Family-owned businesses are the backbone of Canada’s economy, a major driver of wealth, growth and jobs. But if the transition of these family enterprises to next-generation leadership isn’t carefully planned and executed, there can be risks to their future success – as well as to family relationships.
“You have to set clear expectations or there will be conflict,” says Danielle Walsh, a member of the Family Office Services team at MNP, a national accounting, tax and business-consulting firm. A large number of MNP’s clients are private companies, many of them family businesses in various stages of their life cycle.
Ms. Walsh, a partner at MNP, says studies show that 67 per cent of family enterprises won’t make it to the second generation, 88 per cent won’t transition to the third generation and only 4 per cent reach the fourth generation.
Ms. Walsh says most of her clients “are often first generation trying to get to second generation, and they have a really hard time doing that.” If that changeover is not well done, the company “tends to crumble” by the third generation, often because the more motivated members of the family have left the business. This can leave “less committed and less competent” family members running the company, she explains, and they’re often more interested in “stripping it for cash and wealth” than in “building up a model of stewardship.”
MNP helps businesses with intergenerational succession planning, which supports both family harmony and the long-term success of the company.
“When a family business owner is having a rough time, it’s both in the business and at home,” Ms. Walsh remarks. “I try to make sure that we can keep those relationships as sound as possible.”
One “minefield” is friction between family members who are active and inactive in the company, exacerbated by a lack of transparency. “When I work with a family, I try to interview everybody – active, inactive, kids, grandkids, the whole bunch of them, because they all live it, breathe it and know it.”
National Leader of Family Office Services, MNP
Kerry Smith, MNP’s national leader of Family Office Services, says a growing part of his team’s work focuses on management and ownership succession, family communication and readying the next generation to take over.
Mr. Smith says “how the transition is ultimately structured” is critical. He’s seen a lack of planning send transitions off the rails. For example, in one case that MNP was brought into, the family business was being passed to one child, but the spouse of another started complaining things were not fair. The situation had foundered largely because the family didn’t involve professionals right from the start in “the soft side of the conversation,” Mr. Smith says.
“You have to get everything out in the open and make a plan,” he comments, noting that if that had been the case, “I think we would have had a totally different outcome.”
Ms. Walsh says it’s essential to help the whole family understand and support the overall succession plan by “opening the door to honest communication,” preferably before there’s harmful emotional baggage to deal with.
Involve the ever-widening circle of family members, including in-laws, and align expectations, she advises. “Giving them the opportunity to ask questions in a non-judgmental manner certainly helps them to get on board. Once they agree to the general principles and rules, then you have objective decision-making.”
Difficult family dynamics can be distracting, and “in the years leading up to the transition the business struggles, because nobody’s actually building it and focusing on it,” she cautions. It can also be challenging to retain non-family managers when there’s an atmosphere of family chaos. “They don’t want to be sucked into accusations between siblings.”
Ms. Walsh says a major misconception surrounding succession plans is that they only need to be drawn up once owners are ready to retire. She recommends putting in place a “family business constitution with principles that are going to guide decision-making,” including the qualifications needed to be employed in and to manage the company. “If you can get a family to endorse these rules, it guides all decisions pertaining to the family in a way that’s objective.”
Family Office Services team member, MNP
The entire family should meet once a year to reconnect and have a good time as well as to review and discuss any changes, she says. Younger family members can be engaged in planning and setting up activities in this annual family council meeting.
Ms. Walsh says the COVID-19 crisis made a lot of families pause their succession planning, with owners hunkering down and retaining control of business matters. It’s now time for the younger generation to step in and implement new ways of doing things, in some cases solutions precipitated by the pandemic, like customization or hybrid employment for staff.
Bringing in professional managers is an option, especially if there are age and experience gaps. “A non-family CEO can train the next generation in a non-biased way,” she says,
In cases where the business has been sold to a third party, there can still be issues of governance over private family foundations that extend the original owners’ legacy. MNP’s Family Office Services group has specialists who continue to work together with next-gen family members to “keep those values alive,” she says, with expertise in areas from wealth strategy to estate planning. “They all need to be speaking to each other,” she adds.
Seven steps to help you plan for your family’s financial future
By Kerry Smith, CPA, CA, TEP, National Leader, Family Office Services, MNP
As wealth increases, it’s important to have a plan for your family’s finances – today and into the future. A strategic plan for spending, saving and financing your retirement will ensure you can feel confident in your decisions.
Following these seven steps will help ensure you and your family understand your needs, goals and values. It is essential to keep the big picture in mind so that all aspects of financial planning work together seamlessly and in a way that works for you.
- Prioritize goals and objectives. Meet with your key family stakeholders. Together, you will discuss your family’s needs, wants, goals, values, risk tolerance, etc. and develop an in-depth understanding of where you want to go.
- Develop a net worth statement, cash flow summary and insurance analysis. Analyze various scenarios to understand how you can achieve your goals and objectives. It is essential to consider your family’s unique situation and plans for the future to ensure your financial plan works for you.
- Develop financial projections and analysis. Visualize a range of options so you can see your future financial position across several possible scenarios. This allows you to make strong, realistic decisions for the future.
- Complete a retirement planning assessment. Key questions include: How will your financial needs evolve? What do you plan on doing with your time? Will your investments generate enough income to live off of? How big of a nest egg do you want to leave for others?
- Assess estate value and liquidity – now and into the future. Understand how your investments will appreciate over time, and ensure you have the liquidity to cover key expenses throughout the seasons of your life. This gives your family the ability to strategically plan for liquidity through insurance or other tools.
- Identify tax strategies to optimize the financial position. Maximize your options for minimizing taxes over the long term. This could involve setting up trusts and transferring some assets today – or paying more in taxes now to minimize them in the future.
- Develop an action plan to implement recommendations. Create a comprehensive financial plan for your family. Common deliverables include updating legal documents, applying for insurance or putting programs in place to prepare your children for inheritance.
Advertising feature produced by Randall Anthony Communications. The Globe’s editorial department was not involved.