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This article was previously published with the Globe and Mail and has been reproduced with permission.
It’s considered parenting 101 to treat your children equally, but when it comes to passing your family business to the next generation, this golden rule can create complications, says John Hughes, Senior Vice President of MNP's Private Enterprise practice.
Consider the scenario where a business family not only plans to transfer wealth but also have the next generation take the reins of the family enterprise. While parents may want to give their children equal shares, how does this play out when some are actively involved in running the business while others pursue unrelated careers? It can be even more complicated when cousins or other members of the extended family are involved, suggests Hughes. What’s more, different family members may have different — or even conflicting — ideas about desired outcomes.
Such complexities can make continuity planning a daunting prospect. Having a solid plan is key for ensuring the business and the family legacy continue to flourish, believes Hughes. “The stats show that less than 10 percent of companies have a detailed succession plan,” he says. “They may have given some thought to whether they want to sell the business or have a family member take over but that isn’t necessarily enough preparation for the future.”
The majority of Canada’s two million plus corporations are private companies run by families — and their continued success is important for the country’s economic well-being, he explains. “As we move through one of the largest transitions of wealth in history, stewardship of the family’s wealth, businesses and other assets will be critical.”
Transparency about the vision, goals and objectives of the family can ensure that potential concerns can be addressed and Hughes recommends starting transition planning about five years — or a minimum of two years — before changes come into play.
“There are things that need to be done in getting ready for succession as well as during succession, plus follow-up activities post-transition,” he says. “The most important strategy for navigating a successful transition is open and honest communication between family members about the views for best managing the business and family assets.”
While frank conversations carry the potential of people feeling hurt, the cost of not addressing concerns in a timely manner can be even more devastating — it can lead to the family losing control of the process. Having a trusted advisor in the room can make it easier for families to address difficult topics, such as the “four ds: divorce, disagreement, disability and death,” says Hughes. “There are strategies for handling these events and their implications for the governance of the business.”
Hughes recommends considering four key elements for the financial roadmap for family members, business owners and management: wealth analysis (including financial planning and goal setting), family stewardship (creating a structure that allows families to make decisions about the business, their wealth and the next generation), succession (identifying who will manage the business and family wealth) and estate planning.
“Estate planning includes leaving a strong legacy for future generations and prioritizing philanthropic pursuits,” says Hughes. “We find that many families want to give back to the community or to a particular cause. Involving future generations is a wonderful way to make an impact together.”
When a succession plan is in place, family members can monitor the progress and, if necessary, suggest adjustments, he explains. “But it’s important to get everyone on board with the fundamentals.”
Given that succession planning can significantly improve the odds, why are so few business families prepared? Discussing transition issues can be fraught with emotion, he adds. For example, what if the next generation doesn’t want to be involved in the business? Or what if the founder feels they are not well prepared?
“We help families put structures in place, for example, to determine what kind of training and skills incoming family members need,” says Hughes. “Those who want to be in management positions may have to complete a university degree and gain work experience outside the family business.”
When family members have to invest a lot of time and effort in preparation of joining the business, it’s easy to understand why equal treatment of those who are not involved in the enterprise can be considered “unfair,” says Hughes. “Beyond considering equal shares for family members, many leaders look to the market to see what remuneration is appropriate for those working in the business.”
All these matters should be considered with openness and communication, and a trusted advisor can provide guidance on how to overcome challenges, he adds.
Client Groups:Private Enterprise
Related Topics:ExitSMART™; Small Business; Entrepreneurs; Family
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