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The Urgent Case for Planning Ahead


Some people say succession planning is all business. Consultants and senior management who have been through it know better.

While much of succession planning is critical decision-making, intensely fiscal and business strategizing, a lot of succession planning is subtle, unpredictable and personal. Despite some stereotyping that claims succession planning to be a delicate, touchy topic, the personal factors are more business critical than ever.

According to a report from the Canadian Federation of Independent Business (CFIB) – Getting the Transition Right – 72 per cent of business owners are expected to exit their business during the next decade generating a massive transfer of business assets ─ potentially worth over $1.5 trillion. The vast majority of business owners (81 per cent) intend to sell or transfer their business to retire.

Ominously, many business owners do not have a succession plan in place to ensure a smooth transition. “Historically there has not been as much focus on advance planning as there is now,” admits Bill McLean, Canada family enterprises and business leader at PwC, with more than 6,700 partners and staff in locations in Canada. “People were so focused on business growth and success that they didn’t make enough time to think or plan about the next generation of leadership.

“It’s difficult to generalize but it was typically business where families put their heart and soul into growth. Continuity was not in the forefront. Success was top priority. As a rule, entrepreneurs tend to focus on challenges and growth and think ahead 10 years. Eventually they do realize that change is inevitable.”

For Richard Truscott, vice president, B.C. and Alberta for CFIB, gradual and focused succession planning is an essential fact of business life. “To be able to carry out effective exit plans, planning must be done early. Otherwise, you could be restricting the planning options available to you from various points of view, particularly tax. Ideally, the planning should begin in the startup stage. Most of the characteristics that will develop a strong business take time to develop so that the business will eventually be attractive to potential buyers and successors. Tax-efficient structures need to be set up with transactions carried out over time.”

McLean cautions that in addition to timing there are three distinct areas of succession planning. 1) All matters relating to the operations of the business, the structure and the strategy for the company’s future market dynamics. 2) Those that pertain to ownership and wealth transfer to the existing, controlling generation, including buyouts and share transfers. 3) All families have unique family concerns and there are always significant matters, relevant to family members, like family harmony, peace and communication.

“It is human nature to be uncomfortable with change,” McLean says from experience. “Especially if there is no efficient transition plan. There is definitely a need for a well-defined communication and transition continuity plan.”

According to CFIB, the following are key elements of a solid and stable succession plan:

  • Establishing business structure and share ownership.
  • Creating a business exit timeline.
  • Retaining appropriate advisers, such as accountants, lawyers and family business conciliators.
  • Using the lifetime capital gains exemption by the exiting owner(s) and setting up a family trust to minimize the overall tax being paid.
  • Meeting the tests and requirements of the Income Tax Act.
  • Ensuring proper legal transfer of ownership of shares or assets.
  • Financing of successor, whether it is a family member or management team taking over.
  • Compiling the business’ financial and operational information and metrics in preparation for purchaser due diligence.
  • Considering the owner’s personal income tax and estate planning as part of the overall plan.

Although succession planning has been traditionally for the effective transition of a business to the next generation of senior management, there is an increasingly popular trend of succession plans that involve eventual 100 per cent employee ownership.

ESOP Builders is the leading independent Canadian firm that specializes in providing comprehensive employee share ownership plans and services. President and founder Perry Phillips notes the components of succession planning. “The exit, and the owner’s desire to get the money out and to help fund the next stage of their life, since 90 per cent or more of their net worth is tied up in the company. Most owners want a fair value for their company but not necessarily the top price.”

And legacy matters, a lot. Phillips cites studies which have shown that maximizing the sales price is not the top priority for 80 per cent of owners. He says it involves the desire of the owner to preserve the founder’s core values in continuing the company once they leave. “This is important to owners, as they have built the company’s reputation and connection to the community over 20-25 years or more. They want to see the core values maintained and enhanced.”

He also underscores the growing trend of effective succession by selling to employees, noting surveys that show companies sold to first-generation family members have a 30 per cent chance of being successful in the next five years, reducing to about 10 per cent in second-generation sales, whereas companies sold to a third party have a 50 per cent chance of success.

“However, companies sold to employees, which may include family and third parties, have an 80 per cent chance of success. Stats and trends from multiple countries show that ESOP companies in the same industry outperform non-ESOP companies in the same industry in productivity, profits, culture, retention, attraction and employee pensions.”

Of course crunching the numbers is a succession planning must, but most experts agree planning the company culture and choices for future leadership are also vital. “It is critically important,” McLean stresses. “The company culture is created and cascades from the top, and is sustained by those who are active in the business. Having frank and honest discussion about who the primary culture carriers are is a priority and a must for effective succession planning.

“As the changes happen, what will the culture drivers be? Although it is inevitably challenging for some companies to deal with the personal, private, emotional and hurt-feeling aspects of succession planning, there must be emphasis on what it means for their sense of family and feelings like resentment – and creating better communication within the family must be a crucial priority.

“It’s also a significant reason why third-party advisers are not only an advantage but a neutrality benefit.”

As clichéd as it may sound, “the next generation” is a crucial aspect of succession planning. “If the upcoming generation will be taking over ownership and/or management, whether it’s family members, current key employees or the employee group,” Truscott says, “there are essential preparatory steps to be taken to groom the successor.”

He emphasizes that ownership sets the values, vision and mission of the business which must then be implemented in a strategic plan by management.

There is effective management consensus that with succession planning, as with most other aspects of business life, timing is a key.

Phillips points out that ESOP requires much advance planning from owners and if an owner wants to get out in 12 to 18 months, the best course of action is to put the company up for sale. He highlights studies which have shown that only 20 to 25 per cent of privately-held companies actually sell. More than 75 per cent liquidate.

“Succession planning must be done in the context of the vision and strategic plan,” Truscott says. “Leadership takes time to develop.”