There comes a time in the life of most businesses when its founder, or owner, decides it’s time to step away. In the case of family-owned businesses, it can be especially difficult and requires often frank conversations when it comes to creating a viable succession plan.
“You may assume the next generation is going to take over the business, but did you have that conversation with the children and does it algin with their vision? Is there alignment?” says Carlo Ciarmitario, Partner and Regions East Family Office Leader, KPMG Enterprise. “It really could get even more complicated with larger families with multiple family members where some are involved in the business, and some are not involved.”
According to a succession survey conducted by CFIB last year, at least 76% of Canadian business owners plan to exit their business within the decade resulting in over the transfer of $2 trillion worth of business assets changing hands during this period.
Couple this with the fact that only 1 in 10 (roughly 9%) have a formal succession plan in place to assist in the transition of the business and the economic landscape in Canada is in for major changes.
“Those discussions are tough discussions that not everybody wants to get involved with,” says Carlo, adding he spends at least 60-70% of his time in this area. “It’s really about the founder wanting to let go and they may not be ready to let go. For many of them, the business is part of their family, and they can’t fathom the idea that somehow they’re not going to be involved in the business going forward.”
However, he says having a communication framework is fundamental to all succession discussions and must involve everyone, including third generation family members if necessary.
“There can be a lot of emotions involved in that discussion,” says Carlo. “But I think people need to know that discussion has to happen.”
To assist, he offers the following information:
Q. Is having a clear succession planning something many SMEs often put on the backburner?
Founders may not be ready to let go. Many do not feel that the next generation is ready or even capable of running the business the way they have been operating the business. Many of these owners started the business from the ground up and have been involved in every aspect of the operations: whether it’s relating to the hiring of staff, or the way the business operates, to working with the bank and investors on financing the operations and maintaining profitability. Things to consider:
Q. What are the first few important steps towards creating a successful succession plan?
An estate freeze is a common succession planning tool but is part of the overall succession planning process. At a high level, an estate plan involves the founders freezing their current equity interest in the family business shares at today’s fair market value.
This is typically followed by having a family trust, the beneficiaries of which would include the founders’ children subscribing for equity shares that will enable the future growth of the business to pass onto the next generation. When structured properly, an estate freeze allows the founders to cap the taxes their estates will have to pay on death while transferring the future value of the business to the next generation. Things to consider:
Q. When is the right time to create a succession plan? Are there signs to watch for?
There is no real right time to start a succession plan. Just as the business did not grow over night your succession plan won’t happen overnight. The process evolves over time
A good idea is to begin the process five to seven years prior to either selling the business (if that is what the family decides) or from the founder retiring/stepping back from day-to-day operations. This will allow for enough time to affect a proper transition of the business or get it ready for a potential sale.
Q. Is creating a succession plan a difficult process?
The most difficult part is getting the conversation started as noted above. The natural tendency is to avoid the conversation. However, once the process gets started, most succession plans do have a positive outcome. The key is getting everyone’s input and making the decision collectively.
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