Risk Mitigation and the Family Enterprise
A family enterprise is any business or financial venture owned and/or operated by members of the same family, often spanning multiple generations. The Conference Board of Canada’s report on the Economic Impact of Family-Owned Enterprises in Canada highlights the crucial role these businesses play in our economy:
Family-owned enterprises generate almost half of Canada’s private sector real gross domestic product (GDP), equating to nearly $575 billion.
Family businesses account for 63% of Canadian private sector firms.
They employ nearly 7 million people, representing 46.9% of private sector employment.
Family businesses face unique challenges and risks. Here, we explore these issues and how families can best mitigate these risks.
Common Risks with Family Enterprises
WealthCo Senior Planner Jordan Tanner has worked extensively with family-owned enterprises and shares insights on the most common risks he has observed.
Incapacitated Leadership
“The biggest and most blatant threat is when the leader of the family enterprise passes away unexpectedly or becomes incapacitated,” says Tanner. “If the business has a robust management team, this risk is less pronounced, but it can still be tremendously disruptive and put the organization in great peril.”
Family businesses may be more prone to this risk as they often lack the formal governance and succession planning that traditional businesses have. “Business might be done more on the fly,” Tanner points out. “It may be less formalized and structured than it would be if there was an arms-length management team in place.”
Lack of Important Documentation
Another common challenge is the lack of a proper shareholders agreement among parents and their children. “This can be risky, particularly if one of the children has shares and something happens to them. Without an agreement, shares may move to their estate, which may not be in the best interest of the business,” Tanner explains.
Poor Succession Planning
Poor succession planning is another significant risk. The continued success and prosperity of the company often hinge on a timely and well-suited leadership transition. Without strong succession planning, family businesses struggle during times of turnover, facing possible conflict, disruption, and a loss of competitive edge.
“There is a three-circle model that exists when discussing family-owned enterprises,” Tanner explains. “This model consists of three overlapping groups within the family business – family owners, family owner-employees, and non-family owner-employees. Some family members will play much more active roles in the family business, and some will play passive roles, but all must be considered.”
Keeping some family members in the dark about parental estate planning can lead to misunderstandings, resentment, and potentially costly estate litigation.
How Can Families Best Mitigate Their Risks?
Proactive risk avoidance is key in family enterprises. It's important for all parties to be aware of potential problems and create a strategy to address those issues head-on.
“Building a process where you work together as a family is paramount,” Tanner advises. “Plus, meeting with your advisory team regularly to assess the current state, plan for the future, and ensure that all existing risks are understood and being addressed.”
Key elements of this review include assessing the impact of losing a key team member on overall profitability, reviewing the shareholders agreement, and ensuring tax optimization.
“There should be an annual review driven by your CPA firm,” says Tanner. “The firm can bring in additional advisors as needed, including investment managers, insurance specialists, wealth advisors, and lawyers. Even peripheral experts, such as business coaches or leadership coaches, can be involved where required.”
Involving key family members early on and setting them up for success with financial literacy education is also crucial. “It can be daunting for the incoming generation to become stewards of family wealth,” Tanner points out. “The earlier you can get kids and grandkids into the mix, training them on financial literacy, investment decisions, insurance, long-term estate planning, and tax planning, the better off everyone will be.”
About Jordan Tanner
Jordan Tanner is a Senior Advisor at WealthCo, living by the motto, “it’s not how much you make, it’s how much you keep.” With a career spanning two decades, Jordan uses insurance-based tax, estate, and retirement planning solutions for business owners, professionals, executives, and retirees. He firmly believes that your professional advisory team should work together, not independently, to help you develop the most efficient tax, legal, and financial structures based on your unique requirements and goals—the same philosophy that drives the Integrated Advisory Community.
If you have any questions or need assistance with your family enterprise, contact us. WealthCo is here to help you navigate these challenges with confidence and clarity.
The Integrated Advisory Community consists of a network of progressive CPA firms, along with best-in-class professional advisors, service, and product specialists, who work together to deliver an elevated and holistic client experience. One that optimizes both their personal and professional lives with an integrated financial strategy designed to help clients reach their goals.