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Value Series: Part Four

Few business owners ready for succession Add to ...

Although many business owners focus primarily on how to sustain or expand an enterprise, each one will eventually need an exit strategy. Last week, we examined taking a company public through an IPO - a risky, high-stakes game that, with the right market conditions, can pay off big for owners. This week, we'll show a less glamorous but more popular exit: succession planning.

Succession planning is something every business owner or manager will likely have to consider at some point.

It involves creating a detailed framework that outlines who will take over the business and how ownership will be structured once the owner retires. As opposed to an IPO, or initial public offering, where businesses need to be of a certain size, succession is more popular among smaller businesses that are family-owned. By putting adequate time into both the management and ownership sides of the succession process, it's possible for a business owner to create a comfortable retirement plan, watch his or her business grow and create benefits for the next generation.

People are working longer these days, but no CEO remains in charge forever. Indeed, recent studies show that an unprecedented number of workers, many of them in management and ownership positions, plan to retire in the next 10 to 15 years. According to a 2009 study by the BMO Retirement Institute, half of Canadian small business owners older than 45 plan to retire in the next 10 years. The same study shows that 81 per cent of owners have not implemented a formal succession plan.

"Only 10 to 15 per cent have a formal transition plan in place," said Chris Lynch, an adviser with Deloitte's Canadian corporate strategy practice. "It's tough to see an owner whose only option is to sell their business or liquidate their business when that's not how they envisioned it."

Planning is crucial, considering how risky succession can be. There is only a 30 per cent chance of a business surviving a transition from one generation to the next, according to Judi Cunningham, the executive director of the Business Families Centre at the University of British Columbia's Sauder School of Business.

Part of the reason many business owners fail in this realm is because of the length of time it takes to carry out a solid succession plan. Owners often put off planning until they're ready almost ready to leave.

"The question we like is, 'Is your business strong enough to survive the loss of you?' Whether you're 20 or whether you're 80, the answer should be, 'Yes,'" said Harley Mintz, a tax partner with Deloitte's private company services group. "The latest we like to see it is five years before transition."

Although many transitions happen in a shorter period of time, the key consideration is to ensure that the business is left in good hands. Whether an employee or a family member is taking over, that individual will have to exhibit strong enough management skills to fulfill the requirements of a CEO role. Most owners have an emotional or financial interest in the continuing success of the business, and it can take time to get their new CEO up to snuff.

A company's owner will also likely have to employ tax, financial and legal advisers who will help create the business structure of the transition. He or she will have innumerable options when it comes to the ownership side of the turnover, Mr. Mintz said. Advisers, the owners and those who are taking over will have to discuss how the business will be governed, who will be able to own shares, how taxes can be minimized and how the owner will be paid for the assets tied up in his or her business.

Passing a company to a family member or a manager who is known within the business creates a sense of legacy that can add to the current owner's sense of fulfilment, according to Dr. Pramodita Sharma, a professor at Concordia University's John Molson School of Business. Plus, it creates a sense of community within the business itself, which can strengthen employee commitment and productivity in the long run.

"Their identity is more tightly aligned with their business," she said. "They tend to be more community-focused and employee-focused. Many family businesses haven't laid off people - [the owner]might reduce hours, but they're very, very reluctant to lay off people."

A succession plan can also be an exit strategy without a full exit. For many who wish to continue to work in some capacity, succession can mean they can still play an active role in the operations of the business without putting in the same hours they did before.

On the negative side, on top of the length of time it takes to implement a succession plan, an owner may not want to be involved to the extent that they may have to. It can be difficult to commit to a 5-year plan and oversee the day-to-day operations of a business.

Owners may also feel strong emotions about the transition. Particularly within a family business, flare-ups around fairness and favouritism are common.

"The majority of the issues are the family issues," said UBC's Ms. Cunningham. "Often it's because the family can't find alignment, or they can't have the conversations that they need to have, or there's fighting among three or four children. There are so many factors."

Despite the abysmal odds, the UBC Business Families Centre and other organizations are working to make succession planning more successful. Next week, we'll look at how incoming management teams can be prepared for their new roles, how disputes can be mitigated with communication and what kinds of advisers can add an objective voice to what can be a very personal move for retiring entrepreneurs.

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