The keys to succession planning for Canadian family real estate companies

14 September, 2023

Fred Cassano, Partner, National Real Estate Tax Leader, PwC Canada
Hadielia Yassiri, Partner, Family Enterprise Services, PwC Canada

In a recent blog post, we explored some of the key considerations around succession planning in Canada’s family-owned real estate companies as large numbers of founders of these enterprises look to retire or exit the business. As we noted, the transition to the next generation can be challenging for real estate companies given recent trends and changes in the market as well as the complex dynamics within families and their emotional attachments to the business.

There can be diverging views within families about the future of the business and their role in it, while changes within the real estate market have opened up new options and considerations for company founders and the next generation of leaders who stand to inherit valuable assets. Because of this, it’s important to invest time and resources in family communication and governance in order to address potential points of friction and increase clarity and alignment around the future of the company. So what are some of the best practices to consider as the founders of family real estate businesses plan for their exit?

Number one

Engage with the next generation

As a critical stakeholder in the transition, it’s important to engage with the next generation in discussions about the future of the business and the role they want to play in it. Key questions to explore with the next generation include:

  • Does the next generation want to continue owning and operating a real estate business? If they do, will they continue operating the business in its current form?
  • Which real estate asset class is best suited for growth in the future? And which geographies will the company look to for investment and growth? Is the next generation involved in forecasting discussions and decisions?
  • What new business models are emerging that can impact various real estate asset classes in the future?
  • How is real estate growth financed, and are both the current and next generations aligned on the appetite for risk?
  • Does the current generation want their successors involved in decision making today?
  • Does the next generation want to be involved in decisions today that could impact the type of real estate that will be owned and operated several years from now?
  • What role could professional management play in helping to operate the business, mentor the next generation and facilitate an effective transition plan from current owners to successors?
  • What’s the impact of partnering with third parties today to potentially de-risk the current real estate business with the next generation?
  • Are all members of the next generation involved and, if so, in what capacity? Should some family members wish to sell their interest to pursue their own investments, will that cause liquidity issues for the business?
  • Does the next generation have the necessary skill sets to own, operate and govern the business and family capital? What next generation education programs are in place to provide the necessary skill sets and experiences for successors to be ready?
  • Has the next generation modelled the after-tax liquidity of real estate dispositions and subsequent redeployment of capital? What are the future investment return considerations? What new overhead is needed to operate capital after a liquidity event?
Number two

Embrace ongoing dialogue and transparency

In addition to having these important discussions with the next generation specifically, a key aspect of family enterprise governance work is ensuring ongoing and effective dialogue with the family as a whole about the business.

It’s important, for example, to take a step back to discuss what are the core values, purpose and mission of the family and the business. These are all critical questions families need to answer to ensure alignment on foundational issues, including whether they even want to continue being in business together. According to our 2023 Family Business Survey, many enterprising families have yet to answer these questions in a formal way: just 43% of respondents agreed that the family’s values and mission for the company are articulated in written form.

It’s also important to embrace transparency so everyone understands the direction of the company and has clarity on potential points of friction like varying levels of compensation for different family members as well as the timing of payouts like dividends.

Number three

Adopt formal governance structures

One way to increase alignment around the future of the business is to adopt more formal governance structures that professionalize relationships among family members and help achieve family enterprise goals. Proper governance ensures everyone knows and follows established procedures, supports resolution of conflicts, helps family members understand why a specific policy is in place and sets out clear roles and responsibilities.

Getting governance right starts with acknowledging that a family enterprise typically has three separate but overlapping systems: the family, ownership and the business. Ensuring clarity on who belongs within each of the systems reduces the tension and confusion that often results from conflating the three spheres. Understanding the different governance mechanisms within each of the systems is also key to establishing clear lines of separation between the family and the operating business.

One option is to have a family council, which sits within the family system and is separate from the board of directors (the ownership system). The council provides the board with the family’s vision, which, in turn, drives the company’s strategy (the business system). Having robust governance policies within each of the three systems helps family members understand how the operating business is tied to ownership and the overall goals of the family, which enhances alignment and trust.

Connecting the three systems together

Having clearly defined governance mechanisms for the family, ownership and business systems is a key way of improving information sharing between family members and across the generations. So what are some of the roles and responsibilities of the three systems, and how do they connect to one another?

Family system: Among the responsibilities of the family council is drafting key policies, such as those governing family education and employment of family members in the business. The family council also plays an important role in ensuring estate planning is kept up to date.

Ownership system: On the ownership side, the role of the board of directors includes setting out policies in areas like annual and special dividends, life insurance governance, post-mortem actions, control and voting rights. The board communicates and interacts with the family council, which provides family members with updates that help drive participation and engagement from the next generation.

Business system: The board also relays the business strategy, vision and goals set by the family council to company management. Management provides reports on business results directly to the board, which shares the information back to the family, connecting the three systems together.

Management could include the next generation or professional managers. Professional management could also be a succession facilitator and mentor to the next generation.

Building trust and sustained outcomes

By establishing the right foundations for good governance, transparency, trust and communication, the current generation of real estate company leaders can ensure sustained outcomes for their businesses and their families. The conversations involved can be challenging, but with the right support and guidance on how to come together on a shared vision as a family, owners and founders can feel confident moving forward as they prepare to exit.

To learn more about how to navigate or establish foundational governance for your business and your family, contact our family enterprise services team today. They bring deep knowledge of the real estate market trends families need to be aware of and are ready with the insights, tools and solutions for helping you sustain and grow the value of your legacy.

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Fred Cassano

Fred Cassano

Partner, National Real Estate Tax Leader, PwC Canada

Tel: +1 905 418 3469

Hadielia Yassiri

Hadielia Yassiri

Partner, Family Enterprise Services, PwC Canada

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