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Six Strategies to Support a Successful Transition to the Next Generation

January 10, 2019

Six Strategies to Support a Successful Transition to the Next Generation

Synopsis
5 Minute Read

MNP’s Stella Gasparrotalks about how transitioning the business or wealth is a critical part of the future success for any family business.

Stella Gasparro
Stella Gasparro, CPA, CA
Tax and Accounting Partner

Transition Planning for Future Business Leaders, Families and Owners

​​Your family has put in a lot of effort to grow the business from start up to success story. But what happens when the next generation is getting ready to take over? Transitioning the business or wealth is a critical part of the future success for any family business. But far too often, daily operational demands can make it difficult to find time to sit down and engage in a thorough planning process.

During a recent client gathering organized by MNP, next generation leaders preparing to take over family businesses one day had a thought-provoking discussion about how to facilitate an effective transition of the family business or wealth. Six key themes emerged, representing valuable suggestions for those who will ultimately take over ownership and / or key leadership positions in the family business.

1. The Caretaker of the Family Business Capital

Think of yourself as a caretaker of the family business capital. When all the family members involved in a business embrace capital preservation as a goal, the business can fund investments or provide financial backing for the next generation to develop other business endeavours. So even if the current business isn’t one of your passions, you may be able to leverage it to spin off one that is.

2. Compensation Based on Performance

Compensation should be based on performance to align family members’ interests with the bottom line. Base compensation can be based on similar positions and companies, topped up with equity or a bonus linked to EBIDTA or some other measure of company performance.

3. Open Communication is Vital

While it’s often challenging to talk about the economic future of the family and the business, it is necessary to have these difficult discussions while the founder is involved in the business. Address the big questions: If the founder died today, what would happen in the family? How would estate taxes be impacted? How would the business and ownership be impacted? How would customers, suppliers, lenders react? With a focus on being supportive rather than adversarial, frank and respectful communication is central to a well-functioning family businesses.

4. Hold Regular Family Meetings

Family meetings should be held often, at least quarterly. Regular meetings are crucial for problem solving and ongoing discussions. Since the business must earn a profit to stay in business, it’s helpful to focus financial discussions around profitability. Consider the best ways to put profit measurement into context to ensure family members are aligned with goals and to support sound decision making.

5. Match Skill Sets to Right Roles

When siblings work in the business, realistically assess skills and abilities and match with appropriate roles in the organization. Decide what is best for the business and be willing to compromise on each individual’s role preferences. Leverage individual strengths, but collaborate on important business decisions.

6. Turn to Trusted Advisors

Surround yourself with good advisors who will provide an independent perspective to protect the health of the business. Whether you prefer a board of directors, an advisory council or individual advisors, be sure you can tap into reliable legal, financial and business advice. Professionals can contribute extra depth and breadth to planning, while helping to alleviate family tensions and resolve problems.

Stella Gasparro, CPA, CA, is a Partner in MNP’s Toronto office. She brings more than a decade of experience with estate, inheritance and other tax issues related to succession planning for family businesses. You can reach Stella at 416.596.1711 or [email protected].

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