By Gordon Wusyk

The Oxford definition of cottage is “a small simple house in the country”. I recently met a client who bought a “small simple house” in the Muskokas for $50K in 1976. Thirty years later, it is neither small nor simple… and the village at the lake looks more like a small city. The cottage/cabin is now valued at $550K. It is not the principle residence of the owners so, if they sell it or pass it on to their four children, they will be forced to pay tax on a capital gain of $500,000 amounting to $100,000—twice its original purchase price.

Here in Alberta, this issue is exploding and becoming one of the most divisive family estate issues that comes up after parents pass away. The issue is taxing in other ways as well: Relationships and siblings break up over who takes ownership… the opposite of what the parents wanted to see happens.

The matter can be even more complex if the property is a vacation home or a second residence outside the country. Many Canadians now own in places such as Palm Springs and Phoenix where the U.S. government has its set of tax rules… or in Mexico and other countries where rules differ yet again.

A recreational property can be a more emotional affair than the dispositions of the family home or even the family business. The home usually triggers no tax and the business has often provided employment and careers for those members who are actively involved. But the “weekend” retreat is often where children have developed some of their most cherished memories—that’s why most parents want to keep it in the family. However tax laws, sibling personalities, and their moves far away can make keeping the cottage difficult and expensive.

In one family, a son lives in Nova Scotia and will never use the property… the second thinks the cabin is a periodic beer commercial… the eldest finds it a therapeutic retreat… the only daughter—the current caregiver to their mother whose health is deteriorating—feels she has earned the rights of ownership and wants to eventually build her private, domestic residence on this pristine site. Sounds like the ingredients for a robust debate to me. Oh, by the way, the property is now valued at $300K and was purchased for about $15K four decades ago, creating a potential tax of approximately $60K. This has now become a very real human issue and not just a tax issue, because of the fond memories and family history. The value is rapidly rising and not all members have similar financial means or an interest in the property.

This emotional scenario need not have happened, and the consequences of tax on a rapidly appreciating asset could have been foreseen, funded and structured much more effectively. Hindsight is such a wonderful and sometimes useless tool.

The parents could have gifted the property to the children early on, passing the growth in value on to them… or sold it to them with a mortgage or a promissory note to ease the burden. The parents could, in some case, designate this recreational site as their principle residence to avoid the tax entirely on a sale or a gift to the children. There are specific rules that must be followed to enjoy the tax-free “principle residence” status.

The ownership also could have been transferred to a living trust or to a family holding company where children could own shares, and be governed by an agreement on the property’s use, covering how they would share expenses, taxes, maintenance, additions, and schedule activities/occupancy.

Whether the parents should consider passing the cottage to children during their life time or at death requires reviewing the pluses and minuses of both options. These also are some non-technical issues which should be addressed:

Do all the kids want the cottage? If not, maybe those who do, should bid on it?

How will the siblings relate in the future? Maybe they can’t share the asset any more.

What if one of the kids has a divorce? Would the cottage form part of a matrimonial settlement?

Has the family designed a values or mission statement about this type of “family heirloom” and become stewards for the next generation?

Do we want family members with low incomes to be held captive by those who become successful financially? This is where greed and need can begin to compete.

It is possible to minimize the tax issues and maximize the peace of mind of parents and create harmony within the family: A careful and thoughtful communication must take place within what I call a Family Council*—which involves the input of competent tech-nical advisors who know the rules of the cottage tax game and can explain the options in language the family can understand. Some tips to avoid “cottage wars” might include:

•   Plan for tax bite. A cottage is a subject to capital gains which can be funded very efficiently with joint last-to-die insurance contracts and other tools.

•   Set up a cottage fund to share expenses if capital is available.

•   Prepare a written co-ownership document for cottage shares, outlining rights and responsibilities of each user as well as fair exit strategies.

•   Agree to a sharing schedule. Don’t assume you can just drop by whenever.

•   Decide if guest vacationers are allowed or if rental is appropriate.

•   Consider creative alternatives such as life insurance, principle residence status, multiple dwellings or in-law suites to extend the length of ownership or offset taxes.

Families who can successfully navigate through the issues surrounding the cottages, cabins or recreational second residences will often have established the ground work for successful subsequent dealings with the biggest asset—the family business itself.

