Succession: Navigating the transition of a family business to the next generation

“It’s not a straightforward process,” says Steve. “You often see a complex interplay of emotions and expectations that work with and against various roles and organizational structures.

“From uncertainties among existing employees to power struggles within the family, each challenge poses unique obstacles to be addressed with care and strategic planning.”

Those who own a family business and are considering how to transition into retirement have several options to exit the business. These include winding up the business, selling to a third party, or passing it on to children. It’s also possible to retain full ownership of the business and bring in a leadership team to run the day-to-day operations.

Here, we'll explore the family succession option through the story of Peter and Joan, owners of a successful mid-size construction company — and how MNP’s Family Office Services team provided insight and support to the whole family.

Family dynamics

Peter and Joan had invested decades into building P&J Construction. They had a strong core group of long-tenured employees who were fiercely loyal to Peter, who oversaw sales and operations, and Joan, who managed the finances.

The couple reached out to Steve because they were approaching their mid-fifties and hoped to start the transition into retirement over the next three to five years. Most pressing, their three adult children were not responding well to their succession plans. Chiefly, the decision to bring in an external CEO instead of appointing one of them to run the business appeared to ruffle feathers.

Two of Peter and Joan’s children, Dan and Sarah, worked in the family business — Dan in operations and Sarah in marketing. However, Sarah decided to step away from her senior role a couple of months prior. Their third daughter, Claire, never had an interest in the family business and pursued a career in an unrelated field.

Dan and Sarah sat on the family management committee of the company; Dan was keen to take over the chief executive role and had new ideas for the company's direction.

“We see all kinds of situations and challenges when there are multiple children and one family business to run,” says Steve. “Each of the children may see themselves being the natural choice as leader. I’ve also seen cases where one, two, or none want the role.

“The questions for the parents aren’t just limited to who wants to lead and who will be the best fit — but also how to avoid the appearance of playing favourites, how to do what’s best for the business and its employees, and how to preserve the financial interests of all the stakeholders involved.”

After careful consideration, Peter and Joan decided against appointing Dan, who lacked senior management experience. Instead, they brought in an external CEO to lead the company. This immediately led to a clash of visions and personalities between Dan and the new chief executive.

Despite having hired a replacement for herself, Sarah complicated matters further by offering unsolicited advice to the new marketing manager. This caused friction on the team and spurred complaints to Peter and Joan.

Recognizing the need to address these succession-related management issues before they got out of control, the couple asked if Steve could help.

“Ideally, the succession conversations will take place with an advisor before the owner or owners make any decisions related to hiring new leaders or divesting from the business,” says Steve. “This gives them time to establish a clear plan, define the desired roles and responsibilities for all the affected parties, and align and communicate their vision and new corporate strategy.”

Beyond the apparent challenges within the business, Peter and Joan identified another concern, this one regarding Claire. They felt that because Dan and Sarah had invested their time into the business, it was only fair that the couple divest their shares to them. However, they weren’t sure how to communicate this, nor how Claire would take the news.

Steve assured Peter and Joan that their situation was far from ideal, but it was not too late to mend the discord. He also reiterated that a business transition is a sensitive issue for both the family and the employees, who grew accustomed to their leadership style and decision-making.

A successful transition would require clear and open communication. They would need to encourage (and be receptive to) feedback to rebuild the morale, trust, and respect that had eroded over the previous months.

Steve suggested several ways the couple could involve senior employees in the succession planning. One was to offer check-ins over the following weeks to ensure their voices were heard in ways that would maintain productivity and foster a positive company culture.

Defining and clarifying roles and responsibilities

A clear governance structure is another critical aspect of a successful transition plan that Peter and Joan had to work through. As the new CEO assumed her role, there was a shift in power dynamics.

“It’s common to see employees fragment into different groups during the succession process — each loyal to different leaders in the organization. Be it the current owners, a child who is keen on taking over, or the new person who is brought in to assume the management role,” says Steve.

“Skepticism and resistance to change are expected and should be addressed immediately and head-on to avoid further strain and erosion of the culture.”

