Insights
Periodic insights from our Investment and Private Client Teams on a broad range of investment and advice-related topics
Published by the Private Client Team at KJ Harrison Investors – Philip Zappacosta, Private Client Analyst
To put it bluntly, owning and operating a business (or businesses) is a lot of work. For many family business owners, managing staff, dealing with customers and suppliers, developing strategy, growing the company—and just keeping the lights on, so to speak—are not full-time jobs, but all-time jobs. The entrepreneurs I have been lucky enough to encounter in my life, including those in my own family’s business, take justifiable pride in being their own boss. That is great, but let’s not kid ourselves: That boss can be tough.
Perhaps this laser focus on the business is one reason that many—perhaps most—family enterprise owners fail to spend enough time thinking about the long-term future of the company and, by extension, of the family. Running a business can seem all-consuming and, given that most independent owners love what they do, it can be tempting to keep one’s proverbial nose to the grindstone and perpetually leave planning to another day.
But here is the reality: the future is always around the corner. Smart entrepreneurs are always trying to look around that corner—and then taking concrete steps to get where they want to be.
Nowhere is this more important, arguably, than in succession planning. At its root, succession planning is the process of, first, identifying the people who will take over from you when you exit the business and, second, preparing them and yourself for the transition. Business owners with a long-term outlook recognize that it is a critical part of ensuring the continuity and success of family-owned enterprises across generations.
Owners overwhelmingly want to pass along their businesses to family members. One recent survey by U.S.-based Brown Brothers Harriman found that nine out of 10 private business owners feel it is important that their business remain in the family for the next generation; another survey, of Canadian business owners by KPMG, reports that four in five “dream of transitioning the business to a younger generation within the family.”
Yet there seems to be a disconnect between dreams and action when it comes to succession planning. A global study commissioned by HSBC last year found that two-thirds of business owners have no succession or exit plan. Here in Canada, according to the Canadian Federation of Independent Business in a recent report, only 9% of business owners have a formal succession plan in place.
Certainly, there can be challenges and roadblocks to sound succession planning. One of the most significant is often the owner’s deep connection to the business. Not only do they rely on the business for their income, but they their identity and sense of self-worth are intimately tied to the enterprise they have founded and built—so much so that they do not wish to contemplate, let alone plan for, the day when they leave it behind.
That runs the very real risk of leaving it all too late. Life events—death, divorce and disability among them—can sneak up on any of us, and they can force a business owner into a sale or dissolution of their company. These forced exits rarely produce successful emotional or financial outcomes for owners or their families. However, a robust succession plan that takes into account such risks can go a long way towards forestalling the most adverse impacts. One can’t predict the future, but one can prepare for it.
Another potential challenge to transitioning the business to other family members is the family members themselves. Sometimes, owners think that their children lack the experience or ability to be successful running the family business; the KPMG survey of Canadian family business owners found that 71% did not feel that the next generation was ready to take on the responsibility of leading the company into the future. Other owners may not have confidence that their children, however capable, will take the company in the right direction; in the Brown Brothers Harriman study, more than a third reported that they have encountered family members who have differing values concerning the company’s mission.
Again, a succession plan can address those concerns. Remember the second step in the planning process I mentioned above: preparing the successor for the transition. Once you have identified the individual or individuals to whom you wish to transfer the business, it is often imperative to educate them about the values, business processes and operational requirements of the firm. This education can be formal training at an institute of higher education; some business owners will also enlist the services of business or leadership coaches. Others have required their children to get real-world business experience at another company—sometimes even at a competitor—to round out their skills and their perspective.
A third challenge may occur if the would-be successors simply have little or no interest in continuing in the family business. Of course, whatever the desires of the founders, there is nothing wrong with the younger generation wanting to follow their own paths. The trouble occurs when the expectations of the older and younger generations are misaligned. If an owner simply assumes that their child will want to continue the family business, it is a recipe for disappointment, nasty surprises and family strife.
Communication between the generations, therefore, is key. The good news is that the process of succession planning can facilitate that. Succession planning is in part a journey of discovery, and if it reveals that the next generation does indeed want to go their own way, your plan can determine the appropriate alternative—for example, a transition to employees or the sale of the business to a non-family member.
A comprehensive plan also addresses what is often a big concern for business owners: their own liquidity after they exit the business. There are several strategies for efficiently monetizing equity without stripping the company of capital—an estate freeze, for example, or a partial sale of the business. Importantly, however, since most owners wish to retire after their exit, these strategies need to be explored in the context of sound retirement planning. As my colleague Jason Heath, an advice-only Certified Financial Planner who works with KJ Harrison clients to build strategic wealth plans, points out, exiting owners should set clear goals and consider corporate and personal assets and liabilities, income and expected future income (from such sources as dividends, RRSPs and TFSAs), and expenses and expected future expenses. All of these may be impacted by a transition of a business, of course, so ultimately a succession plan should be built around your retirement goals.
Finally, a well-thought-out succession plan should be actionable; that is, it includes a timeline and a strategy for implementation. This points to the importance of starting early. Some of the processes required of a successful succession—for example, successor education and training, or the development of tax-efficient corporate structures—can take years to bear fruit. And every day an owner delays planning for a succession raises the risk that an unforeseen event will force a transition on them.
At KJ Harrison Investors, we understand that family business succession can be a complex, perhaps even frightening subject for many business owners. But there is no need to go it alone. The input and guidance of a trusted, experienced wealth advisor can help owners identify and mitigate the risks, navigate often-complex family dynamics, and ensure a successful and financially secure future for their businesses, for themselves and for the next generation.
Contact us by email to learn more. Or call us on 416.324.8833.
