We didn’t share the same vision, risk tolerance and personal objectives and our general assumption that siblings are of course similar, was surprisingly inaccurate. We were better brothers than business partners.”

Most often, it’s money and corporate strategy – including how various family members are compensated and disagreement over the direction of the company – that lead to family business feuds, says Jane-Michèle Clark, an instructor who teaches the family enterprise course in the entrepreneurship program at York University’s Schulich School of Business.

Ms. Clark recommends business families hold strategy sessions that cover topics such as their family values, how they want the business to work for them and vision for the company.

“When you start by reaffirming the family values and relationship, then get clear about each person’s expectations about what they want the family business to do for them, and then move on to the vision, the conversation takes on a whole different tone,” she says. And while she recommends family businesses bring in a family council or an advisory board “to act as both a resource and a buffer,” few do, believing it’s not necessary or conflict won’t happen in their case.

3 Questions to ask to check your portfolio

The only limit to making impact is your imagination and your commitment. This is why I am proud to being part of a team dedicated to adding more value to investors and their families.

This past month has been interesting, in my role as business development for my team of financial advisers. I have heard the same three questions from prospective clients.

To see if you also share these, I thought I would give a quick answer to these important questions to ask in regards to managing your money:

1. How will you react in a coming correction? 

Most people will tell you they are cool under pressure, yet during a correction in the market, the truth is that many will panic and do the worst thing – sell at the wrong time. Selling is exactly what you should not do and this fear over common market occurrences is probably the number one reason you should partner with an expert to manage your wealth. They protect you from your own psychology.  The past years have been smooth sailing where most could have made money but what about when the correction arrives - and it will arrive. Talk to your adviser about an upcoming correction and how are you protected from the downside.

2.Are you overpaying for performance? 

It is no longer about the fees. In fact, it is about the economics. Do you understand the business model of a broker versus the Financial Adviser being rewarded to advise you to achieve your goals? What would you do if you had your doctor prescribing treatments where he got a kick back from the drug company? That is the broker model, which I believe is flawed, and people are realizing the economics are set up to reward the house, not the client. Ask your adviser for the economics of your portfolio. Are they able to source investments outside of their institution? How are they paid? Ask if they earn an additional fee when you accept their recommendation.

Does your adviser have conflicts of interest? 

Again, the broker model is set up to reward the broker, not you, the investor. If your financial adviser is pressuring you to trade often and to buy their own products, rather than offer an open-house architecture, your long term financial outcome will be compromised. Is your broker stuck selling you their in-house products or do they have a global diversification and product diversification capability at minimal cost?

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Money Magnet, by Jacoline Loewen

Is it better for company boards to have at least one director educated in board governance?

It is an honour to be part of the Rotman graduating class for the Directors Education Program, 2018.
The experience was top quality and I come away from the intense experience knowing a great deal more than when I started, despite having served on many boards.

The Rotman DEP assembled a great class of individuals and I valued the group work done with each of these terrific people. Rotman puts together a professional post in the newspaper to celebrate all the hard work, along with the message below.

ICD - D Rotman Graduating Class - Jacoline Loewen

"Congratulations, You have completed the ICD-Rotman Directors Education Program (DEP), and are a part of the 72^nd DEP, Toronto. "

"To recognize your achievement, the ICD ran a full page graduation advertisement in The Globe & Mail today. For your convenience, the ad has also been posted on the ICD website, available here"

The time invested in this program run by top academics and practitioners does yield much worth. I believe it will benefit the Canadian economy as the expertise flows through to publicly traded corporations, in particular.

Too many of these boards are appointed by the CEO or Founder which makes them far too docile. Many directors believe their prime role is governance and do not contribute towards the strategy.

Also, many directors believe their allegiance is to the person who hired them to the board, too often the CEO or Founder. Hopefully, Canadian companies will benefit from all this terrific business acumen.

Two steps to reduce complexity in performing a valuation

I was listening to Tom Deans, writer or Every Families Business and a good friend of mine, talk about how Founders of businesses transition from business owner to sale of business - to an outside buyer or to their family. One of the best practices recommended by Tom is to get a realistic valuation of the business. Tom recommends to do this years before any form of sale or succession.