Communicate, communicate, communicate and you may avoid the Hatfield-McCoy scenario. Leave a legacy and not a mess. The “cottage” issue is a good place to start. √ 

*Family Council: A board of directors for the family where relational issues can be discussed that impact the family and the business. 

For more information on family business issues and a copy of Beyond Survival, contact Gordon Wusyk at Predictable Futures Inc. at 780.702.2499.

By Rick Lauber

It’s truly a story of taking the bull by the horns.

Gail and Paul Murphy of Sara Consulting & Promotions Inc. now lead the way in the food demonstration business. The company that started humbly out of Gail’s garage now nets $10 million in annual sales.

“The gist of our business is the in-store sampling program,” explains Paul. The term may be unfamiliar; however, you have certainly seen and/or been approached by food demonstrators in your local supermarket. Often balancing a tray filled with small sampling cups, they politely offer food samples—a cube of sharp cheddar cheese… a forkful of Spanish rice… a perfectly-sliced Gala apple wedge—to passers-by. They are on-hand to actively promote a specific product or to exhibit a culinary tool, sometimes offering coupon discounts.

But, it takes far more than a pleasant smile and social demeanor to succeed as a food demonstrator. Sara representatives are required to dress in a certain uniform: The black pants, white shirt and black apron are immediately identifiable. This provides wardrobe consistency among Sara’s demonstration staff while promoting a positive corporate image.

“Demonstrators are qualified food handlers… they have to take a safety certification food handling course. They don’t just slice, dice and here you go,” says Paul. “There are particular sanitary procedures that they must follow, so really now they’re a marketer and presenter to consumers.”

In addition, food demonstrators must always remain cognizant of other safety factors… an appliance extension cord could pose a tripping hazard, an unattended hot griddle could burn small hands, and certain foods can cause allergic reactions.

And they must make a positive first impression—quickly. “You have to engage the client, you have to educate them and you have to convert them—and you’ve got about 20 seconds to do that,” according to Paul. When it comes to making and keeping positive impressions, the Murphys know all about them.

As the story goes, it all began “over a bottle of whiskey at a Red Deer agricultural show. We sat with a couple of people who thought we should invest in cattle. One thing led to another… we had ourselves a prize bull who had some offspring and one of those offspring was quite the little lady and we had to give her a name.” The couple selected “Sara” and the calf grew to win “top prize at a stock show,” remembers Paul. Based on that experiment’s success, the name was deemed lucky for their business.

Sara Consulting & Promotions has grown as a family business. The Murphys work together. “Our son, Tim, is involved and he’s one heck of a marketer. He could sell cows. Our daughter, Kim, looks after our distribution and works part-time,” says the proud father. What might be considered close quarters is rarely a problem: “Each family member has a role to play and a definite job description.” The end result is a “neat little business opportunity for all four of us.”

And working together is a positive experience, for the most part. “There’s a lot of trust… confidence… arguments.” Despite occasional disagreements, mother and father wouldn’t have it any other way. “As a family unit in business, you can never fall out of love together. You might have a disagreement but, at some point, you get back on the road and focus on what the job’s going to be.”

The younger Murphys don’t receive any special treatment from Mom and Dad. “If somebody screws up, there will be a closed-door meeting.” And neither of the younger generation should automatically expect to earn the keys to the corporate office. When the time comes for succession, it will be a choice—not an obligation. Furthermore, Paul believes both adult children should earn this right. “They’re paying their dues in every respect and that’s foremost for us in succession planning.”

With 23 years of company involvement—being available around the clock to attend to client concerns—behind them, the time to hang up the demonstration aprons may soon come for Gail and Paul Murphy. Over the years, they’ve been a key part of trade shows, grand openings and commercial anniversaries. They will have earned their retirement.

Leaving the business in the hands of their capable children would not be a “cow-ardly” decision to make. √

Guess who’s coming to dinner?

By Rick Lauber

Families in business often need an extra place at the dinner table—for the business itself.

The uninvited omnipresence can cause rifts between marriage partners and/or other family members who are directly or indirectly involved with the company. But, there are ways to maintain harmony.

Bringing business home is just one of many challenges facing today’s entrepreneurial families. “I think that a lot of families in business will tell you that there’s always an additional member of the family and that’s the business itself,” confirms Anita Lehmann, executive director of Edmonton’s chapter of the Canadian Association of Family Enterprises (CAFE). She knows the home and the business should remain, whenever possible, as separate entities for the sake of all parties.

