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Succession Planning: Essential—Yet Often Overlooked
by John Hughes and Wendi Crowe
A business owner’s most valuable asset is usually his or her interest in the business. Developing a strategy for a business exit (sometimes referred to as “exit planning”) often involves specialized considerations. In Canada, there are thousands of owner-managed businesses and farms from which the owners plan to retire in the next 20 years. An integraded long-term approach will maximize the chance of achieving a successful transition.
A well-planned business transition can deliver a secure retirement to the original owners, preserve a family legacy and provide the next generation with a solid platform upon which to build their own wealth and success in years to come. But succession planning is complex, challenging and time-consuming. It can require difficult decisions—and difficult conversations. By tackling succession planning early and addressing the key issues up front, Canada’s business and farm owners can help ensure a smooth transition that delivers what each generation needs.
Business transition success factors
Even if you are planning to stay in charge for a few more years, it’s important to begin planning now for your business transition. In helping business and farm owners across Canada plan their successions, we have identified several key areas to consider to help ensure a successful transition.
Yes, you need a succession plan
While many business and farm owners have certainly thought about how they would like to transition their business as they near retirement age, far fewer have put a formal succession plan in place. It’s not hard to understand why. The challenges of day-to-day operations can easily push succession planning far down the agenda, and owners are often
very reluctant to consider leaving the business they have put their heart and soul into building over many years. But society has changed, too. Many people in their 60s have the energy, drive and passion to continue for another 10 or even 20 years—retirement is what “old folks” do. Yet even those dynamos eager to work well into their 70s need to step back from the business and begin putting a succession plan together. An accident or unexpected health issue could throw a business or farm into chaos if there is no plan that spells out what is to happen when the founder is no longer running the business.. Children may not be interested in taking over the family business, sending owners searching for an alternative exit strategy. Planning can mitigate these and other risks.
Start planning early
Succession planning is a process, not an event. It can take years to discuss transition objectives and options with family members or others, determine how to structure and govern the business, figure out the wealth management and tax planning implications, and more. Certain tax structures, for example, need to be in place for a period of time
before the transition takes place in order to be effective. Those taking over the business may require intensive training to learn what they need to know before taking over themselves. Investments may be needed to boost revenue or improve the cost structure to achieve the desired retirement and family legacy. That takes time—and getting an early start on planning can improve the owners’ chance of success.
Address retirement planning at the outset
Retirement planning should be an integral part of any transition plan, and it should be factored into the plan from the beginning. The retiring owners’ goals and income needs have a direct impact on the cash flow of the business and how the rest of the family is compensated for their involvement. Discussing retirement needs at the start of the planning process enables those involved to determine whether the business can actually support them. In some cases, the business or farm may need to grow or expand to achieve the income required to fund mom and dad’s retirement and remain viable. For some owners, these conversations may be the first time they have given serious, deliberate thought to life after the family business—and they may be surprised by the cash needed to provide the lifestyle they have earned.
Ongoing communication is essential
Ongoing, open and frank communication is the foundation for a successful business or farm transition. Owners need to start their transition journey by sitting down with their families and having a candid conversation about everyone’s objectives and expectations for the handover. One-on-one discussions with individual family members can help clarify personal ambitions and identify strengths and skill or knowledge gaps to be addressed. These conversations may not always be easy—owners may have to tell a child that they simply do not have the skills or aptitude needed to take on a coveted role, for example. But regular, candid communication is essential to building a succession plan that reflects the needs of the entire family—and to ensure all involved do what is required to achieve a smooth transition.
Hold people accountable
Developing a succession plan is one thing; seeing it through to completion is something else entirely. Transitioning a business is a process that can take years, during which it can be all too easy for owners and family members to get distracted by running the business day-to-day. To keep a succession plan on track, it’s important to make people accountable for doing what needs to be done. Make someone accountable for starting and driving the succession planning process itself, whether the owner, a family member, or even an outside advisor. Establish and communicate timetables and action plans—and put them in writing. Assign responsibilities, and schedule regular meetings to discuss progress and ensure people deliver what they committed to do. This is especially critical in the first year or two of the succession plan, so that necessary investments, tax structures and other initiatives can be put in place in time to achieve the intended goals.
