Home Top News Succession Planning The Secrets of (Successful) Succession Planning

The Secrets of (Successful) Succession Planning

No matter what – it’s personal


Publicly, accountants, lawyers, management consultants and other experienced succession planning professionals talk about balance sheets, maximizing values, financial projections, payout models, timing, transition planning, tax efficiencies, managing risk and exit strategies.

Privately, and behind closed doors, accountants, lawyers, management consultants and other experienced succession planning professionals delicately but pointedly emphasize the emotions, fragile egos, feelings, the optics of handing over the business (a.k.a. what people think) and other inescapable and common family dynamics, the realities of letting go, and a fact of life that, unfortunately, some business owners and their families never master – communication.

Although the business science of succession and transitioning is detailed and complex, there is professional consensus that it all begins with an owner’s often challenging but private soul-searching to determine the right time.

“Three key factors must be considered when deciding that it’s time,” says Lynne Fisher, senior manager of ExitSMARTTM at Calgary’s MNP. “There are personal considerations, like the owner thinking about their current level of energy and passion and looking ahead.

“Some transitions take up to 10 years. The owner must be realistic. Is there enough gas in the tank to continue to run the business now and then transition it? Ideally, the business should transition before the owner’s passion and energy wane and all parties are at their best. Sometimes the owner may have objectives about transitioning or selling to family, management or a third party.

“Sometimes those plans don’t work out,” she cautions. “So it’s important to allow sufficient time to work through options and, if necessary, move to a Plan B.”

For Philip Davidson, instructor of strategy and global management at the Haskayne School of Business, the transition involves a somewhat hazy overlap between private and business aspects.

“Do you still love what you are doing? And I mean really love it, not just because you’re the boss and you have been doing it for such a long time,” says Davidson. There is no rule that says you have to retire. In fact, retirement seems to kill some people.

“And do other people still love working with you? Do they, really? Look at yourself as critically as a new hire. You may still love what you are doing, but people may be increasingly frustrated working with you because you insist on doing things the way you have always done and they may feel that there are newer and better methods to make the business thrive.”

As with the lessons learned from so many important decisions owners have made over the years, it ultimately comes down to business.

“There are key business considerations,” Fisher points out. “For an owner to transition or sell successfully, and get best value, the business needs to be running well. Ideally there should be at least three-plus years of steady growth and a management team that is fully capable of running the business without the owner.

“Whether it’s a sale to a third party or an internal transition to family or management, the business needs to be healthy and profitable enough to cover the financing to pay the founder and work through the transition.”

She emphasizes that transitions, like normal business, are laced with some hard-core business dos and don’ts. “Considering tax efficiency is a vital part of the planning, but so is considering all exit strategies. Founders often make assumptions about the level of interest of family members or the ability of management to attract financing that may turn out to be inaccurate.”

Most professional planners underscore that despite the celebrations, good wishes and nice speeches, effective (and successful) succession transitioning is not an event. It is a detailed process – and a process that relies heavily on communication and timing.

It’s not a “next week” item on a to-do list. It could take a few years – some consultants caution that it could take up to 10 years – to put the strategizing and pieces together.

Experience demonstrates succession planning that doesn’t respect the critical aspect of timing not only creates obstacles to effective transitioning but often results in leaving value on the table.

“Determining the timing of the transition is based on personal objectives, business value, personal, financial and lifestyle objectives, and the readiness of the business to be managed by managers,” Fisher adds. “And it’s prudent to include managing risk in the form of clear emergency plans for the business should death or disability of the owner occur before succession.”

Communication – honest, open and blunt (not strategic) communication – before, during and after the process is crucial. After years of hard work, effective succession planning doesn’t allow for details to be just locked in the owner’s head.

“Once timelines are set,” Davidsons says, “it’s critical to respect them and pay attention to them. It doesn’t mean being overly rigid but it also doesn’t mean taking every event as an excuse to delay the process.” Davidson adds the defined timeline should be communicated with potential successors, just in case the schedule does not align with their expectations or plans.

Fisher echoes the importance of communication and the sometimes fragile stage of broaching the succession conversation with family. “It should be inclusive, involving all family members, and start by just asking questions: ‘I have been thinking about succession in the business for a while now, and not sure what I want to do. What are your thoughts on the subject?’

“It is important to be clear that business is business, and family is family. Communicate basic principles and explain that fair doesn’t necessarily mean equal. Consider structured family meetings, maybe with the help of an outside facilitator, with ground rules and guided by agendas,” she recommends.

“Odds are that the owner’s children are more ready than the owner is willing to give them credit for,” Davidson says from experience. “But there is a common problem of owners convincing themselves that their son or daughter has to be their successor, when, in fact, they could simply be participating in the company to make the owner happy.”

He explains that transitioning to family can be awkward. “The grown children of founders could fall into various categories. They could be legitimately driven to show their parents that they can go even further, while others ride the comfy ride made possible by their parents’ success. Some are very capable of performing required tasks but not willing to make the same sacrifices that the founder did to get the business to where it is.”

Canadian business stats still show that more than a third of second-generation businesses don’t make it. The causes are many.

“It’s a big mistake to think of succession as just transitioning shares. Successful succession is about transitioning ownership and leadership in a manner that works for the business, the owners and everyone involved,” Fisher notes with enthusiasm.