For the new CEO to succeed, it was imperative to clearly outline the roles, expectations, and responsibilities for everyone in the company, especially those who wanted Dan to take over the business. This began with Peter and Joan sitting down with Dan (with Steve’s help) to explain their decision to look outside the business — and reiterate that the door wasn’t closed on his taking over at some point in the future.

They discussed the importance of stability during and after the transition and how experienced leadership would help the company grow and thrive. They worked to convince him that a wise and steady hand wouldn’t just benefit Peter and Joan or P&J Construction but the entire family.

Steve suggested that Peter and Joan might benefit from regular family meetings to get everyone on the same page and gauge their children’s appetite for involvement in the broader family enterprise. Each child would receive defined roles and responsibilities, and the parents would have an opportunity to mentor Dan, Sarah, and Claire in the areas where they could create the most value and feel fulfilled.

“One of the biggest sources of friction that we see in family businesses is a lack of defined roles, reporting structures, and decision-making authority,” says Steve.

“A well-defined and professionally prepared organizational and governance structure helps mitigate power struggles by clearly defining what each person is accountable for and how those responsibilities connect throughout the business.”

Peter and Joan also encouraged Dan to get management training to give him the skills and knowledge to take over the business. They also suggested he could collaborate with the new CEO instead of warring with her. Dan would learn from her years of experience and amplify her leadership skills with his operational strengths.

The family management meetings also proved to be an appropriate forum to resolve the issue of Sarah's armchair quarterbacking. Peter and Joan empathized with Sarah's instincts to help. But on Steve’s recommendation, they stressed the new governance framework and the importance of maintaining clear boundaries in her role as a non-active team member.

Successful Succession Planning Tips:

• Initiate your succession planning early to ensure employees and family members can contribute or adjust to the changes related to the transition.
• Identify roles and responsibilities within the family and outside of it; create a governance structure that clarifies boundaries and allows everyone to know their function and where they fit in the business moving forward.
• Communicate clearly and often to ease uncertainty and anxiety among employees and stakeholders.
• Manage stakeholder expectations, including customers, suppliers, lenders, and the local community.
• Retain the advice of a succession planning advisor to identify any business, estate, or tax-related issues that may arise.

Navigating the journey: the benefits of a knowledgeable advisor

A family business transition presents an opportunity to reassess the business's vision, mission, long-term strategy, and operations. It is often the perfect time to set the course for future success, and a seasoned advisor can help family business owners maximize the business’s future potential.

Sometimes, the changes involve the owners themselves, as Joan quickly found out when the new CEO suggested automating certain functions for managing cash flow. Joan was confident in the tried-and-true methods she had relied on for years to manage the company’s books. She was nervous and unprepared to make the change.

Steve reminded Joan that the new governance structure applied to her and Peter as much as it did to their children. Instead of dismissing the recommendations outright, he encouraged her to investigate the value they could bring to the company. She agreed to bring in MNP’s cloud accounting team, who quickly confirmed the merits of the new program, helped with onboarding, and trained the employees on how to use it.

“New leadership generally brings fresh ideas and perspectives on things the previous leaders never recognized as a problem. It can be difficult for the exiting generation to acknowledge these shortcomings. But it's important that they provide the latitude for management to pursue initiatives that suit their leadership style and that can demonstrate meaningful business benefits,” says Steve.

The last major issue of concern for Peter and Joan was their daughter Claire's financial legacy. They were steadfast in passing their shares in P&J construction to Dan and Sara. Still, they didn’t want to leave Claire with nothing.

Steve explained the concept of insurance equalization, which involved designating Claire as a beneficiary in an amount comparable to the value of the shares the others will receive — thus ensuring financial harmony and promoting family cohesion during the succession process.

That led the three to identify another potential hurdle: the tax burden resulting from Peter or Joan’s premature death.

“Because an individual is deemed to dispose of all their assets on death — including those that are illiquid, such as a business — children may face a large tax bill and insufficient cash to pay it if their parents haven't planned properly,” says Steve.

Given that the couple’s net worth was tied up in the family business, they agreed it would also be prudent to revisit their estate plans as part of the transition process.

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