Family Business Succession Guide
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Transferring your wealth creating potential

Many baby-boomers—those born in the mid-40s to 60s—who own family businesses, will move into retirement over the next two decades. A delicate process referred to as "succession" or "business continuity" planning can lead to relinquishing their leadership roles while transferring their businesses to the next Family Business Succession Guidegeneration.

In general, succession involves developing a strategy to meet these criteria: a) fairly distribute business assets b) transfer the power and authority associated with leadership from the senior to next generation, and c) cultivate family harmony. The successor then becomes the new steward of the family legacy. Business successions that succeed are in fact rare—70% fail to achieve business continuity from the founding generation to the next.

What are the pitfalls of succession? Various circumstances can make succession planning either difficult or impossible.

  • The right successor quits A son or daughter may labour in the family business for years. Parents may make idle promises, never committing to follow through on a concrete succession plan. Consequently, a bright young potential successor may decide to leave the family business to pursue an alternative career
I think one's feelings waste themselves in words; they ought to be distilled into actions and actions bring results. — Florence Nightingale
  • Business succession isn't viable Perhaps there is no child- successor or executive available or willing to take on the responsibilities of your firm. There may be changing circum- stances such as a new competitor, loss of huge contracts, or the product or service is becoming obsolete.
  • You might want to sell The success of the business is not necessarily based on flourishing over successive generations. It might even be achieved by selling the company at the right time to create investment wealth. Or unexpectedly, a competing business or a group of executives may offer to buy it.
There is a time for departure even when there's no certain place to go. — Tennessee Williams
  • No succession plan Without a plan, there is no defining strategy to carry out the transition of the business; and good intentions never seem to come to pass. The following will explain why many owners fail to plan.
  • Founder-owner's fantasies or fears One may hold on to a company because it has provided income for years, offering a means to control one's destiny. Much of the owner's self- identity may have evolved out of the business. Like King Arthur who ruled old Camelot, the owner may be oblivious to any future problems in his kingdom.
  • Power struggles with partners There are situations that incite resentment such as when one co-owning brother wants to retire, such as: He requests less business involvement; less investing of the company profits back into the company; and maybe he wants his son to take over. Resenting these new ideas, a younger brother may want his two sons to have equal ownership with their cousin, but they are not competent. Bickering can prevent a succession process and undermine the business.
'Tis the sorest of all human ills, to abound in knowledge and yet have no power over action. — Herodotus
  • No retirement goals Many founder-owners have no interests outside the business; their work is their life, and they have no intention of ever retiring.
  • Can't face mortality Many owners (including sensitive children) find it hard to discuss the issues associated with aging, loss of health or death. Entrepreneurs, who have carved out their own destiny, may believe they are somewhat immortal, even denying real health risks when faced with a heart bypass or a terminal illness.
  • Territorial dominance The urge to protect one's turf is revealed when his own children or key executives intimidate an owner in the business.
  • No trust of successor's skill It is often hard for parents to see their children as capable successors. They may criticize even their good efforts. Such distrust of his heir apparent, seriously incapacitated Henry Ford's own son for life.
  • The owner dies In some cases the owner dies, even before considering succession planning, leaving the responsibility to a spouse or child to conclude or abandon.
The real risk is doing nothing. — Denis Waitley

Empower The Process of Succession

  • Establish appropriate forums Family retreats can allow the family to get away to discuss the issues that will promote the continuation of a profitable company. Further, regular meetings can develop teams and assign tasks to the most promising successor candidates to test their mettle. Include all the constituent players: the owner(s) and spouse(s); the owner's children (including nieces or nephews) who are involved in the business or are shareholders; key executives; and once the successor is chosen, the following professionals:
  • Corporate tax accountant To value the business and assess capital gains tax liability; and to recognize if an estate freeze makes sense. Have the company financials explained to the successor.
  • Corporate lawyer To install buy-sell and share redemption agreements, to advise all parties of various legal risks, and assess all historic agreements to see if they need to be changed in light of the succession.
  • Succession consultant These specialists can consult and quarterback the sessions through the entire planning process, keeping it on track.
  • Insurance specialist There are various insurance solutions to mitigate succession planning risk.
There can be no real communication without a reciprocity of ideas.— Ernest Holmes

