Intricate succession planning is important business strategy.
Despite some in-denial insistence to the contrary, it is also deeply personal, often emotional and significantly impacted by the quirks of human nature.
“According to the 2018 Canadian Federation of Independent Business (CFIB) report,” says the knowledgeable Jim Rea, partner, private enterprise with MNP in Calgary, “while 72 per cent of Canadian small business owners plan to sell or transfer their business in the next 10 years, only eight per cent have a formal succession plan, 41 per cent have an informal plan and 51 per cent [have] no plan at all.”
Succession planned and un-planned organizations share a similar focus on various business bottom lines: tax implications of a sole proprietor, a partnership or a corporation. Included in the list are ways to minimize the tax hit, taking advantage of capital gains exemptions and other financial, legal and tax implications.
In addition to hard-core business and tax issues, succession planning is much, much more than just about control and ownership. There are many tricky aspects to defining a viable exit strategy while navigating the rough waters of staff (and family) feelings and morale, customer and market perceptions, and training concerns.
“When succession is not planned far in advance, business owners can find that they are surprised by the next generation’s lack of desire to take on leadership positions in the business,” Rea warns. “It takes years to educate and train successors, whether family or management. An early start to planning minimizes surprises and gets everyone on the same track.
“Delays in planning can result in delayed retirement and many business owners continue with leadership responsibilities well beyond their desired personal time frame because they feel the successors are not yet ready.”
He explains that, ideally, implementation of a well-thought out succession plan can take six months or more. However, he recommends business families start planning at least two to three years prior to any contemplated transition or sale.
MNP’s ExitSMARTTM process starts with the discovery stage: accumulating information; interviewing owners, management and family; and facilitating discussions to identify and prioritize issues.
“Depending on the situation, we may prepare or update net-worth statements, determine financial retirement needs, review wills and the adequacy of insurance, help document emergency plans, review corporate structure, perform a valuation of the business, help management implement value-enhancing processes, and determine the training for new leaders at least two to three years prior to a contemplated transition or sale,” he points out.
In addition to the business bottom line specifics of a plan, vital components include developing a long-term vision for the business, creating a timeline to help keep the succession plan on track, establishing the owner’s retirement and post-ownership goals, and setting milestones for achieving business goals and objectives.
“There are so many reasons why it’s important to start succession planning as soon as possible,” urges Nadja Ibrahim, Calgary private company services leader with PwC Canada. “A main concern for family businesses is training, empowering the next generation and making sure that they inherit a company that’s not only surviving, but thriving.”
She notes that, according to PwC’s 2018 Global Family Business Survey, 70 per cent of family business transfers fail between generations. More than half are due to a breakdown in communication and trust while a quarter result from inadequate training of the next generation.
“A common mistake is believing you have to do it alone,” she says. “Leaders should involve the next generation in these discussions, build trust and align on to their vision. The next generation is a savvy bunch, armed with great ideas and digital proficiencies. Excluding them from this process is a definite missed opportunity.
“Particularly since many owners rely on their businesses to support them financially when they retire, whether they continue to profit from the family company they built or if it is sold to a third party.”
She underscores the importance of transition planning, whether the goal is succession or sale, allowing the business to identify how to achieve optimal shape as well as address any variables that may affect performance and perceived value.
“Succession planning is definitely one of the most sensitive family topics, particularly for family business owners,” Ibrahim notes. “According to our survey, almost half of Canadian family business owners say they plan to pass on management or ownership to the next generation. Unfortunately, most of these companies are shuttered or sold by the third generation, with only five per cent making it to a fourth.”
In many ways, succession planning comes down to a personal decision. “Company legacy is a huge consideration, as owners want to preserve the company they’ve dedicated their careers to building,” she emphasizes.
Just as various factors impact business in different regions, Rea points out an important consideration for succession planning in Alberta is the economic cycle. “Owners want to time their exit for an ‘upcycle,’ when values are up, buyers are abundant and interested, and business is good,” he explains. “This is one reason why starting early with planning is so important. Whether owners are considering selling to a third party, transitioning to family or selling to employees or managers, it’s easier and a better return during an upcycle.”
Fred Schickedanz is a delightfully honest and blunt business leader with a dynamic succession planning success story.
Boasting more than 40 years of experience in Western Canada, the third-generation, Calgary-based Schickedanz West is a respected family business and a leader in unique recreational real estate and commercial development.
“We started thinking about a succession plan 10 years ago and started the detailed restructuring six years ago: the inter-generational ownership structure; the decisions to be made moving forward; what happens when I die; updating the company documents, including the shareholder documents,” says Schickedanz.
“It was horribly complex and took us six years to complete, involving detailed and complicated monthly meetings with the consultants. And we finally put the plan in place just before last Christmas.”
He explains that, regardless how tight or like-minded the partners and shareholders of a business may be, succession planning is not only smart but vital business planning. “In any business, some people may want to challenge decisions. And that’s healthy and normal. And in a lot of businesses, a lot of things are done in good faith but not according to formal documents.”
Schickedanz enthusiastically explains that it’s not about letting go or retirement. “I have a passion and I have always been blessed and liked what I did. It’s business as usual but with a big difference. The new partnership group is responsible for their own passion.”
He underscores the personal side of succession planning. “MNP must get much credit for special skills. Succession planning is much more than lawyers and accounting. The professionals have psychological skills. The technical side of succession planning is big, but the personal side is bigger!”