Now more than ever, in business and in life, timing is everything!
In Calgary business, there is also the added speedbump of a notorious triple whammy: the COVID-lockdown, the oil slump and the Alberta economy.
There is an additional monkey wrench when it comes to popular succession planning wisdom: the transition should happen (and owners should time their exit) in a business “upcycle,” when values are up, there are lots of interested buyers and business is good.
Of course effective succession planning takes much planning and strategizing. Experts consistently caution that achieving succession-transition takes an absolute minimum of two years of planning and preparation, and sometimes longer.
Regardless the unpredictability and extremes of Alberta’s triple whammy, there is consensus that starting the succession planning when the upcycle actually hits, is too little-too late. “Ideally, the succession process should begin at least five years before an owner plans to exit the business,” says the experienced and respected Jim Rea, Family Enterprise Advisor with MNP Calgary.
“There’s an old saying that the time to plan your succession and exit is the day that you begin the business,” smiles Lynne Fisher, MNP’s national team leader of EXITSMART. “While that’s not really practical for a lot of owners, always having the business systems, people, and finances in a condition that it could be sold if a buyer comes along, is good advice.” From much experience, she explains some business as well as personal considerations for starting succession, such as when industry indicators signal change.
“In many industries like dentistry, pharmacy and optometry, there have been significant consolidations over the past few years. For business owners who are considering transition, having a plan to build the business and sell when the time is right could be a good strategy. Other business owners might see the changes as an opportunity to bring in new or additional owners who can assist with capitalizing on those changes and building value in the business.
“Another common indicator is when the owners’ contacts are changing. In a number of small and medium sized businesses, key connections with major customers and suppliers rest with the owner. When those contacts—clients, suppliers, etc. —are beginning to be replaced by the next generation, and the team inside hasn’t kept pace, the ability of the business to get good work begins to diminish. And there’s the vital factor of strong employees leaving because they don’t see a plan or a place for themselves in the future.”
She stresses that the key steps for succession planning may be flexible but well-defined. “The owner must consider what’s wanted and needed from the succession. How much will they need for next stage or retirement? Who are the preferred successors? Family? Employees? An outside buyer? What is a possible timeline?”
Jim Rea echoes that much of the value of a business is represented by personal goodwill—value created by the entrepreneur through their strong relationships with customers and suppliers and through their knowledge of how to run the business. “This value is often not transferable and can disappear once the entrepreneur exits. Ideally, the new leadership team would nurture these relationships long before the transition. Documenting and optimizing the business processes will also help create real value for which potential buyers are willing to pay.”
Fisher highlights the personal side of the succession planning ledger. The reality that sometimes the owner’s interest and energy for the business may be waning and they spend more and more time dreaming about their next stage, whether retirement or other options.
To some degree, successional planning involves juggling. A recent Canadian Federation of Independent Business (CFIB) report showed that 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, four per cent have an informal plan and 51 per cent with no plan at all.
Most succession planning experts are unanimous and emphasize the importance to “know when to hold ’em, know when to fold ’em” timing. When to do it is almost as crucial as how to do if effectively.
According to Nadja Ibrahim, Calgary Private Company Services Leader with PwC, “Effective succession planning is often something that is avoided by business owners, likely due to the many complex considerations involved. Busy owners will often de-prioritize the weight of forward planning the transition because the day-to-day management of the business can be all consuming, especially in these turbulent times.
“Business owners have to find time to mentor and train their successors, which can be time consuming and interpersonal dynamics can complicate matters. A common mistake is believing it must be done alone. The most successful family succession transitions involve plans that are developed by all of the family members who are involved. It builds trust and aligns everyone involved in the go-forward plan. The next generation is a savvy bunch, armed with great ideas and digital proficiencies. Excluding them from the process is a definite missed opportunity.”
MNP’s Jim Rea points out that “The succeeding leadership team may not be ready to take the reins from the exiting leader if they have not been adequately prepared through training and mentorship. There may also be gradual and increased reliance on them to carry out the responsibilities historically handled by the current owner/leader. If the new generation of leaders is not adequately prepared, the business may fail.”
With succession planning, as with most aspects of business, communication is critical and often personal. “The question of who will own the business after owner has moved on is rarely a simple one,” Ibrahim says. “Whether it is transitioned within the family, transferred to non-family managers or sold to an outside purchaser, the decision will likely be based on more than a tax-saving strategy. Communication is going to be everything when planning for business continuity and the eventual exit. The first step is starting the initial conversation. The current and next generation must be open and transparent with each other, voicing their needs and aligning on their views and goals.”
In addition to the unique ripples of Calgary’s triple whammy, the screeching disruption of the lockdown on business is also an aggravating succession planning factor. “The pandemic, as well as the challenges hampering Alberta’s resource industry, have caused a lot of business owners to reassess their current situation,” Rea notes. “How much longer does the owner want to be in the business? If it’s going to take years to recover, do they really have the energy and perseverance to lead the business through more tough times?”
Nadja Ibrahim agrees that the suddenness and the depth of the COVID-19 repercussions continue to impact succession planning. “There are more conversations around the transfer of wealth are happening. It is partly due to being at home with families more during the pandemic and owners having more time to contemplate the company’s future. Should they exit or should they weather the storm? On the flip side, there are companies looking to invest. From a capital markets perspective, there’s no shortage of capital. It all points to a potential increase in activity in the coming months.”
Jim Rea suggests that the business turmoil sparked by the pandemic has also triggered much business planning and strategizing. “In some cases, succession planning may be on hold while the current leader, with more crisis management experience, works tirelessly to keep the cash flow positive. In other cases, COVID-19 has presented an opportunity to reflect on the most important things in life and put in-place a plan that meets both the needs of the current owners as well as the future generations of owners.”