Select the right successor

  • Look for leadership skills The selection of the right successor is vital as a poor decision could mean the demise of the company. The most suitable candidate will probably have leadership potential made obvious by: willing and capable followers; care for employees; decisive self-confidence; ability to plan strategy and deliver on promises; amiable interaction with peers and colleagues; integrity; ability to inspire others with a vision; skilled at listening to others and can resolve conflicts; and holds others accountable, encouraging them to meet the company's objectives.
Man does not simply exist, but always decides what his existence will be, what he will become in the next moment. — Viktor Frankl
  • Whose destiny is it? Some parents believe that the business was developed for a certain child. But perhaps this child has his/her own alternative career-dream. If a son or daughter is bribed, or cajoled into becoming a successor, hard feelings may arise later when the realization of lost opportunity to be an artist, a doctor, or a zoologist sets in. During mid-life he/she may bitterly resent his/her parent(s), live unhappily and may subconsciously sabotage the company out of revenge.

From the beginning, try to find a contingent successor, as no one knows what the future may hold—change is part of life.

Grooming the Successor
  • Allow the potential successor to get involved in managing important team projects. Increase responsibility over time. Allow independence and don't interfere; make room for mistakes.
  • Consider visiting other family businesses that have effectively transferred their business through continuity planning.
We do not suddenly become what we do not cooperate in becoming.— William J. Bennett
  • Establish mentors and advisors for the successor Consider establishing a board of directors if one is not in place. Implement leadership training programs. Protect Your Assets During Succession
  • Cover your key persons Use life and disability insurance to cover the cost of replacing an owner, successor, contingent successor, or a key executive in the event of death or disability.
  • Family Business Succession GuideEnsure debt redemption Life insurance proceeds can pay off bank loans and other liabilities—paid at the time of the owner's death. Also, consider critical illness insurance, which would pay up to 2,000,000 if the owner were to become critically ill.
  • Provide income replacement insurance Disability insurance benefits can provide income to an owner, successor, or key executive, if disabled over certain periods of time. Income paid to a disabled insured, places less payroll burden on the company.
  • Fund a buy-sell agreement Life and disability insurance proceeds can fund a buy-out upon death or disability, where there are two or more owners in a business (effective for current owners or succeeding generations).
  • Fund a stock redemption Where other members of the family own stock, you can buy life insurance on the owner, and make the successor the beneficiary. This will provide cash upon the owner's death to allow the successor to buy the stock of say, sisters or brothers, based on a pre-determined formula related to equalizing the estate.
  • Fund capital gains tax liabilities Where large capital gains will impair the company or deplete personal assets, or disallow a bequest of a cottage or other asset, use a permanent life insurance product, designed to pay off all capital gains liabilities.
  • Create capital to equalize your Estate Where one child will inherit the company, life insurance can be purchased on the owner and/or spouse, to pay the non-involved children a tax- free cash benefit in predetermined amounts, clear of probate. Avoiding resentment, you can inform these children that they will be treated fairly in the over-all estate.
Let him who would move the whole world, first move himself. — Socrates

Maintain relationships during succession

  • Keep your banker informed What would your banker do if something happened to your firm's current owner? Who else knows of the loans or the true financial status of the company? Introduce your successor (and the succession plan) to your banker and go over all the liabilities of the company.
  • Sustain client relationships Introduce your successor early on, to your key clients. Perhaps host client appreciation events.
  • Harmonize the successor with the constituency The key players will help the company survive, including: key suppliers; influential family within and without; shareholders whom you hope will seek minimal dividends in lieu of future growth; employees, especially those holding company stock; and the key executives.

Family Business Succession Guide

Diversify sources of retirement income

  • Use an RRSP Avoid investing all of your profits into the business with disregard to developing your own independent retirement resources. Thus you will not need to rely on the company to create an ongoing retirement income, though you may indeed receive dividends and income from the business. Consider purchasing segregated funds, separating your personal assets from the company, while reducing exposure to creditors.
  • View business assets separately They are a legacy to be left to your successor(s), but insure that the legacy will have sufficient funds to survive during and after the succession. Drawing from RRSP/RRIFs can reduce the need to depend on business income (or dividends).
I believe that every right implies a responsibility; every opportunity, an obligation; every possession, a duty. — John D. Rockefeller

Note: Succession planning is complex, so make sure that you involve the professionals mentioned in this publication.


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