Business can be challenging, exciting and rewarding. It can also be, as many small business owners know, notoriously unpredictable. It is smart business to be prepared.
Canadian business stats show that while 72 per cent of Canadian small business owners plan to sell or transfer their business in the next 10 years, only nine per cent have a formal succession plan, 41 per cent have an informal plan and 51 per cent have no plan at all.
For most small business owners, a difficult and multifaceted decision is timing.
“Our most recent succession report indicates that 31 per cent of business owners did not know when to start developing a succession plan,” says Corinne Pohlmann, senior vice-president of national affairs with the Canadian Federation of Independent Business (CFIB). “The key indicators for the timing for exiting a business will look different for each individual business owner.
“For some it could be a new business opportunity or an ongoing lack of profitability; for others it could be a doctor’s recommendation to take time off or meeting a potential future successor.” She emphasizes the most common reason (81 per cent of Canadian business owners) is retirement. “While only nine per cent have a formalized succession plan, 62 per cent of owners say they rely on the sale of their business as a source of retirement income.”
According to Lynne Fisher, national team leader of ExitSMARTTM at MNP Calgary, while the standard reason for a succession is the age of the owner, there are also some other factors – including the loss of key employees. “When they aren’t seeing an opportunity to buy in, they are not aware of a plan for succession and they are concerned about the future of the business, they will move on or be pursued by other employers. Strong talent can work anywhere.”
She also mentions a delicate factor that can come into play if the majority of the leadership team – including the owner – are north of 55. “Maybe the owner’s and the leadership team’s connections with customers and suppliers isn’t what it used to be, leaving the business vulnerable. Or the business is growing at a rate slower than industry rates and struggles to be competitive.”
The perception surrounding succession planning (detailed and intense huddling with accountants, lawyers and tax strategists) is often a contradiction of the business cliché: “it’s not personal; it’s only business.”
Many (spoken and unspoken) aspects of succession are entirely personal.
“Some business owners define themselves by the business they have built and the teams they have led,” explains Jim Rea, family enterprise advisor with MNP Calgary. “The transition can lead to a loss of identity. Some owners have issues with a loss of control, often surprised by how quickly their authority is replaced by the successor’s authority. It can lead to feelings of unworthiness and even embarrassment, seeing their staff, who moments ago were devoted to their leadership, now take the direction from the ‘new team.’
“And it’s not uncommon for the founder to unintentionally meddle in the affairs of the business long after their authority has been replaced, sometimes causing rifts between management who are still loyal to the founder and those following the new leader.”
Most succession planning experts agree that common speed bumps of the transition process are ultimately solvable, but having a plan is a critical must-have for today’s businesses. “Creating a formalized succession plan will help minimize the costs of time and money spent on the transfer of ownership to a successor, ensure the future financial stability and value of the business, and continue to provide stability to employees,” Pohlmann adds. “Most importantly, it will ease the transition process for all involved when the owner decides to leave the business.”
Planning – and timing – is crucial. “Ideally, the succession process should begin at least five years before an owner plans to exit the business,” Rea cautions. “The ease of the transition will be directly related to the efforts put in during the years leading up to the transition. Has the governance structure been formalized? Are processes functioning efficiently so that the business operates effectively when the owner is absent? Are the future leaders being trained and mentored in all aspects of business ownership and management? Has a family council been created to guide family decision-making and to deal with issues of the business family outside of the operations of the family business?”
With some quirky exceptions, there are three basic ways to pass a company to the next generation: selling or transferring to family members; selling to employees; or selling to a third-party buyer. Each option has different considerations.
“Selling to a family member is often desirable because there is more time to groom a successor making the transition smoother,” Pohlmann notes. “It also allows a successor more access to the past owner, can bring more stability for employees, and operational business tax reporting can stay on the same timeline.”
However, it is also the transition that gets clouded in the personal. “Barriers to family succession can include difficulty choosing the best successor, the previous owner not letting go of the business decision-making, conflicting business visions of family members, or not being eligible for tax exemptions such as the lifetime capital gains tax exemption.”
With all its potential danger zones, MNP’s Lynne Fisher suggests the many pros of family succession outweigh the cons of selling. “There is the huge matter of legacy, maintaining family ownership for future generations and devotion to employees – rewarding and caring for those who helped build the business. Besides, in today’s market, there aren’t as many buyers. And those who are around, are looking for a bargain. So, transitioning to family or employees is a better option to harvest value. A transition allows for more control over timelines for exit – an owner can exit gradually on their own terms.”
Jim Rea agrees. “Selling to a third party is stressful and subjects the business and owners to intense scrutiny during the due-diligence process. Successors inside the business are more comfortable with the history of the business, having lived through it, and are usually more tolerant if certain processes are not in accordance with the high standards demanded of a consolidator or private equity firm.”
He underscores some undocumented possible wrinkles of a family succession. “A concern, especially among parents who know the history of their children’s rivalries and resentments, is putting siblings in supervisor and subordinate roles. It can often lead to difficulties which impact the success of the business.
“In many cases, successor family members have agreed to take on the leadership role on the condition that they will be able to implement changes that may have been stifled by their parents. In these cases, staying on as a mentor may lead to disagreements over strategic changes and increase family conflict.
“Statistically, successors in the family business are often well into their 40s or 50s and resent the fact that their career has been under the control of their parents, when most of their colleagues have been succeeding on their own for quite some time,” Rea adds.
“A clean break may be needed to give them the feeling of control over their own destiny. The transfer of full control can also spark new passion for the business and allow them to make their mark and contribute to the family legacy.”