Guest post by Matthew Bailey, BAA, Investment Advisor at RBC Dominion Securities, part of our series 10 Key Decisions for Business Owners.
Plan ahead to maintain stability in the business – and the family
While management buyouts are often more successful than passing the business to family members or third parties, this may not be the case for all industries and businesses. Owners of businesses employing family members often place significant importance on keeping the business in the family compared to owners of businesses not employing family members. This is particularly so for agriculturally based businesses. Many small and medium- sized enterprise owners employ at least one family member, and statistically, family businesses often play a bigger role in local communities, place greater emphasis on customer loyalty and foster a culture of shared values. This may allow for a successful and smoother transition.
What are the challenges of keeping a business in the family?
There are a number of challenges unique to running a family business and planning its future. Consider the interaction of family, business and ownership values and interests. There are long-standing relationships between family members that will still be there long after the transition, so don’t overlook family dynamics. Is there a suitable successor within the family, and if so, can they work with others in the family who may also be involved in the business?
The high failure rate of inter-generational business transfers can be attributed to a combination of factors. These include the lack of a formal succession plan, a tendency to leave succession planning too late and the absence of clear communication. When you involve family members and discuss their concerns, it helps clarify expectations of everyone’s roles and commitment to make the transition a success. Don’t assume that you understand the needs and perspectives of your relatives and employees. Address potential issues, perhaps by means of a family council, rather than avoiding them.
Involve your heirs and key employees in your succession planning
Owners of family businesses often assume they are “on the same page” as their chosen successors. This may be one reason why they are less likely to have a formal succession plan than those selling the business outside the family. It’s a risk to assume that one of your children or another family member wants to take over the business. They may have other plans. When you have identified a successor, involve them in your succession plan and share your long-term goals with them, your family and key employees. Their input can minimize potential conflict and help maintain stability in the business and the family.
When you have identified a successor, involve them in your succession plan and share your long-term goals with them, your family and key employees.
It’s never too early to start building your succession plan
Don’t underestimate the value of starting the process early. If you start to design your succession plan many years ahead of your expected exit date, you can build the interest of potential successors within the family by involving them in meetings and asking for their input. This can help them make an informed decision about whether they want to participate and to what extent.
If you don’t have one family successor in mind yet, consider splitting the business and its responsibilities among family members. Who has been actively involved in the business and shown an aptitude and desire for leadership? Given the differing levels of commitment that your children may have shown, should you divide the business equity equally between them? The business may be your largest asset. Can you recognize their contributions in other ways and is it appropriate for children who are not actively involved in the business to be shareholders?
Obtain professional advice from your legal advisor, tax specialist and possibly a family business facilitator.
A facilitator can help you discuss issues with family members, provide objectivity, find constructive ways to resolve conflicts, review plans, establish priorities and involve stakeholders in the succession process.
Create and implement a business succession plan
- Develop a leadership profile – What do you want to see in a future leader?
- Identify suitable candidates – Who demonstrates the commitment and leadership qualities you’re looking for? Assess their experience and the gaps in their education. How can these be remedied?
- Prepare management and personal development plans – Project the company’s future management needs and guide the career paths of individuals to meet them.
- Mentor and evaluate candidates – Develop their skills and leadership qualities. It can be difficult for a parent to do this objectively due to conflicting roles of parent and business owner. Choose someone else as mentor.
- Select a succession – Your choice could be clear due to years of preparation, or if not, use set criteria to make your selection. Your business facilitator can help.
- Communicate your plan – Ensure everyone understands the plan and their proposed roles. A business facilitator can help with communicating and coaching.
- Manage the transition – Withdrawing from daily business activities can be difficult. A gradual transition may work best.
Continuing involvement after succession
Will you have an ongoing role after the transition, perhaps in an advisory capacity? This is common among entrepreneurs. The longer they have been in control, the more personally attached they are and the more likely they will want to stay involved. This can gradually reduce the business’s dependence on you and may make it easier to separate your identity from the business role you’ve held for so long. It can also help you gradually transition into retirement.
Business planning quick tip
Family businesses have increasing rates of failure with each successive generation due to lack of realistic planning. Take a hard, honest look at the capabilities and interests of your younger family members. Are they really capable of taking over the family business? Do certain family members have more aptitude and interest than others? Or is someone outside the family a better choice? Once you’ve made your decision, start grooming your successor right away, giving them progressively more responsibility. As you approach your retirement date, give them the lead in planning the succession, which can improve the odds of a successful transition.
Plan for contingencies
Incorporate personal planning considerations into your succession plan. Have you prepared a Will and a power of attorney/mandate? Who will run the business if you become incapable of doing so or pass away before the transition? Should you have a buy-sell agreement in place? Your tax planning may also include a discussion of family trusts, estate freezes and structuring your business succession to maximize the capital gains exemption.
Benefits of a business succession plan
Business owners who implement a succession plan well in advance report significant benefits. The business enjoys improved financial stability as it moves through a well planned and managed transition, and relationships with employees and family members also benefit. A large percentage of business owners feel that a succession plan has helped them provide for their family’s future, and many report that they have been able to minimize their future tax liability and improve their business’s financial stability. Those who acquired their business agreed that succession planning yielded significant benefits and helped prepare them for their future as a business owner.
Please contact us for more information on successfully handing over the reins of your family business to the next generation. Contact Nicole Montminy or Matthew Bailey.