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This article was originally published in The Bottom Line.
After 40 years of hard work, a successful small business owner in her 60s has decided it’s time to retire and pass the venture to her eldest daughter, who has just graduated from university. The succession plan is relatively simple. The owner will transfer the business within a few months and keep enough money to
enjoy her golden years. Everything will be peachy.
Unfortunately, intergenerational transfers rarely work out that way.
Professionals who advise businesses on estate and succession planning and other matters say that the process of passing the family business on to the next generation is more difficult than it appears, as only a third of family ventures survive it.
To be successful, they say, owners must plan well in advance of the takeover, ensure the successor is really interested in acquiring the business and has the necessary skills.
“Parents always think their children are wonderful and they’re not looking at their children from a business point of view, and assessing their strengths and weaknesses to see if they would be a good fit for a role in the company,” says Colleen Gibb, partner at Gibb Widdis Chartered Accountants in Toronto. “They’re
just the heir apparent and that’s it. To me, that seems to be the biggest reason for failure.”
Gibb says small business owners need to have conversations with the successor years in advance of a possible takeover to assess whether the individual has the desire to take over the business, and also to give the individual time to acquire the skills.
“There’s no point in an owner waiting until they’re 70 and then saying to the kids, ‘Hey, come here and sign this, the company’s yours,’ ” she says. “That would be a disaster.”
In many instances, she says, the son or daughter of an owner isn’t really interested in taking over.
“The parents assume the children want to take over the business and nobody ever sits down and has that hard conversation as to what everybody’s goals are in the family.”
A sure-fire recipe for failure, says Gibb, is giving the business to a child who isn’t interested.
“That’s disastrous because then they feel resentful. They may have always wanted to be a doctor, but now they’re stuck running a manufacturing company.”
To prevent problems, Gibb says small-business owners must open up the lines of communication and, if the child is interested, a plan should be laid out that allows the successor to get more involved so they can learn the business from the ground up.
She also recommends bringing in a professional advisor who would meet separately with the owner and successor to ensure both are on the same page, and come up with a plan to ensure the transition goes smoothly when the owner decides to retire.
“Sometimes it’s best for the professionals to deal with the parents to find out what their goals are and when they want to get out because sometimes the parents are talking like they want out but they’re only 50, and they don’t really want out till they’re 75, and the kids think it’s happening tomorrow.”
Luanna McGowan, a lawyer and president of the McGowan Group in Hamilton, Ont., says intergenerational transfers most often fail because owners and successors don’t communicate properly and fail to put a robust succession plan together for a takeover.
Other times, she says, the owner assumes the child will take over the business but the child isn’t really interested. “They don’t want to tell the parent because they’re afraid of disappointing, or they don’t know how to say it.” McGowan, who founded the PricewaterhouseCoopers Centre for Entrepreneurs and Family Business, recommends bringing in an independent third-party professional business advisor or consultant to meet with both the owner and possible successor to identify the objectives of each, and try to figure out a plan that works for both of them.
“It’s about identifying objectives and understanding what the different stakeholders might want, what the owner wants and what his or her children want.”
The benefit, says McGowan, is that it provides a forum where everybody can have their say, allowing a plan to be designed that makes sense for both the owner and successor.
“This allows individuals to say what’s on their mind without worrying about repercussions,” she says. “It gives them a sounding board to also appreciate other perspectives and it’s an opportunity for education in a non-threatening environment. “It’s just a forum that will allow the information to come forward in a respectful way.”
McGowan notes it can be tricky dealing with an intergenerational transfer that involves a son or daughter because there are family dynamics at play and emotions are involved.
“Historical patterns of behaviour and communication and emotions get in the way of perhaps good business decisions or good dialogue,” she says. “Sometimes people are afraid to speak up or don’t know how to say it, or miscommunicate and it’s misconstrued.”
For example, she says, if one child is chosen to be the successor and another is not, the owner will have to find a way to appease both, perhaps by giving the child who’s not going to be part of the business real estate or other investments.
Bob Tosh, a business advisor in MNP’s farm management consulting group in Saskatoon, Sask., says most intergenerational transfers fail because of lack of preparation. With small businesses, he says, often the owner is entrepreneurial but the successor might not be so inclined, meaning they might have to learn a whole new set of skills to succeed.
To ensure the continued success of a business, owners must groom the successor, explains Tosh, and, if there’s more than one child, make it clear who is going to run the business.
“There needs to be development of leadership,” he says. “The family needs to create the rules around who’s going to be the next leader and what they can expect to see happen. Leadership development
is important and there are certain things that work.”
Tosh notes that the chosen successor must have the right qualifications which may, for example, have to be acquired by going to work for another business.
To offset any problems, he suggests that owners talk to their sons or daughters sooner rather than later about their succession plans in an effort to iron out any problems early on.
“Family businesses are full of paradoxes that don’t have answers,” he says. “There are problems that need to be managed because there aren’t solutions.”
Tosh says that most successful transitions occur when families have planned ahead and have the ability to resolve conflicts amicably and understand how to make decisions.
“Family businesses that do this work well, they meet regularly and have good family meetings,” he says. “They have active governance and they have a strategic plan. They focus on the process rather than the answer and they’re willing to manage paradoxes. They’re able to understand that there’s always going to be some tension.”
So what does an owner do if a child isn’t ready to take over the business?
Lawyer McGowan says the owner and successor need to design a grooming plan to bring him or her up speed. It could include more work experience or training or more education, she says.
“The grooming plan would identify strategically what they need, what the skills of the identified successor should be, what their experience should be, what the gap is, and identify, ‘Here’s what we need and here’s what we have,’ now let’s fill that gap.”
Gibb says it’s important for families to start talking about succession planning early on so the next generation can pick the right education plan and be prepared.
“The owner might say, ‘OK, if you want to take over my business, I think you should get an MBA, or maybe you want to be the company accountant so let’s put you on the path to get a CPA.’ ”
In addition to the skill set and education, Gibb says the successor also needs to participate in meetings the owner has with lawyers and accountants so they’re exposed to the decision-making process and understand why the business runs a certain way.
“Some kids come in and want to put their mark on the business and change things because they think mom and dad were so old-fashioned,” she says. “But maybe they’re not thinking of the ramifications and that mom and dad did it that way for a reason.”
If the kid just isn’t interested, though, that’s another story. In that case, Gibb suggests that parents consider selling the business to existing employees or an outsider. Parents often think it’s a failure to sell the business instead of transfer it to the next generation, she says, but sometimes it’s necessary.
“The viable choice in such circumstances is to sell and sell it to somebody who has the skills and who wants to keep it going and who will keep all your employees employed, and you’ll get all your money out of it and you won’t have to worry again and maybe keep harmony in the family as well.”
Tosh of MNP says there’s no point in forcing a son or daughter to take over a family business because it will only create resentment.
“If no one wants to take it over then it’s probably not the best scenario.”
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