Succession Planning For Family Owned Businesses

July 16th 2012
Succession Planning For Family Owned Businesses

Succession Planning for Family Owned Businesses – START NOW


Do you know that over half of Canadian family owned businesses are expected to pass on the ownership down to family members, employees or third parties within the next five years?  However according to a recent study by KMPG Enterprise and the Canadian Association of Family Enterprise over 80% of these businesses have no formal succession plans in place to manage the process. Most business owners are usually totally engaged with running their day to day operation to have the time to consider developing a succession plan, find it too complicated or are “snowed under” by the work required to tie together the future for their business and family. 

Planning and saving for retirement is extremely important.  Succession plans take a significant amount of preparation and thought which should happen now.  As a small family business owner, you are reaching the stage in your life where the years of hard work should now be rewarded to the fullest.  However one of the hardest things to recognize is that you have to give up your “responsibilities” to someone else and the decision-making process that goes along with it.

This short article attempts to provide clarity about succession planning, what it is all about and what steps one should take to put a plan into place for the transition from ownership to retirement.


What is Succession Planning?


Succession planning is a “roadmap” that provides direction on the future ownership of one’s business as well as defining one’s personal goals and financial needs for the future. A successful plan will strive to provide the assurance that the business will continue to prosper and one’s personal goals and financial security are achieved.


Family Communications


When starting to put together a succession plan, it is important to first meet with your wife, then family members who may work in the business, then with key people in the business to talk about the various steps involved in the planning process.  These types of meetings can create trust, reduce stress and provide ideas on options to sell or transfer the business and how to plan for retirement.  Should the business be kept in the family, should you still maintain some involvement in the business, will the family still have any share ownership, what is the best time to sell, how do I value the business.  What about estate planning…when should I retire, what income do I need, how do I structure my will and how should I leave my estate to the family? 


The Need for an Advisory Team


As the process can be “overwhelming” to most business owners, it is important that one establishes a team in going through the various steps of the planning process.  My suggestion is to first select a facilitator or mentor who you trust and can work with you to provide guidance, lead the planning and make sure your best interests are looked after.  Other candidates of the advisory team could include a lawyer, accountant, tax specialist, family member, financial advisor and members of your management team.  Each of these professionals has their own expertise and self-interest, therefore it is the role of the mentor to “quarterback” the team and put all the pieces together for the final succession plan.


Planning to Sell Your Business


There are three basic steps in preparing for the sale of your business.  First, it is important to develop a business plan that outlines its vision and direction for the future.  The second step involves considering your various exit options in selling your business.  This is followed up by establishing a value as to how much your business is worth.

A well documented business plan is critical as it outlines the current status of the business and it future goals and direction.  In developing a plan, a strategic assessment is a good start as it helps to identify the business’s strengths, weaknesses, opportunities and threats and in turn can identify specific priorities and needs on how future goals will be achieved.  Critical in this exercise and to potential investors is to provide current financials and how these will change over the next 3 to 5 years.  

Once a strategic plan for the business is in place, the next important step is to develop a strategy for exiting your business and the mechanics for the sale or transfer of your business.  Do you want to keep the business in the family and who would your successors be?  What about restructuring the business? Selling to current management or employees is another option as they have a vested interest in seeing it prosper.  Selling to a “third party” may be another option however this option may take more time to find likely candidates.

Finally, you need to determine the value of your business because the value will be the basis of negotiating.  You need to make the right decisions on the time to exit, how to structure the sale and who can afford to buy the business.  You will need to leverage some of your advisory team expertise regarding valuation and tax issues.  Valuation is not an exact science.  Some methods of business valuation include valuation of the company’s assets or projected cash flows or revenues.  Most investors prefer methods based on cash flow earnings.   


Planning Your Retirement

With the decision made on how to exit your business, a successful retirement plan should define your personal goals and that you have the financial security in place to do so.  You’ve worked hard all your life at the family business…now is the time to ensure you are going to live as happily as possible and do what you want to do whether it is golfing, travelling or just relaxing.

To accomplish your personal retirement plan, it is best to work with your advisors to get your equity out of the business and ensure a level of income to meet your goals.  Decide on a time line for retirement, ensure your wills and power of attorney’s are up to date, for estate planning, decide on how you want to leave your assets to your family, update your insurance and ensure your assets and investments are secure and protected from taxation, administration fees and inflation.   If you still have share ownership in the business, to know and outline how this ownership will benefit the family after your death.


It’s Up to You to Start Now


 As a small business owner, you are responsible for planning your retirement and ensuring that your business continues to be successful.  This is a process that could take a long time, from weeks to months depending on people’s availability.  But to make the right decisions, you need the time and best information from people you trust and respect to be comfortable throughout the whole process.  If you haven’t already done so, now is the time to take action and start developing your own succession plan.