Ownership Transitions
Nothing Left to Chance
Reprinted from the National Post
October 22, 2007
By Alexandra Lopez-Pacheco
Across the country, there are thousands of savvy business owners who have built successful companies, diligently investing countless hours into planning to ensure the success and viability of their businesses. But when it comes to planning for their company’s future after their retirement or death, a majority are just crossing their fingers.
Most are hoping new appointed leadership will have the skills for the job or that come retirement day, there will be an interested buyer and their company will be worth enough. They are hoping, too, their life’s major investment will not disintegrate as investors and customers shy away from a cloud of uncertainty; or that their family will not be torn apart in an emotionally charged conflict over the business.
Many of these small to mid-sized companies have business, strategic or marketing plans, but according to the Canadian Federation of Independent Business, only 10% of those they surveyed have a formal, written succession plan in place. Thirty-eight per cent have an informal plan and a staggering 52% have no succession plan in place at all.
“When we don’t plan, then things happen to us—or maybe we get lucky,” says Ron Prehogan, president of Ottawa-based Equitas Consultants Inc. “I’ve seen all kinds of situations where they left it until it was too late. Getting those phone calls was what made me decide to go into this succession planning business. We need to be more proactive and less reactive.”
A general rule of thumb is to begin succession planning five to 10 years before the anticipated changeover. That’s because it is not simply about deciding on ownership and who will lead the company or if it will be sold.
It is a process of developing and optimizing a business’s worth and its leadership as well as facilitating healthy dynamics among its stakeholders through the transition. Owners wanting to develop and implement an effective succession plan will likely need the help of a team of professionals, many of whom are probably already in their service: an accountant, lawyer, financial planner, insurance agents and their banks. Increasingly, many are also hiring consultants who specialize in succession planning and can help them understand all the options, facilitate the needed dialogue and co-ordinate the multi-year process.
The best time to begin succession planning, says business consultant John Fast of John Fast and Associates, is “when you’re not in a crisis. It’s always good to plan when you’re not forced to plan. I’d say start as early as possible. You can always revisit and update the plan depending on new data and new circumstances.”
A rigorous succession plan protects both the company’s value and its future viability. “If something should happen to the founder and key person, you want a backup plan in place. A good succession strategy reassures everyone—the staff, suppliers, and customers < that the business is not going to go south if something unforeseen should happen to the owner,” Mr. Fast says.
Typically, the owner of a SME is often the glue that keeps the business together, so when that key person is no longer at the helm, the business’s prospects and value could plunge. That is one reason why succession planning is not just about naming a successor: It is about going through a rigorous inventory of all the possible options, assessing potential successors’ skills and readiness, getting agreement from all the major stakeholders and executing a step-by-step plan designed to ensure success after succession.
The foundation of the process is structured, honest and positive communication and a clear and objective assessment of the business and its needs.
“Two generations often have a different skill set and come at it from different points of view,” Mr. Prehogan says. “It’s all about the senior generation and the next generation understanding where each is coming from. Those considerations help ensure a smooth transition.”
Succession planning can also involve setting up such support systems for the new leadership as an advisory board <—something that might have helped the multi-generation family business Andrew Pigott, managing director for Kilbride Partners, once belonged to. “We were not the poster child for succession planning,” says Mr. Pigott, whose Burlington, Ont.-based firm advises businesses on such matters as succession. “Toward the end of the business, the person running it was from an operations side. So he favoured everyone with a background in operations, which wasn’t great. You need to bring a management team that has some depth. And that’s what an advisory board can do. They can say, all these people you have here are really good operators, but what about sales, and HR and planning, finance and all those things that can help create a successful business?’ “
Depending on the company, owners and circumstances, the succession planning process can include everyone from the owner’s immediate family, to his or her extended family, and sometimes even in-laws. It should engage all potential stakeholders in the discussions, giving each the opportunity to be heard and dealing with any potential conflicts and disagreements long before they can become a serious detriment to the business.
As well, without a formal succession plan, members of the next generation often face uncertainty about their future career, Mr. Fast says. “That’s a huge issue. Without a plan, it stunts their lives and that has the potential to explode. At least have a plan so the new generation can plan their lives.”
Regardless of whether the owner’s decision is to pass on the business to the next generation or to sell it, there will likely be financial implications for all the major stakeholders. Therefore, good succession planning includes everything from putting together and implementing a plan for ownership transfer—and the necessary financing—to having shareholder agreements in place and maximizing the value of the owner’s estate. In other words, it doesn’t leave the future to hope or chance.
“Don’t leave it to the next generation to pick up the pieces,” Mr. Prehogan says. “Do as much as you can while you are alive and well because the more you do, the easier it will be for them.”
© Financial Post 2007
