Dealing with Fairness in the Family - Part II

November 02, 2012

Dealing with Fairness in the Family - Part II

4 Minute Read

When should the succession process start? The sooner you start, the better.

Eben Louw
Eben Louw, CPA, CA

When Should the Succession Process Start?

I think there is a general understatement of exactly what succession typically entails, leading to a belief that business transition to the next generation can be accomplished by following a series of simple steps, with the end results easily determined over a short timeline. The reality in most cases is quite different.

If you are a business owner at an age where you would like to slow down, with or without the next generation ready or in place, succession is starting now. If you are in a successful business but want to bring senior management into ownership, succession has started. The same applies for deciding that it is time to sell the business.

The sooner you start, the better, for a number of reasons

It opens up more options

In nautical terms, an early start can be described as opening up your options by getting you away from the rocky shore and creating more seaway. This enables a ship to ride out any storms, without fear of imminent disaster. The longer succession is delayed, the more likely that not all the proverbial stars will be aligned to enable a proper succession, the stars being all layers (finance, people, operations, relationships, capital structure, legal structure, taxation structure, retirement planning). Unfortunately, many business owners are in a personal space where it is hard to acknowledge that the business may be handed over in the future, leading to procrastination and, in some cases, even denial. This inevitably leads to a situation where future decisions will have to be made in an environment of heightened anxiety, the compressed timelines creating pressure on all those involved in the process. Typically this would narrow down the options to only those available at that time, instead of giving you enough time to build a range of options to choose from, including backup plans to ensure this one opportunity to do things right is executed properly.

It provides time to enhance the value of the business

The reality is that although a business owner may know the ins and outs of the business, due to the complexities of product lines, production technology, and customers and their needs, the potential purchaser or next generation of owners, who may be family members, are not in this boat. As an extreme case: I had a discussion with a business owner who considered himself to be the only reason for success in his business. No one else was good enough, or could perform to his high standards. (Ironically, these were standards that he created and only he understood.) I asked him what he thought his business was worth and his response was a large dollar figure. When I asked him what the business would be worth should he suddenly pass away, he quoted the same dollar value. He was shocked when I explained to him that, other than the furniture and equipment, most of the value existed between his ears, through solid relationships with clients, and the reputation built on him as a person and not on brand loyalty. By putting in place a system of procedures and key people who are trained and have had responsibilities for key value drivers (with instructions to grow it of course), you are able to build this value—if you have time to do so. This is not something that can be done by the executor of a business owner’s estate. At that point, it is too late.

Family relationships are more easily managed

As explained in a previous post, there are many layers to the succession and transition process. As much as business owners want to believe that all family members think the same and have the same motivations, drive, values, ambitions, and personality types, it is just not the case. To complicate matters, some family members may be married and thus members of their own family units, bringing into the equation not only those family members actively involved in the business, but also their spouses, as well as, potentially, their children.

Inevitably, the transition will be smoother

Any problems that may arise are dealt with on a timely basis. This allows for the continuation of the individual steps in the process so you can avoid having to deal with problems that have become ‘groups’ of individual decisions and discussions, which so easily stalls the process.

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