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Skilled entrepreneurs know how to build their business. But what about managing their growing wealth? It’s the stage that Richter, a Business | Family office, calls diversification. Getting it right is critical to long-term corporate and personal wealth creation, says Brett Miller, a partner and business advisor at Richter.
“At this stage, these entrepreneurs have hit a certain size and success,” Mr. Miller says. “They’re funding their business and personal life from the profits they generate, and likely building excess cash in the business. Their business has really started to mature and they’re thinking about what’s next.”
Richter’s approach to addressing clients’ integrated business and family needs breaks down business growth into four stages. The first involves growing the business. Later comes ensuring family wealth and supporting the next generation.
This second stage, diversification, is often new ground for entrepreneurs. Typically, they might think of diversification as expanding into different products, services, markets or industries. Here, it means something very different: diversifying capital allocation from their business as a wealth creation strategy, or diversifying themselves from their business. Ensuring that the family’s wealth isn’t entirely tied up in the business can help reduce risk.
“The whole purpose is to make sure that you are truly diversified, and you don’t have all your resources tied up in one area of your life: the business,” says Mr. Miller.
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Outside experts can guide strategic thinking
Getting outside expertise at this stage can help business owners to act strategically. Mr. Miller talks to clients about their long-term plan and objectives, current and future financial needs for the company and their family, and how best to get money out of the business in a tax-efficient way that aligns with their goals.
Developing a plan is all about customization, because no two situations, businesses, portfolios or entrepreneurs are alike.
An owner may be ready to develop a dividend policy to transfer wealth from the business, while continuing the existing management and ownership structure. Some may want to “professionalize” the business, Mr. Miller continues, by bringing in outside management to run it. And other owners may decide it’s an opportune time to monetize their ownership. That can happen by selling all or part of the business, bringing on a strategic partner or starting to transition the business to the next generation.
Every option benefits from having an expert who takes a holistic approach to working with an owner. Together, they can examine how each possibility impacts the enterprise, the owner, their family and the legacy of their business.
Going through a monetization means looking at business and personal considerations from multiple angles. The experts at Richter have been part of many scenarios with their clients, and bring that knowledge and insight to the diversification stage.
“We spend a lot of time discussing our client’s goals and objectives when preparing a plan for diversification. We ensure there’s a plan for the business that the current or next owners can create value with, and talk with owners about their next steps and legacy,” Mr. Miller says.
Diversification has emotional considerations
Creating liquidity within a business has financial and tax considerations. But there are also emotional considerations, which Mr. Miller says are sometimes overlooked.
In the case of an outright sale, for instance, he says it’s important for business owners to think about what their lives will look like after, and what they want to dedicate their time and money to once they have more of both.
“When you get to the closing stage, it can be quite difficult and emotional to move on. You need the right people around you asking the right questions, who know both you and your business.”
As wealth is transferred out of the business, owners also need to think about and receive advice on how to invest and manage this wealth. At first, it’s overseen in a different manner than the business. But as wealth grows outside the business, the management of these tend to overlap.
Investments can include a multitude of assets such as real estate, private businesses or public markets. Mr. Miller says you need a structure to govern this portfolio, similar to how a CEO and CFO runs a business. This way, owners gain a strategic approach to diversification and a structure to manage their growing wealth.
To learn more about tactics for diversification, join a webcast on February 15th as part of The Globe and Mail’s lifecycle of a business series. During “De-risking Your Family Business”, you’ll gain insight into how family governance structures, opportunities for generating liquidity and new investments can all play a role in fortifying the family portfolio. Click here to register for the free virtual event.
Advertising feature produced by Globe Content Studio with Richter. The Globe’s editorial department was not involved.