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Business Succession

Plan it properly and your company could last for generations.

by Richard S. Niedermayer

 

Business succession planning involves the identification of an appropriate exit strategy for the owner-manager of a business that addresses the management of the business, the financial situation of the owner-manager, and the personal/family concerns of the owner-manager and other family members. Succession planning is broader than estate and tax planning. The actual business is the largest asset for most owner-managers, and an appropriate succession plan can preserve that value. Regrettably, only 28% of family businesses have a succession plan. Perhaps as a result of this lack of planning, only 32% of businesses successfully transfer from the first to the second generation and only 10% to 19% survive from the second to third generation.
 
The Succession Planning Process: A Multi-Step Approach
 
A formal business succession planning process usually involves working with a succession planning consultant who acts as a facilitator. The consultant focuses on fact-finding and family issues rather than on estate and tax planning issues. It is the consultant’s role to meet with the client to understand the structure of the business, with family members to learn their goals and concerns, with their advisors (such as the corporate solicitor) to identify potential succession, financing, estate and tax planning issues, and then to prepare the succession planning deliverables and review them with the owner-manager and his or her family. The deliverables in a succession plan can include the following items:
 
•     Contingency plan: This takes effect in the event of an unanticipated death or disability of a key stakeholder to stabilize the business and give the family peace of mind (i.e. who would immediately assume responsibilities; what external support is available for the successor; who are the key contacts; where are important documents located, etc.).
 
•     Issue identification summary: A personalized document that summarizes the issues identified through individual meetings and experience with other families in business that serves as a foundation for discussion in a facilitated session (i.e. what are the short- and long-term objectives of the stakeholders; what are the ownership and management succession planning objectives; are appropriate governance structures in place, etc.).
 
•     Family participation plan: This outlines guidelines and manages expectations for family employment in the business (i.e. who is eligible to join the family business; what experience or education is required; how will family members be compensated, etc.).
 
•     Forward work program: This is based on the issue identification summary and follows from facilitated sessions to identify actions and the persons responsible to address those issues.
 
What Are the Succession Options?
 
A true succession plan involves naming a family member or members as successor—generally the preferred outcome to the process. To the extent that certain family members will be participating in the business on a go-forward basis and others will not, the owner-manager will likely consider estate equalization through other assets for those non-participating children. Other outcomes to a succession planning process when no family member is identified as the successor include appointing a professional manager (whether through a management buy-in or as a non-equity manager) or sale of the business in whole or in part (which creates immediate results, but which caps the owner-manager’s financial interest in the business and eliminates the possibility of future family involvement).
 
What Can Owner-Managers Do About Succession Planning?
 
The most important thing owner-managers can do is to start planning early. The sooner the process starts, the better the outcome will be. Owner-managers should encourage intergenerational teamwork, involve family and colleagues in their thinking and in the process itself, take advantage of outside advisors, establish a training/development process for family members, plan for retirement, and decide on a retirement date and stick to it. A formal written succession plan encompasses all these issues.
 
 
Richard S. Niedermayer  rniedermayer@smss.com is a partner in the Halifax office of  Stewart McKelvey,  www.smss.com, specializing in estate planning and owner-managed businesses.

 

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