Are you selling or passing on?
For owners of a closely-held or owner-managed business, a material amount of their wealth may be tied up in their operating business. Too often, they are so preoccupied in running and growing their business, they pay little attention to the planning necessary to realize their preferred exit or transition of the ownership of their business.
Succession of an operating business typically involves two primary elements: (1) A change of management authority, and (2) The transfer of ownership. The transition of business management presents many considerations which are not, strictly speaking, legal in nature (for example, business strategy, human resources, executive search and intra-family counselling). As well, management changes will occur both within and outside the estate planning process. For this reason, it is important to keep in mind the legal issues and considerations which arise with the transfer of ownership of an interest in a business. In the situation of passing on responsibility and ownership, a key aspect of planning for exit is understanding the range of possible successors and their suitability based on the type of business and the goals of the person exiting.
If a business owner seeks to monetize his or her interest in the business in order to fund retirement, whether in whole or in part, they will need to plan properly, and well in advance, for such a transition in order to receive full value. Without proper planning, the business owner may be disappointed with the consideration received and the timing of such consideration when offering a business for sale. That is why the business owner and his or her advisors are encouraged to look forward and plan ahead proactively for the eventual sale of the business owner’s interest.
Bring in professional expertise
Succession planning is a complex process, and it’s one where the family’s emotions can sometimes interfere with good decision making. As well, planning for a smooth, effective transition can involve highly technical issues around business and tax structures, finance and wealth management, and even a business sale or acquisition. An external business advisor can bring the experience, expertise and independent perspective needed to help owners understand and navigate the many issues and challenges involved in transitioning the family farm or business.
Specialized advisors can help you identify and put in place the ownership structure that best addresses the needs of the business and the family. They can help implement a tax structure that delivers the optimal outcome for retiring and incoming owners. They can offer insights into how to improve operations and grow revenues to boost the value of the farm or business before and after the handover. They can identify likely buyers or targets for owners choosing to sell their business or those aiming to achieve strategic growth through acquisition. They can offer wealth management advice to help owners achieve a comfortable retirement and provide a lasting, growing legacy or their family. Outside advisors can even help steer the succession planning process itself—keeping the owner and family on target and on track from the outset.
A critical investment for you and your business
You’ve put many years into building a thriving, successful business. As retirement nears, it’s important make sure you have a plan in place to ensure that you and your family can reap the rewards of all you’ve achieved—and that your business is in the best position to provide a new generation with all they need to achieve their own ambitions. Starting your succession planning today can be one of the best investments you’ve ever made.
MNP is a the leading national mid-market accounting, tax and business consulting firm in Canada. We proudly serve and respond to the needs of our clients in the public, private and not-for-profit sectors. Through partner-led engagements, we provide a collaborative, cost-effective approach to doing business and personalized strategies to help organizations succeed across the country and around the world.
About Miller Thomson
Miller Thomson LLP is a national business law firm with 500 lawyers working from 11 offices across Canada. The firm offers a complete range of business law, advocacy and personal legal services. Miller Thomson works regularly with in-house legal departments and external counsel world-wide to facilitate cross-border and multinational transactions and business needs. Miller Thomson offices are located in Vancouver, Calgary, Edmonton, Regina, Saskatoon, London, Kitchener-Waterloo, Guelph, Toronto, Markham and Montréal.
If you’d like to discuss how to develop an effective plan for transitioning your farm or business, contact MNP or Miller Thomson.
John HughesNational Leader, Private Enterprise
T: 416.596.1711 E: [email protected]
Wendi Crowe Partner and Lead, Private Client Services Group Miller Thomson LLP T: 780.429.9764 E: [email protected]
At MNP, our resources are your resources. We look forward to seeing you at our next Private Enterprise 24/7 event.
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