Managing Partner explains his role amid massive generational shift, notes how financial advisors can support business owners as part of broadening service model
Canada is headed for a tsunami of business transitions. According to the Canadian Federation of Independent Business over $2 trillion of business assets are expected to change hands over the next decade. 76 per cent of all Canadian small and medium enterprise (SME) owners will exit their businesses in the next ten years, though most of those owners don’t have formal succession plans in place. Daniel Scaini calls it a “generational inflection point.”
Scaini is a Managing Partner at The Fairing Group, a boutique GTA-based private M&A advisory firm. Working on both the sell and buy side of this business transition, Scaini explained some of why this market is becoming so busy. He outlined his firm’s process in this environment and why they see an unfilled gap in serving smaller enterprises. He notes that despite their work managing personal wealth, financial advisors should be aware of these trends for the sake of their business owner clients and their commitment to holistic wealth management.
“It’s about delivering comprehensive service. Just as we don’t offer certain services because they fall outside our expertise, many wealth advisors don’t provide the kind of specialized support we offer,” Scaini says. “When you can surround the client with a full suite of services or service providers, minimizing the need to search for other third-party professionals, you strengthen the relationship and increase client retention by keeping everything under one roof.”
Scaini notes that many advisors’ ideal clients are SME owners who are already feeling the pressure of their own business transitions. 75 per cent of owners who are transitioning their businesses are simply retiring. Another 22 per cent are leaving ownership due to stress, which has been driven in part by ongoing economic uncertainty and carryovers from the upheavals during and after the pandemic. Whatever their reasons, the process for exiting a business comes fraught with challenges for these individuals.
Business owners face four major sets of challenges in transitioning their businesses, Scaini explains. The first is time, operating a business is more than a full time job already, and the M&A process can be so complex and time consuming as to be prohibitive for these owners or detrimental to business performance. Valuation uncertainty is the second issue. Owners may not be aware of how to value their business or what can drive that value, resulting in a mismatch between what they think their business is worth and its real market value. Scaini notes that his firm uses a data-driven approach called a precedent transaction analysis to demonstrate to owners what their value is based on similar transactions. In a similar vein, the third issue holding back these transactions is a lack of familiarity with the process and a lack of easily accessible transition services geared towards smaller enterprises.
The fourth and final reason these can be so challenging, in Scaini’s view, is the emotional complexity of a business transition. SME owners see the business as more than just a means of making money. Often it’s their whole identity, their legacy, and an asset laden with family expectation and intergenerational dynamics. Managing that side of the business transition takes tact and soft skills as well as hard.
Despite those challenges, businesses are transacting in deals facilitated by M&A advisory firms like The Fairing Group, as well as larger outfits often run out of major financial institutions. According to the CFIB, 49 per cent of those businesses are sold to unrelated buyers: companies in the same industry or financial buyers like private equity firms and pension funds. Family members buy 24 per cent of these businesses and employees buy 23 per cent. Each of those deals comes with a form of challenge that Scaini says his team helps owners navigate.
An employee purchase faces a liquidity hurdle. It can be hard for an employee to come up with enough cash to buy the business at five times EBITDA within the relatively tight timeframe of an owner’s retirement.
Selling to a financial buyer means fully exploring that market, giving highly sophisticated firms an ‘under the hood’ view of the business, and ensuring appropriate competitiveness. Scaini explains that his firm’s work on the sell side involves developing comprehensive confidential marketing materials, finding ways to maximize the business, and using an invited auction process that involves the best prospective buyers for the business.
Family sales might not require the same level of diligence on the sell side, but they often come with lofty goals. That next generation will often want to push the business to a new level via acquisitions or strategic investments. Scaini notes that his firm works on the buy side as well, helping the next generation of owner facilitate deals that will firm up the next stage of their growth.
Scaini says that he and his partner, Zach Schenker, set up The Fairing Group to offer SME owners a boutique service in a market otherwise dominated by major financial institutions. He argues that financial advisors, especially those at independent firms, may be more inclined to work with an independent M&A advisory because many larger institutions have set up pathways to bring the assets gained by a sale into their in-house asset management teams.
“Advisors are in the AUM game,” Scaini says. “If a client engages a non-independent M&A advisory team within an institution that also manages wealth, those teams can build trust and rapport throughout the process. When the liquidity event happens, that institution may be first in line to manage the resulting assets. That’s why it’s essential for independent advisors to offer a full suite of services – through collaboration with other professionals or strategic partnerships – to ensure they are the ones capturing those assets when the time comes.”
