For entrepreneurs, there are few more important considerations when building and growing a business than their eventual exit—either by choice upon retirement, or by some other inevitable circumstance such as their passing. Many CEOs hope that their eventual line of succession leads directly to family members, perhaps an ambitious son or daughter, or a management-minded niece or nephew.
Despite the desire to see their business pass directly to family members, the vast majority of entrepreneurs fail to take the necessary steps to make that transition smooth and seamless. In fact, a 2006 report by the Canadian Federation of Independent Business found that 52 per cent of SMEs lack a formal succession plan. In other words, the chances of a business continuing on in the hands of family members after the founder’s exit or passing are relatively slim.
This needn’t be the case. A well-structured succession strategy helps mitigate a wide range of risks and ensures, among other things, the future stability and value of the family business, sets a realistic timeline for selecting and grooming a successor and weighs the potential tax liabilities of transferring ownership—all in an effort to help proactively structure and minimize tax liabilities.
I’ll be outlining business succession strategies over several posts, but I wanted to begin by looking at some very fundamental considerations that often go overlooked. Remember, this is one of the most important decisions you’ll ever make as an entrepreneur, which means it also has the potential to be one of the most stressful, emotional and divisive. With that in mind, here are three of the main points to consider when formulating your business succession plan:
The family—Nothing causes rifts in families like money, or the potential to earn it by inheriting a business. With that in mind, family should be the foundational consideration of any well-structured succession plan. Familial harmony—to help avoid situations that make family dinners painfully awkward—and emotional stability are prime concerns. So, too, is financial security to ensure that whoever assumes control of the business is taking over a profitable going concern. Other major considerations include maintaining a strong sense of family within the business and enjoying the operation of what will undoubtedly require most of the new owner’s time. That’s in addition to ensuring that all family members are bound by strict rules of participation to guarantee equal treatment and the very best management for the business over the long term.
The Business—For any retiring CEO, the prime concern should be business continuity, service consistency and product or service quality. Without addressing those three areas, the business will eventually fail and your successors will be left without a company to run. It’s the reason why ensuring strong management and leadership is such a critical consideration. Failing to take both factors into account will result in an inevitable decline in business prospects. Also: How will governance be managed with family members running the business, and how will new management influence the organization’s financial performance to help grow or at least retain the existing customer base? These are all key questions that need to be asked.
Ongoing ownership—What will be the ownership roles and responsibilities when family members take the helm? Designating specific roles based on aptitudes can be an effective way to mitigate the risk of rifts within the family. Other key questions: How will shares be acquired or sold? Can owners work in the business, or will they strictly be shareholders or board members? Additional factors to consider include wealth protection and future growth. Is there a strategy in place to maintain a degree of wealth to protect the second generation of family-owners in case the business falls flat due to external forces such as a major recession or market shock, or if their management acumen isn’t up to par?
If this seems like a great amount of information to digest, that’s because it is. As I mentioned earlier, building an effective business succession plan takes time and is best done with the help of a chartered accountant or strategic financial advisor. This isn’t a process you want to rush or manage without professional assistance.
In my next post I’ll outline steps to selecting and grooming a successor.
Hartley Cohen, Partner