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Succession planning for family businesses

Succession planning for family businesses

Posted on: December 14, 2011
Author: ATB Business & Agriculture

Family businesses are at the very heart of the Canadian and Albertan economy. According to the Alberta Business Family Institute, family businesses generate approximately 60 per cent of Canada’s gross domestic product, employ over six million workers in Canada, and provide 55 per cent of charitable donations. That’s a major contribution to Canada! And it all begins with family.

But far too often, it ends with family too. 70 per cent of family-owned businesses fail before they’re passed on to the second generation. 88 per cent fail before reaching third generation, and 97 per cent before the fourth generation takes over. Yet one of key reasons that family businesses are developed is to provide opportunities for the next generation. They’re also a way of creating and preserving family traditions and lifestyles. So what’s going wrong?

In many cases, problems arise when it comes to succession. There are two main reasons: There is either no qualified or interested successor within the family, or there is no succession plan. If there’s no suitable family member, you can still make sure that the value of your business survives and can be passed down to benefit your family. But without a succession plan, your business is at high risk of failing when it’s time for you to step aside. Then, everyone loses.

There are three basic steps to family succession planning:

  1. Determine whether or not succession within the family is likely to succeed.

    The main questions here are:

    • Are my children capable of running the business?
    • Are my children interested in running the business?
    • If there’s more than one interested and capable child, do they share a common vision for the business and a strong trust in each other?

    Some of these questions may seem obvious, but have you actually asked your children if they want to succeed you? And are you confident that they’re being truthful and not just telling you what you want to hear? This process can take an incredible amount of objectivity and communication.

    You may need to decide what to do with your business if there is no family successor.

  2. Develop your succession plan.

    Succession plans are built around the unique characteristics of your family and your business, but here are some elements that are common to most successful plans:
    • The owner is committed to the major changes needed to implement a succession plan.
    • A single successor is clearly identified. While shared succession can work, it’s much more difficult.
    • Consideration is given to how family members other than the successor will be treated.
    • The successor has a clear understanding of their current and future role in the business.
    • Succession is viewed as a process, not an event.
    • There is a written succession plan and detailed business plan.
    • The succession plan is communicated to everyone who is impacted by it: family, employees, key customers, business contacts, etc.
    • The successor assumes increasing involvement and responsibility in the business, while the current owner decreases their involvement.
    • There is a clear delineation of the roles and responsibilities of the owner and the successor during the implementation process.
    • The plan includes a timetable that identifies dates for the retirement of the business owner, transfer of share ownership, and transfer of voting control as well as other significant succession events.
  3. Monitor the implementation of the plan.

    Having a plan is not enough. You have to make sure that the plan is working.

    • Schedule regular review sessions to evaluate how well the succession plan is working.
    • Make changes as necessary.
    • Coordinate your succession plan with your personal tax planning for retirement and estate distribution.

Being prepared, and putting in the work up front, can dramatically increase the odds of business success after succession. And that’s a wonderful thing to do for your family!