The local chapter of CAFE is one of 15 branch offices located across Canada. It has operated since 1992 and is now 65 members strong. CAFE, originally founded in 1983, exists to teach and help business families handle a variety of concerns, specific to their circumstances. According to Lehmann, who has managed the chapter for the past five years, “CAFE is really a unique national organization in that we provide resources, support and mentoring opportunities to the family business community and their advisors. It’s a learning opportunity for all… we bring families in business together at a peer-to-peer level so that they can mentor and talk to one another about the issues pretty unique and specific to families in business. The industries may differ, but the challenges faced by families in business are all very similar.”

CAFE members can attend monthly seminars where presenters speak on issues: separating dining room from boardroom plus “…things like succession planning, tax planning, how to create a board of directors, how to run a family council [and] some HR topics. We call them awareness events because you could spend a day on any one of those topics… talking and learning about them,” explains Lehmann. The cost of attending these seminars is covered in the membership fee, set at $715.50 annually.  

NEW AWARD

In addition to recognizing potential “red flag” issues, CAFE also recognizes and honours its own. To that end, the local chapter will host the upcoming Grant Thornton Achievement Award for the CAFE Edmonton Family Enterprise of the Year. “We’re now able to include this family business award in our programming, partly because of this sponsorship funding.” Lehmann continues, “CAFE Edmonton will have a family business of the year and the award recognizes significant achievement made within a Canadian family enterprise, acknowledging the importance of the family business in today’s changing economy…”

In considering some statistics, “over 70 percent of new jobs are created by family business. Over 50 percent of the Canadian workforce is employed by family business… this award is to recognize the achievements of some of those businesses—just because they do play such an important part keeping us going in Canada.”

The award will be presented on Monday, October 22nd at the Sutton Place Hotel during CAFE’s annual gala event*. On that night, one local family business will be recognized by its peers.

The nomination process was kept internal; CAFE Edmonton members were invited to suggest their colleagues based on a number of criteria including company development, revenue growth, family involvement within the business, innovation and corporate image. The finalists are Kevin and Belinda Lang of Machine-O-Matic, John Cloutier of Nordic Mechanical Services and Sean Rayner of Vet’s Sheet Metal.

Whoever walks home with the crown that evening should feel immensely proud explains Lehmann. “I think it’s really significant to win an award like this because you’re nominated by your peers… other families in business who recognize the contribution that your business is making, the way that you run your business… and that you’re an example to other businesses in the Edmonton community.”

This month’s awards night should serve to bring further awareness to both CAFE and its clients. “CAFE is one of the best-kept secrets in the family business community—not only in Edmonton but across the country—and families in business should know that there are often a lot of resources out there for them.” Such entrepreneurs can be helped both personally and professionally and that extra chair at the dinner table could be used by a far more welcome guest. √

*The 2007 CAFE Break a Plate Gala Event also will feature founder Yianni Psalios and his son Theo of Koutouki Restaurants. The event is open to non-members as well. Tickets are $100 each, table of eight is $750. Contact edmonton@cafecanada.ca or phone 780.484.4484.

Much like the custom parts they help to produce, Kevin and Belinda Lang are reinforcing the foundation of a very successful family business.

The brother and sister team of Kevin and Belinda Lang is taking over the reins of Machine O Matic described as “a turnkey small parts manufacturing company.” Machine O Matic caters primarily to the oil and natural gas industry. “We specialize in machining large quantities of components out of a variety of metals and plastics that go into larger assemblies.” Clients needing 100 widgets, for example, will provide the design plans to Machine O Matic for manufacturing.  

Father Albrecht, who founded the company in 1991, is stepping down. This decision was made a number of years ago with son and daughter being named as successors. “We had a five-year plan set out and this is year four and a little bit, so it will be next summer when the succession will be officially finalized,” explains Kevin. The gradual process has allowed time for learning and adjusting… on all parts.

Change, as one might expect, hasn’t always been easy, specifically for the company founder. “There are a lot of things we had to set in place to make sure that Dad can step out from projects so that he still has a good lifestyle in retirement. He wants to make sure his ‘baby’ is still running well… so we had to set out what we needed to do.” Through taking the Roadmaps program at the Alberta Business Family Institute and attending workshops through the Canadian Association of Family Enterprise (CAFE), the younger Langs learned what they needed to know and what to expect. The process continues.

