Home Month and Year November 2016 Transitioning and Succession Planning

Transitioning and Succession Planning

The human process


The greatest joy and the most complex and delicate challenge in a family business is … family!

Most family businesses are not in the icon league of the Shaws, the Westons, the Southerns, the Thomsons, the Irvings and the Molsons. A vast majority of family businesses, especially in the Calgary area, are close-to-home, private and personal with hard-earned reputations and success.

Lawyers, accountants, consultants and professional succession planners are unanimous: family dynamics, sensitivities, and individual and private family-member quirks, feelings and emotional considerations are often the minefield of differences between family-owned businesses and other companies.

While the family business is invariably a hard-earned success story and a great source of family pride, it can be a significant, stealth and overwhelming challenge.

“Handing over a family business to the next generation, especially the first succession, is a make or break time for most family-run businesses,” cautions Deborah A. MacPherson, partner, KPMG, tax business unit leader, regions west. “That’s why it’s imperative to approach this situation with forethought, and create a clear succession plan ahead of time that can be implemented when the time arises.

“It doesn’t matter how successful a family business is in one generation if it isn’t able to effectively transfer the momentum to the next generation. Without a good succession plan in place, each time the business passes into the hands of the next generation, it could face failure, no matter how well it was doing previously.”

Regardless of size and the nature of the business, Canadian stats show the cold, hard and indisputable family business risks and trends. Fewer than 30 per cent of family businesses survive into the second generation, 12 per cent are still viable into the third generation, and maybe three per cent are still in business by the fourth generation or beyond.

Research shows many family business failures are invariably traceable to one underlying and common factor: a lack of calm and carefully thought-out succession planning – from the gut-wrenching or inevitable decisions to signing the multi-page documents on the dotted lines.

“The exhilarating part of our business is that most situations are interesting and individual,” MacPherson says. “And a key aspect of our role as consultants is to establish communication and get the conversation going. It’s almost basic reality that, despite tremendous business smarts and success, the founder sometimes just doesn’t want to bring it up. Of course it’s complex but … communication, sitting down, putting everything on the table and talking about it is the most important.”

The personal aspects of transitioning a family business are as vital as the fine print and the business aspects. John Hughes is national leader, private enterprise, and Shane King is national leader, succession services at MNP, Canada’s leading national accounting, tax and business consulting firm. With years of experience and expertise, they have a wealth of suggestions – including how to avoid possible pitfalls – regarding the transfer of family businesses.

“One of the biggest challenges is not understanding that succession is not an event. It’s a process,” King points out. “Communication before, during and even after the process is crucial. Most business people don’t think or plan for what happens after the process.”

“The dialogue takes time,” Hughes emphasizes. “It’s not a do-it-next-week project. It takes years. Part of our role is helping the owners, and their families, understand that it could take one or two years, or longer. A vast majority, 70 per cent or more, of mid-market family businesses don’t have an articulated plan. Most of the details are in the owner’s head.”

“Trends and situations show that, if the business doesn’t start soon enough and transition properly, they leave value on the table,” King says.

Most succession planning experts agree that, on a not-so-management and hard-core business level, one enormous but inevitable speed bump of the family business is the human emotion of letting go.

Before the planning, the strategy and the details of maximizing the momentum comes the dauntingly difficult task of stepping back and handing over the keys, the access cards and restricted login codes – after years of struggle, sacrifice, making deals, building relationships, early mornings, late nights and what seems like several lifetimes of hard work,

It’s not easy. And no management or succession planning professional will pretend it is. But the unique aspects of individual family businesses – regardless the business model, the product or the service – create situations and details that must be dealt with to ensure an effective transition and to maximize ongoing and future success.

“In many situations, successful entrepreneurs have identified themselves as ‘the business’ and they are passionately focused on the legacy they have built up,” says Harold Kunik, president of Mosaic Capital Corporation, the innovative and Calgary-based investment company that owns a solid and diverse portfolio of established businesses operating in the infrastructure, printing, oil and gas services, technology, manufacturing and real estate industries.

“Not to be simplistic, but we urge owners to carefully think through the process. Where do they and the business want to be three to five years from now? And what it’s going to take to find an effective way to get there. Do they plan to be out completely or be part of a transition? Establishing value and price is vital and can get tricky. Many entrepreneurs don’t realize they can enhance the interest of potential buyers, and increase the actual value of the business, with an effective and experienced management team in place and ready to run the business.

“If the business is all about the owner,” he cautions, “then the buyer isn’t buying a business as much as buying a job.”

MacPherson and the KPMG approach recommends a three-part business succession plan. “Review current goals and objectives. Document the succession plan. Create a plan for the transition.”

With all the stereotypical fine print, subclauses and transition details like balance sheets, strategic plans and the stack of terms and conditions, a significant aspect of the process is remarkably basic and surprisingly human.

“No two situations are the same,” MNP’s Hughes adds. “The owner has invested money and life, worked hard, managed the risks and breathed the business. But they only sell once and, for many, it’s simply not part of their skill set. They look for help. Our real value is to set out the options. We’re facilitators. We get them to think it through.”

“Of course it’s complex but things continue to change at such a rate,” Shane King says. “It’s no longer (if it ever was) ‘just hand over the keys.’ The next generation may have to work even harder. But working harder doesn’t mean longer hours. It means working smarter. The important aspect is what value do you create? Not the hours you work.”

Succession planning professionals agree: communication is the key.

The succession plan should include a timeline for how the succession will take place.

Once the plan has been drawn up, the details and contents must be communicated to the family, those active within the business, as well as non-active members. In order for the succession plan to be successful, and afford the company a seamless transition between generations, every family member must fully understand how the succession will work, and what their specific part is in the entire plan.