Written By: Michael R. Henry, Esq.
Houser Henry & Syron LLP
Sooner or later, every business leader hands over the reins. But for founders and owners of family businesses, managing a successful transition is both difficult and risky. Whether you’re planning to keep your business in the family or to usher it in a favoured direction, here are some important succession considerations.
Family business owners have three basic options when exiting a business:
Whichever option an owner chooses, the chances of success are greatly improved if the business follows a clear succession plan. Yet a 2005 Canadian Federation of Independent Business (CFIB) survey reported that just over one-third of small business owners have a succession plan, and less than 10% have a formal plan.
Among the many benefits of succession planning are the opportunity to maximize the sale price and owner’s retirement income, to optimize personal and business tax planning and to enhance financial stability for the business.
But succession planning also has its challenges, often reflecting the complex personalities of entrepreneurs and equally convoluted family dynamics. Many owners are unwilling or unable to give up control and/or to decide on a successor. Entire families, including those not active in the business, often depend on the enterprise to provide incomes far above those attainable on their own.
In these situations, mere discussion of succession is difficult, let alone reaching a fair decision and then tackling the equally daunting task of grooming an internal successor or positioning the company to be attractive to an external buyer.
A solid succession plan, developed using an inclusive process, can help resolve many of these issues.
Experience with several family businesses suggests the following principles for successful succession planning:
Selling his or her business to an outsider is an owner’s best option for maximizing value. Sadly, most family businesses are eventually sold in distress or bankruptcy. Usually this is because the family lacks either the know-how or discipline (or both) to groom the business for a successful sale.
According to the Canadian Institute of Chartered Accountants, buyers are attracted to businesses with most or all of the following attributes. Even if your plan is to transfer your business within the family, these items provide a helpful checklist in determining a realistic value:
A succession plan is equally important for a business being transferred within the family. Especially challenging in these cases is selecting and grooming the person who will take over.
It can be difficult for a founder to stand aside and allow a family successor to take charge and prove him or herself. Family members will often tolerate a level of interference unacceptable to an outsider. Old rivalries and jealousies can interfere with an orderly process. And, of course, being clear-eyed about the competence of a successor is especially difficult when the individual is also a son or daughter. The best advice in this case is to involve trusted outside advisors.
Another challenge in family successions is dealing with all the closing details an outside buyer would require. Although a family successor might not insist on these items, fairness demands that he or she starts with as few loose ends as possible.
Examples of these items include:
Whatever an owner’s intention for transferring a business, starting early to develop a clear succession plan is the first step. It’s not easy—as the fact that most owners have not made formal succession plans demonstrates.
But with good accounting and legal advice and specialized coaching as needed, successful succession planning can be accomplished.
And the payoff for success is huge
About Houser Henry & Syron LLP
For over 75 years, Houser Henry & Syron has helped entrepreneurs and private companies of all sizes grow and prosper. We provide a range of business law services – from assisting with day-to-day legal requirements to providing strategic counsel on highly complex transactions. We are uniquely positioned to provide high-quality legal advice, tailored to the specific needs of our clients, at a reasonable price. Read what our clients have to say about working with our firm.
This publication is taken from a 2010 HHS presentation on succession planning. It provides an outline of issues for business professionals to consider. The content should not be taken as legal advice. It is not exhaustive and is subject to change. Please consult with an HHS lawyer for information or advice specific to your situation. © HHS 2013