Not only were there corporate policies, goal-setting, industry specifics and much more to learn, the son and daughter also had to learn to function together in the workplace. True, both had grown up with the business and worked there in their younger years; however, cleaning and shipping of parts ranks nowhere close to functioning together as an effective management team.

Before striding confidently into their new offices, Kevin and Belinda tread carefully. “We weren’t sure we would work well together because we’re very different people,” admits Belinda. “Yet somehow, the combination of our different personalities I think really works well for the business. I’m more task-oriented, getting structure in place, getting procedures and plans written out and all that, while Kevin’s more visionary-looking.”

Another key aspect was learning how to move ahead in much different times. The family has struggled with company growth. In thinking of his father, Kevin laughs, “I think we’ve taken the company beyond his expectations and now he’s worried.” Managing growth has particular challenges, but the short-term future of Machine O Matic holds tremendous promise.

That transition process began four years ago when Machine O Matic partnered with The United Way’s Tools for Schools program. Two framed plaques, hung in the front lobby, recognize the contributions of the staff, consistently topping $10,000. An admirable effort from a staff of only 20, with company management matching all donations gathered.

The possibility of winning the Grant Thornton Family Enterprise of the Year award excites the younger Langs as it provides recognition for what their family has accomplished. It would be “justification for all the work that we’re doing and it’s kinda neat,” smiles Kevin. √

Successful Entrepreneurship:

Just a piece of cake 

By Rick Lauber

“Attention all staff … it’s Alison’s birthday and this is a message to get together to have some birthday cake!” To the casual business visitor, such an announcement might be surprising; however, such broadcasts are commonplace throughout the office quarters of Nordic Mechanical Services Ltd.

Marking and celebrating significant days and occasions for his staff are top of mind for John Cloutier, company president. Whether it’s a birth or a birthday, a wedding or an anniversary, such times are special and should be duly noted, he believes. In addition, he recognizes the needs of the local community and explains that his company does “a lot of work with non-profit organizations. We support the YMCA, Alberta Diabetes Association, Youth Emergency Shelters, the Canadian National Institute for the Blind [and] the Humane Society.”

Nordic Mechanical Services, from its one location in south Edmonton, provides heating, ventilation, air conditioning and refrigeration services. Such mechanisms do break down and servicing can be costly, specifically to a non-profit agency. There is little warning to mechanical failures and “…when they have unforeseen breakdowns, it causes them financial damage… we are able to flat line their costs and proactively prevent monitor breakdowns.”

Giving back, when and where possible, is all part of gaining corporate success for Cloutier. “I think that being part of the community is very important.” By extension, he believes, that includes clients and company personnel.

Community service plays a key role in the evaluation process for the CAFE Edmonton Family Enterprise of the Year: other criteria include revenue growth, company development, environmental initiatives and family involvement in the business.

When it comes to the family involvement category, the judging committee will consider past, present and future familial participation, specifically in the area of succession planning. Cloutier remains as the first generation family member to own his company and should easily have a good number of more years before stepping down. Still, a plan, involving his son, has been drawn up.

“Rene has a degree in business… hopefully, he can grow to take over. He works for us full-time. He is only 23—there are many years to come and many experiences to be had before that final decision is made.” With time on their side, father and son have not yet written that final decision in stone. When the time comes though, it will be a joint decision; succession will be Rene’s choice and not an obligation.

It’s interesting to note that Cloutier and his son consciously work at arm’s length from one another; “He doesn’t work for me. He has never reported to me. He has worked here since he was 14. He will probably never report to me…” Keeping a distance keeps the family and the family business entities separate, meaning life at home can run more smoothly. Despite not directly overseeing his son’s work, Cloutier knows he is gaining invaluable experience and company knowledge.

By Rick Lauber

Is taking on management of a company with an 85-year history beneficial or detrimental? Ask Sean Rayner that question and he’ll say, “Both.”

Rayner, president of Vet’s Sheet Metal Ltd., explains that, with the longevity involved with his corporate history, “There is a reputation… an association with stability and long-term success just because we’ve been around for so long. And, it’s a name that the majority of people in the various industries that we serve are very familiar with.”

