How to start your family business succession planning
It could be the most emotional conversation of your life: talking to your children about taking over the family business.
“It’s sitting down and having maybe the most raw and open conversations you’ve ever had in your entire life with your father and mother in a business setting,” says Margaret Snell, Business Advisor, BDC Advisory Services.
For parents, the challenge is about setting a date for exiting their business, which they see as their legacy, Snell says. For the adult child or children, they can worry about taking over a “super successful” family business, she adds.
Succession planning takes more than a few months
Five out of six entrepreneurs believe a transition process can be completed in two years or less, according to a 2017 BDC survey. Yet according to experts, a transition can take up to five years to complete and, in the case of a family business, as many as ten, depending on the company’s size and complexity.
Creating a succession plan is a proven way to help minimize turbulence while transitioning the business from one generation to another.
Your children might be in their 20s and you don’t see them taking over until they are 30, but that’s not a reason to put off succession planning in the coming years, Snell advises.
Having a plan in place will ensure the details of the sale have been discussed with your bank. It will also give you time to do estate and tax planning, Snell says. You will also need to ensure that the new family CEO is ready to take over, she says.
5 tips to get started with family succession planning
Baby boomers are the primary owners of Canadian businesses. A significant number are still lagging in family succession planning because they don’t see themselves retiring or their health failing, says Snell, who specializes in family succession planning.
The following five tips can help get the process going.
1. Start the conversation
Make sure that your son or daughter wants to take over the family business. “It’s the rest of their career and life that you are asking them to devote to this company,” Snell notes. “It can happen that adult children don’t really want the job, but do it anyway, and that leaves the parents in a leadership role.”
2. Don’t let it get personal
Family succession can bring out underlying conflict and spill into personal lives. Get professional help, such as a mediator, if needed. “It’s a pretty serious conversation, hence why we suggest that it be mediated in a business setting, to manage all expectations,” Snell advises.
Family counselling may also be needed to help parents let go of their business. “It gets to be quite emotional because this is their legacy they’re talking about. It’s what they have spent decades building. It can take a lot of time to finally come to a comfortable decision on everything.”
3. Your kids may have a different vision
How will your child or children make the company grow once they take over? What do they want to achieve? Your company may go in a new direction to grow, and you may or may not agree with the decision. “It’s not just about continuing the vision of your father or mother,” Snell says.
4. Say No to a family discount
Your sale price should be fair market value, even if you’re selling to your child or children. It shouldn’t be sold at a discount because the money is usually needed for retirement, Snell says. ”The only difference is that you might set it up so that you will be paid over many years instead of getting a lump sum.”
5. Respect the new family CEO
The new boss is not the old boss. “Ideally, if you have done succession planning correctly, you should step away entirely,” Snell says. By staying on either as board chair or in some other capacity, it still allows for meddling and can prevent growth from occurring under the new generation’s decisions. Your family successor may redefine the CEO role and that’s something you need to accept.
Also on your to-do list
Snell says it’s important your human resources department is ready to bring on other members of your senior management team to work with the new family CEO. Some of the senior management staff may retire with you, leaving positions to fill.
Your HR team can also help your successor(s) prepare to take over the company. Does your child or children need to take any course to lead the business? Do they need mentoring or to shadow an employee to learn more. “If your successor needs a lot of development that could take another year,” Snell notes.
Not enough buyers
Snell says in a number of cases, there is no family succession. The result is that businesses will end up closing or selling to foreign owners to remain open.
“It’s terribly sad,” she says. “It’s a job loss, it’s a resource loss, it’s a brain drain, a knowledge loss and it has a financial impact.”
Almost 60% of Canada’s small and mid-sized business owners are aged 50 or older, nearly double the proportion of the overall workforce, indicated the 2017 BDC study.
Four out of 10 entrepreneurs are likely to leave their businesses in the coming years, the study indicated. Of these, only a quarter expect to transfer the business to a family member, while more than half intend to sell or transfer their business to someone outside their family. Just one in five expects to wind down the business and sell its assets.