To get a realistic understanding of the value of the business, here is an overview of how to get a rough estimate that you can do yourself:

While firstly, revenue and secondly, profit are obviously two key factors in determining your company’s worth, assessing them in a vacuum simply won’t result in an accurate valuation. Even the additional details you provide regarding the number of customers you served during the previous two years simply don’t amount to sufficient data to perform a reliable valuation.

What you have to remember is that any investor, regardless of the reason for the interest in your company, will not be satisfied with a “ballpark” estimate of your value. They will delve deep into every aspect of your business when performing their due diligence in this regard and so should you.

To give you an idea of the complexity involved in performing a valuation, allow me to describe the process:.

1) EBITDA

Firstly, we will establish the company’s Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) or Seller Discretionary Earnings (SDE).

EBITDA is used mostly for companies valued at over $5M and is calculated by adding interest, taxes, depreciation and amortization back to your net income.

For companies valued at under $5M, Seller Discretionary Earnings (SDE) is typically used. SDE is the profit left to the business owner after the costs of all goods sold as well as critical operating expenses have been subtracted from gross income. Importantly, the owner’s salary can also be added back to the profit to reflect the true earnings power of the business.

SDE can be calculated using the following formula:

2) The Multiple Applied

The second step of the valuation process is to calculate the multiple that is applied to the EBITDA or SDE figure.

There can be between 80 and 100 data points into consideration when conducting this comprehensive investigation. Here is a small extract from the checklist of factors that we delve into:

Niche

• What level of threat does established competitors pose?
• Are there any expansion options available within the company’s niche?
• Is the niche evergreen?

Operations

• What level of technical know-how is required to manage the business?
• How are current staff members and contractors managed?
• What standard operating procedures (SOPs) in place?

Financials

• How has the gross and net income been trending for the past 1 - 3 years?
• How stable is the company’s earning power?
• Are there any anomalies in the business’ financial history and can they be explained?

Customer base

• What is the customer churn rate and lifetime value?
• How much does it cost to acquire a new customer?
• Why is the business losing customers?

Traffic

• Are current referral programs effective and sustainable?
• How effective and secure are current search engine rankings?
• Has the site been affected by any Google algorithm changes or manual penalties?

Other

• Are there any specific locational responsibilities or physical assets with the business?
• Are there any licensing requirements in order to run the business?
• Is the company’s intellectual property (IP) protected?

This investigation and research process leads us to an eventual multiple figure that we apply to the EBITDA or SDE value to establish your company’s value.

Typically, this falls between the 2.5x to 4.0x range, although there are exceptions to both sides of this spectrum.

Investigating these factors is dependent not only on a significant amount of experience in the M&A industry, but also on having the time and capacity to perform all the necessary research.

You can get more information on the valuation process by reading the full article at the website of FI International  - this article.

Jacoline Loewen on Twitter @jacolineloewen 

Investing and saving yourself from your emotions

As the stock market bumps along, there is a rising noise of worried analysts saying it is time to liquidate. 

One of the wealthiest, self made men is Ray Dalio, a leading Hedge Fund expert and author of Principles. Ray says one of the top three objectives of investing is to save yourself from your own psychological impulses. When the market goes down it is called a falling knife and many try to catch it by selling out. They forget their long term goals and give in to their fear.

"While we all tend to be emotional about money, we're far better off when we approach long-term investment strategy from a cool and rational perspective," Ray says. "Letting emotions influence our investing decisions can often lead us to lose opportunities and result in decisions we'll regret in the long term," he added.

Getting Caught Up in the Excitement

With stock markets continuing one of their longest bull runs in history, despite some recent whipsaw movements, it's hard to avoid getting caught up in the excitement. There's no shortage of tales of overnight success as certain hot investments skyrocket, which for some makes it seem like a great idea to jump on the bandwagon. Same goes for getting caught in panic mode and maybe selling prematurely when markets turn. Investing can be a roller coaster of emotions.

Goal-based investing helps to keep you going down that river and to survive the big waterfalls. Ray Dalio should know. He is the 13th richest person in the world (recorded).

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