Along with that reputation, Rayner manages a staff of long-term employees. “We’ve got people here–I can name three people who have 90 years experience [among them] and there’s more 20-year people on top of that. So there’s a lot of people who found their home in Vet’s and just stayed.”

History, however, isn’t always good. Conversely, “I’ve also got 85 years worth of baggage. You inherit the culture of the business, whether you like it or not, because that doesn’t change overnight.”

The company serves the industrial marketplace… “Industrial ventilation. We service that side of the business… we service companies like general and mechanical contractors,” explains Rayner. There is also some creativity involved with the company’s work. “On the custom sheet metal manufacturing side, we can make just about anything that you can imagine or visualize out of a sheet of metal… electronic enclosures to troughs and drip pans and all kinds of neat stuff.” Shoppers visiting Southgate Mall and Millwoods Town Centre may have seen the futuristic mall directories which were manufactured by Vet’s.

The company also serves as an interesting history lesson itself. “Vet’s is actually from the word ‘veterans’… it was started by my great-grandfather, Fred Rayner, and he was a World War I veteran. So most of the other people who worked here in the first years of the business were also veterans.”

Rayner is now the fourth generation family member to sit in the president’s chair, succeeding his father, David. There aren’t that many statistics on fourth-generation successors in Canada, simply because these are quite rare. By the numbers, 70 percent of Canadian family businesses do not survive the transition to a second generation, and 90 percent do not last to a third generation.  In part, it is the company’s longevity that earned it a nomination for the local Family Enterprise of the Year award.

As a family member, Sean Rayner has been involved with the family business for a lifetime; however, he has only recently stepped into the management role. “It’ll be three years running the business in January so I basically came back and spent eight or 10 months working in the business and figuring out if it was something I could see myself doing on a full-time basis and whether I was up to the challenge,” he says. Rayner is not completely running his own ship yet with Vet’s Sheet Metal Ltd. … “I report to my father, basically as a banker. It’s a friendly banking arrangement and he’s a member of our board of advisors.” 

By Rick Lauber

There will be fewer echoes within the long—and near—vacant Hudson’s Bay building downtown. Jim Henderson and the staff of the Alberta Business Family Institute are among the first new occupants in the re-purposed property—now called the Enterprise Centre. In 2005, the landmark was purchased by the University of Alberta which designated the space for a variety of campus departments with a focus on business incubation and development. ABFI operates through the university’s School of Business.

Amid the current dust and debris of reconstruction, Henderson manages the institute as the new executive director. He holds his BA and his MBA plus has been recognized as a member of the FCA—Fellow of Chartered Accountants. He also is well-travelled. Originally from Stonewall, Manitoba, he has served as president of the Grande Prairie Regional College, vice-president of Grant MacEwan College and vice-president of Fort McMurray’s Keyano College. He’s no stranger to Edmonton—now back for the third time. “I think there’s a message here for us. This must be the place for us,” he jokes.

The institute works with business families to help teach them the intangibles, rather than the tangibles, of running a successful operation. “I think the biggest thing that our clients expect to learn is the soft side of being in a family: decision-making, learning how to communicate and make a decision that is in the best interests of the family,” explains Henderson. “Apparently, more than half of the problems encountered are not anything to do with law or tax or any of the hard sciences. Most of it is the emotional. Most of it is decision-making and communication.”

He cites the example of succession planning as an area far too often overlooked in the initial planning, opening and operating of a family business. The decision may have been silently made but never openly discussed. “Dad decides that the oldest son is going to take over. Whoever said the oldest son is the one capable of taking over and running the place? Maybe it’s the eldest daughter. Maybe, in fact, it shouldn’t be either. Maybe the siblings can’t get along and there should be some other decision-making structure that would help them… There’s very good examples of families that cannot get along in decision-making so they find a way of setting up an advisory board or bring in external people to help lead some semblance of order.”

To prove his point, he recounts a recent instance. “I talked to a family where the father said, ‘Well, we’ve got things worked out just fine. We’re passing the business on to our children; our children are paying us so much a year to buy it out and it’s working out just fine.’” It wasn’t. During the discussion, Henderson glanced over the man’s shoulder and “…one of the siblings behind the father was shaking his head.”

