Looking to transition your business to the next generation so you can enjoy retirement, or simply because you’ve decided that it’s time to hang up the entrepreneurial reins? You may want to take some lessons from the popular HBO series Succession to ensure things don’t go seriously awry, creating irreparable family rifts—and even loss of business opportunity and wealth. Because as so many entrepreneurs have learned the hard way, simply having adult children or relatives that could potentially run the family business is no guarantee that the transition will go smoothly. Developing an effective business succession strategy requires far more than family lineage and a founder’s dream of creating a multi-generational corporate legacy.
According to a recent Globe and Mail analysis, in the coming decade Canada will experience the generational transfer of about six in 10 family businesses.
Many founders envision their children one day assuming control of the enterprise that made them wealthy, shaped their character and contributed to their success. The challenge is that just as many potential successors aren’t groomed for the task. They can often be ill-qualified, ill-prepared or lack interest in running the family enterprise. While it’s no secret that generational wealth helps families prosper long term, a lack of financial, strategic and operational know-how can compromise that hard-earned legacy in no time.
Business succession soul searching
As a result, some successors will run the family enterprise into the ground or steer it far short of its growth potential. Many businesses won’t survive to be handed over to a third generation of family leaders. When done well, however, a generational transition can maintain strong brand equity (and valuation), product and service levels and the deft management that led to the company’s success in the first place.
Here are some important questions to consider when deciding if family members’ involvement in your business succession strategy makes sense:
1. Have you discussed the transition with them? Shockingly, many business owners simply assume their children (or other family members who may take over the business) want to follow the same professional path. Many will prefer to take a different route, while others may be eager to take over. Be sure your professional aspirations are in alignment.
2. Are they qualified to take over? Financial and operational literacy are two of the biggest hurdles to continuing an organization’s profitable operation. Your heirs need to understand accounting, budgeting, cash flow analysis, tax strategy—to name only a few essential skills—all of which are necessary to keep the business on a solid financial footing. If they lack this background, consider hiring a CEO with experience in your industry to handle the company’s operations either permanently, or until your successors can bring their managerial skills up to speed. Having a team of advisors, potentially including an advisory board, along with your Chartered Professional Accountant, lawyer and various management consultants, will help to ease the transition and protect the company’s balance sheet.
3. How familiar are they with the business? Do they know the industry, employees, key clients, and are they as passionate about the business as you are? Have they spent time with you working in the business and learning about how it works? Knowledge, passion, insight, foresight, and dedication are keys to business success, but so too is experience and some degree of baseline expertise.
4. What corporate governance rules will you set up to mitigate the risk of family in-fighting? Employing an effective governance structure that clearly defines responsibilities across the business (especially important if multiple children/family members inherit a company) and outlines a code of conduct, can provide a buffer to the emotional side of operating a family enterprise and add a layer of much-needed accountability. A board of directors and/or advisory board can be essential in de-escalating or avoiding tensions.
5. Do you need to consider equalizing inheritance when multiple heirs inherit a family business (but only one is qualified to take over)? Determining how to equitably share and distribute family wealth from a business can be a complex undertaking. However, there are strategies that can be put in place when drafting an estate plan to mitigate the risk of conflict and animosity among inheritors, while once again ensuring business continuity. Tools and strategies ranging from family trusts to pre-death share transfers are just some of the options available. Talk to an Adams + Miles partner in our Private Family and High Net-Worth practice to learn more.
6. Have you considered the tax implications? Trusts, estate freezes, and other tactics can help mitigate liabilities on the transfer of shares in your business. They’ll also avoid putting your successors in a potential financial predicament when the business transitions to them after your passing. It’s a topic we’ll cover in detail in a future blog. In the meantime, be sure to speak with one of our tax specialists to develop a proactive strategy that considers your long-term personal and professional financial goals, while outlining the full range of tax-planning options.
7. What about a pre-death sale of the business? If your children are unable or unwilling to take over the business—or may squabble about its management—a pre-death sale may be the most logical approach. Again, tax implications should be a priority, but selling a company (potentially for a stronger valuation) can limit familial in-fighting and simplify the estate planning process.
Regardless of the approach taken to business succession—whether you opt for a generational transition or outright sale—consider your options and work with your Chartered Professional Accountant to start planning early. Your team of trusted business, tax, wealth, and accounting advisors can help put you on the path to success.
For more information on business succession or generational transfers, contact a member of our team.
