Ownership Transitions

Beating the Odds

A recent survey of small-to-medium sized businesses (SMEs) in Canada by the Canadian Federation of Independent Business (CFIB) found that only 35% of business owners have a plan to exit their business.  Of those with a plan, only 23% have a process for identifying a successor and just 38% have a process for training one. 

This may account for the surprising statistics about the success of transitioning a family business from the founding generation to the next.  Just 30% of family owned businesses succeed into the second generation and only 10% succeed into the third generation.

Most succession plans deal with the technical aspects of who gets what on death at a minimum tax cost to the estate.  Lawyers, accountants and estate planners help ensure that these details are properly looked after.  Often overlooked are the practical steps that will increase the chance that what is put on paper will result in a successful transition. 

Suppose, for example,  that a business owner wants his son to take over the business and there are other children who are not involved in the business.  The conventional advice has been for the business owner in his will to provide for the business to be passed on to the son and for other assets of equivalent value to be passed on to the other children.  All good on paper except for one thing – the father who claims that he wants to retire in a few years continues to make all the major decisions in the business and the son has not been allowed to develop the business skills necessary to one day lead the company.

A succession plan that deals with the practical as well as the technical would include a process for preparing the business for succession, preparing the successor to lead the business and would involve key stakeholders such as family members not directly involved in the business as well as the non-family senior management of the business. 

Preparing the business for succession includes such things as:

• creating a strategic business plan that includes the leadership transition;
• dealing with pressing issues that oftentimes divert the attention of the founder and other family members away from longer term planning initiatives; and
• creating lines of communication between the founder and the incoming leadership team (family and non-family) to ensure that key information and history is passed on.

Preparing the successor to lead the business includes such things as:

• helping identify and then bridge the skills gap between the prospective leader’s current skill set and what is needed to run the company; and
• helping with the establishment of a board of advisors to bridge the gap between the outgoing generation of leadership and the incoming generation.

Involving key stakeholders (family and others) in the business includes such things as:

• providing tools to help family members establish boundaries between the business and family relationships;
• helping to articulate family values and traditions that impact the business;
• creating processes for decision making; and
• identifying the role of family members not actively involved in the business.

It was recently announced that Samuel, Son & Co., Ltd., a $3 billion Canadian steel manufacturing and distribution business, appointed a 5th generation of the Samuels family as chairman of the board.  According to newspaper reports, the 4th generation leader had suffered an untimely death but that thanks to having a good succession plan in place the transition to the next generation was most successful.  According to the current chair: “I think it’s important for each generation to understand what expectations are so when those crises come it’s good for everyone to have a mutual understanding of what’s to happen next.  We did a good job with that, and I’ve counseled other family businesses that it’s something to focus on in the good times, because you never know when the bad times will come.”

The emerging field of family business consulting is helping family owned and closely held businesses deal not only with the legal and financial aspects of a plan but also some of the operational and behavioural issues that usually come into play. In addition these specialists work with the family, the business leaders and the stakeholders to not only plan for the future but ensure continued good health for both the business and the family.

These specialists bridge the gap between the technical aspects of succession planning and the critical success factors (the soft stuff) that when overlooked can make even the best plans fall short. The statistics quoted above are staggering and can only be changed by those bold enough to deal with the tough stuff today ensuring that both the family and the business will prevail into the next generation.