ABFI provides insights on the dynamics of business families. “We run programs in support of the youth who look to be leaders in the family business in the future. We also run programs for the current leaders of the families, and we run programs for the advisories of those families,” explains Henderson. The workshops, seminars and courses—including its renowned Roadmaps program—range in price from $25 to $2500—a few hours or a few days. Classes are typically kept small, purposefully, to build trust. “People don’t want to open up if there’s any doubt about whether it stays in the room. You can’t get a large group and do that… a group of 10 is very often the size you want.”

This training is supplemented by a referral department that helps match business families with sources within the community or within professions, a resource library, an e-mail hotline and a mentorship team. “Our mentorship team is a group of individuals—no set number, but we have five at the moment—all of whom have had senior business experience in industry. So if someone calls and says, ‘I’ve got a problem and need to talk to someone,’ these individuals have volunteered that they will sit down—for a short time anyways—with the families, talk to them and give them some ideas on how to go about straightening out some of the concerns they have.” Among Henderson’s experts are Bill Grace from PriceWaterhouseCoopers and Gord Tallman from the Royal Bank.

With just four months at the helm, Henderson has faced a steep learning curve but has managed this well. He has analyzed course content, considered expanding his client base plus evaluated his mentorship team and instructors. He has questioned the institute’s own future, “How do I make it a self-sustaining program so that people in other communities can carry on without us?”

FROM ROADMAPS TO PATHWAYS

On the subject of those “other communities,” Henderson responded to a call for proposals to access the $100-million Rural Alberta’s Development Fund. “They put out a call for expressions of interest and that call set out a number of criteria: Things that they were looking for in any proposals… like the quality of life, healthcare, innovative learning, education, health. Things that would make rural communities grow and thrive and be that much better.”

Henderson’s bid was approved and ABFI will receive $1.5 million over the next three years to help rural, family owned small businesses in Alberta successfully transfer expertise and assets from one owner to another. “This is a great project. The Board is confident it will enable many rural entrepreneurs, particularly young people, to get the training and support they need to stay and build a future in rural communities,” says Bob Clark, RADF chair.

Family enterprises are the largest and most significant group of business owners in rural Alberta. Of the more than 45,000 small businesses in rural Alberta, most are very small with five or fewer employees. Those that wish to transfer their business to the next generation often lack the knowledge to do it well. RADF selected Henderson’s Creating Pathways for Entrepreneurial Families project to fill that void.

ABFI will deliver project components through community hubs and communication vehicles like the SuperNet. Training hubs will be set up in areas that have the heaviest concentration of family operated small businesses. Grande Prairie and Lethbridge are expected to be operational by next summer.

“Funding allows us to promote economic development in rural communities, build community capacity, expand learning and skill development and provide opportunities for rural youth,” explains Henderson. The main goal is to create sustainability across rural Alberta by assisting rural family enterprises, including farm families, and their advisors to develop and implement strategies for the future. As always, particular focus will be placed on good succession planning.

Another major component is knowledge transfer: RADF Managing Director Terry Keyko notes that training local professionals and service providers to be mentors, teachers and delivering on-going education in local communities was an attractive feature of the funding application. “Over time, this will build a stockpile of expertise and resources right where they are needed.”

For Alberta’s family businesses to continue to thrive and maintain their strong community ties, it is vital that family members plan and openly communicate their wishes now, rather than later. Otherwise—like the echoes in the once-empty Hudson’s Bay building—there may be no one to fulfill hear the dreams and aspirations, from one generation to the next. √

Creating Pathways

for Entrepreneurial Families

ABFI’s partners in the project include the Agriculture & Food Council, Alberta Council of Technologies, Alberta Financial Services Corporation, Community Futures Offices, Canadian Association of Family Enterprise and Centre for Entrepreneurship and Family Enterprise.

Implementation of Creating Pathways for Entrepreneurial Families is expected to have a number of positive results:

• More young people will choose to stay and build their futures in rural Alberta;

• More rural family businesses will be able to transfer successfully from one generation to the next;

• There will be greater availability of highly skilled and trained people to work in and lead business initiatives in rural communities;

• Leadership in business families will be strengthened. There will also be increased retention of that leadership as it is passed on;

• There will be increased access to quality and relevant business education in rural Alberta, particularly through the hubs;

• There will be increased diversity of employment opportunities in rural Alberta; and