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Value Series: Part Three

Family succession a tricky proposition Add to ...

Passing a business on to the next generation through a succession plan can have its rewards, both financially and emotionally. But only about 30 per cent of businesses make it through the transition, according to the Business Families Centre at the University of British Columbia's Sauder School of Business.

"It's not a given that the business is going to survive," said Theodore Homa, a managing partner for the consulting arm of the Business Development Bank of Canada (BDC). "For the founding member, this is like their child. They've toiled, they've sweated, they've struggled to make payroll, they've fought with competitors. The last thing they want to see is the business to fail."

Because of the discouraging statistics and the high number of business owners who are preparing to retire in the coming years, consultants such as Mr. Homa have identified key factors that can help businesses make a smooth and fruitful transition.

Choosing and grooming a successor can be the most crucial aspect of the transition, he said. Owners are forced to compare their children's capabilities and interest in the business against current management's.

"When it comes to a family buyout versus a management buyout, you assess their management capacity," Mr. Homa said. "Who's capable of taking over the business? Who has the desire?"

Most successors will have gaps in their experience or leadership skills that will need to be filled. Dr. Pramodita Sharma, a professor at Concordia University's John Molson School of Business, said the likeliest candidates to succeed are those who have both experience within the business they're taking over, as well as exposure to competing enterprises.

Although she wasn't planning on it, Marcia Mayhew, the 33-year-old president and CEO of her family's office design and furniture business, gained that combination of experience that helped in her ascent to the leadership role at Mayhew & Associates. Ms. Mayhew grew up in the company, working after school and during the summers at the business, but when she graduated from university, she decided to work at a large financial institution in a marketing management capacity.

"I wanted to prove that I could make it on my own," she said.

After a few years she returned to Mayhew to work in marketing. Five years later, her parents asked whether she was up to taking over the top leadership role. By this time, she'd developed a keen understanding of the business and an ambitious commitment to expanding it. She took the job.

Although Ms. Mayhew had solid foundations in business, she built an advisory team around her that could fill the gaps in her management skills. Her parents served as mentors.

Consultants agree that building both internal and external advisory teams is fundamental to a transition. Harley Mintz, a tax partner with Deloitte's private company services group, said the most common gaps in management are in financial experience and marketing, so rather than trying to scramble to acquire those skills, many successors hire a chief financial officer or a vice-president of marketing.

It's important also to build a network of objective advisers. Along with the tax and estate-planning experts who will assist with the transfer of ownership, organizations can assist entrepreneurs in assembling a team that doesn't have emotional ties to the company. The Canadian Association of Family Enterprise (CAFE) organizes support groups that bring businesses in transition together to share successes and failures.

"We recommend to all of our family business members to join a peer advisory group," said Lorraine Bauer, interim CEO of CAFE. Business owners who are decision makers meet with other, non-competing owners to share information. "It's based on peer advice and peer sharing," she said.

Ms. Mayhew joined CEO Global Network, an organization that brings CEOs of various industries together. Members share best practices, and mentoring and development opportunities are offered through the network. "I'm a person who likes to reach out and get as much information as possible, and then decide how to move forward with all of that information," she said.

Even though Ms. Mayhew excelled at collecting information, she said her family's communication skills could have been better - and discussions could have happened earlier. Because succession is such a long process and can be an emotional one, consultants agree that entrepreneurs need to communicate their concerns, ask questions and make their goals known if they're going to improve their chances.

"Say a father is looking at his options," Mr. Mintz said. "He might think one child will come into the business. What about the other two children? He might think they're not interested, but the father has never had that conversation."

Frank discussions give entrepreneurs a chance to air grievances or concerns that can get in the way of a company's chance of succeeding in the hands of the next generation.

And even though Ms. Mayhew said she wishes her family had had some of these conversations earlier on, she said she hasn't yet gotten the ball rolling on her own succession plan.

"I'm only 33," she said. "So no, I haven't started it yet."

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