Naim Ali, the CEO of SM2 Capital Partners, sits in his office in Calgary.Sarah B Groot/The Globe and Mail
Naim Ali knew differing generational viewpoints on diversification could create tension when he joined SM2 Capital Partners, a private, Calgary-based family-owned holding company that oversees his family’s wealth. It was 2010, and Naim had just left his job as a structured finance lawyer to move back to Calgary for the family business, which started more than 50 years ago when his father, Mohamed Ali, and uncle, Shiraz Ali, bought a Budget rental car franchise in Calgary.
“My father and uncle washed cars, worked the counter and secured the fleet,” says Naim. “On the weekends, they would look at where to open new locations.”
Soon, that spread to three other Budget rental car franchises in Calgary. From there, the older Ali brothers diversified, purchasing hotels, commercial real estate, airport parking lots and retail plazas.
Diversification is a touchstone of building wealth: A survey from the Business Development Bank of Canada polled 500 entrepreneurs in Alberta and Saskatchewan and found diversified companies were two times as likely to experience more than 10 per cent revenue growth during the past year. Many in leadership within family enterprises also see diversification as a tool for maintaining a lasting legacy.
For SM2 Capital Partners, things changed when Naim – who took over as chief executive officer in 2019 – and his brother, Hafiz Ali – who had been working in private equity and is now the business’s chief investment officer – joined the company. From their perspective, the family’s wealth was tied up in owning and operating businesses, exposing them to risks like the COVID-19 pandemic, which had a profound impact across their entire portfolio of hotels and rental car companies.
“My father and uncle were incredible entrepreneurs, but what did they do? They ran these businesses with no debt,” says Naim. “They just kept on plowing their wealth and equity into the businesses.”
Naim and his brother restructured the family business, requiring every company in its portfolio to run with a certain level of debt so they could use some of their equity to diversify their portfolio’s holdings and grow their business more rapidly. They invested in hotels in Paris and London – their first move into international markets. They also invested in public market equities, residential private equity across Canada, casinos and a tequila brand.
“The difference was we didn’t own and operate those investments, but used them as a source to diversify the family’s wealth geographically and in areas that we were comfortable investing,” says Naim, who adds that those investments also reduced SM2′s risk exposure.
Naim admits that the generational debate over diversification versus reinvestment required a lot of open communication and challenging conversations – especially regarding the family enterprise’s strategic direction. “Our founders may have originally thought that we were going to be exactly like them,” says Naim. However, he says the second generation felt their strengths and ambitions could serve the family business differently.
Melanie Segal, senior portfolio manager and investment adviser at BMO Nesbitt Burns’ Segal Wealth Management, says the Ali family’s story is common and is why each generation should have its own plan. “For different generations, they should be doing wealth plans, and then from there, figure out how much they should allocate to private equity,” says Segal, who has worked with business-owning families spanning four generations.
This is especially true amid shifting market dynamics and when it comes to generational differences in goals and timelines. While these can overlap, Segal says it’s important for each generation to set their own objectives and work toward communicating them across generations. This ultimately helps shape the wider legacy that they want for their family business.
To navigate different generational business goals and objectives, the Flanagan family – owners of food distributor and restaurant supply company Flanagan Foodservice – has established a multi-generational family council.
The management team at SM2 Capital Partners is photographed in their Calgary office on Nov. 22. Since its inception, the company has grown a diverse portfolio – spanning automotive, parking, hospitality and insurance industries.Sarah B Groot/The Globe and Mail
Sarah Flanagan, the first of the third generation to work in the business, is Flanagan Foodservice’s continuous improvement manager and a member of the family council. “Over the past decade or so, we’ve started doing a lot of work as a family (to educate) the next generation on the business, what it means to be an owner, what it means to be a shareholder,” Sarah says.
Dan Flanagan, Sarah’s father and the executive chairman of Flanagan Foodservice, says the company’s strategic investments have followed a similar trend: acquiring commercial real estate in new markets for distribution warehouses and buying or investing in similar businesses, like convenience store suppliers.
He says the business started as a grocery store before transitioning into food supply for restaurants. In 2015, Flanagan Foodservice entered into a joint venture to acquire Moncton, N.B., food distributor Capital Foodservice. It also acquired a family-owned food distribution company in Newfoundland and competitor Summit Foods in 2020. Additionally, the family enterprise owns s.t.o.p. Restaurant Supply, which supplies cookware and restaurant equipment.
He says the business has transitioned ownership of s.t.o.p. and several real estate holdings to third-generation members. “The real estate is held by family shareholders – both (generation two and three) – either directly or through family trusts,” he says, adding that the family enterprise hasn’t considered a real estate investment trust. The transfer of ownership allows members of the Flanagan family to play an arm’s length role in the business.
Segal says it’s not uncommon for owner-operated businesses to invest in other businesses in their industry. “They’re putting their money where they believe their best growth is,” she says. “At some point, maybe when they’re looking to sell or exit, they could start diversifying.”
For Naim, he says it’s hard to predict how his children and the next generation will reshape the business. “I don’t know what the world looks like in 20 years, but at the very least, I must equip them with the tools to steward and oversee capital,” he says.
“They may not be strong operators, but they may be philanthropists (and) oversee capital that can change this world.”