Passing your business onto a new generation does not need to be difficult
One of the hardest conversations any entrepreneur must have with themselves is what will become of their business when they decide to retire.
Most never have that conversation. Many think they will never retire as they believe themselves too important to the operations and the ongoing success of the business; others think they will simply give the business to their offspring when the time is right, or someone will come forward and take it over when they find out how successful it is.
Too often, reality gives that entrepreneur a wake-up call. Illness may force their hand to quickly find someone to take the business over and they may discover one’s son or daughter have no interest in the business, having chosen other careers. In such cases, the only option may be to sell, and that brings a host of other problems.
Kerry Smith, partner within MNP LLP’s Professional Services team and national leader of Family Office Services, part of MNP’s Private Enterprise group, says succession planning is something too many entrepreneurs leave for another time.
In a study the firm commissioned to look at succession planning amongst Canadian small business owners, some two-thirds (64.1%) have considered their exit objectives but have yet to formalize a plan, while one in five (20.7%) have not even started thinking about one.
Smith says in the last 10 years, amongst their clients, there is a growing awareness of the need to plan for what to do with their businesses. The problem for many is where to start.
“When they become aware of the need for succession planning and what is involved with succession planning and all the moving parts in that, it can become overwhelming for business owners,” Smith says. “These owners have put in blood, sweat and tears for over 20 years to build those businesses and they have never taken their eyes off their businesses. To then do something this important and knowing it needs their full attention, can create a barrier for some. Then you may have a feeling of paralysis of where to start or knowing where to start.”
Smith says it became natural for some to pull back and focus on just running the business or to think that they can deal with it tomorrow; or that the next generation will step up and take over. That second belief is one that too often leads to consternation and even heartbreak as the owner in many cases has never spoken about their desire to leave the business to the children.
“They have never actually sat with them to find out if they have any interest in doing so,” he continues. “We find that when Mom and Dad have an interest in doing that, believing their children will naturally take over the business, only to find out when they sit down with them that they are not interested in doing so, it can be a bit of a shock.”
He says succession planning does not have to be so hard. The reality of it is that there are really three options for transitioning a business to new owners: one is to the next generation in the family, another is a sale of the business to a management group or a buyout of the business from say an employee or a group of employees coming together to do so; a third would be a strategic and planned sales to a third party.
“Once you understand what is involved in each, then you can begin to build a plan,” he continues. “One conversation to have as you make the plan is to ask what the goals and objectives are for this business. Is this business going to provide you equity or capital for the future, for retirement, for example.”
That conversation will then help in deciding what is the best strategy to take when it comes to getting a proper valuation of the business, to see what may need to be done to increase the valuation. If one is planning to sell the business to an employee or a group of employees, “had I had the right conversation with the right people in my team so as to retain them and they are on board with the plan,” Smith adds.
When it comes to a family member taking on the business, one needs to sit down with them to find out if they are ready to take on the business. Too often, businesses falter from family members being ill-equipped to operate the business, lacking the needed skills or understanding of what is involved in operating the business and working with the employees and suppliers who will be critical in keeping the business operating successfully. It may be best to keep in the back of one’s mind an old saying when it comes to a business:
The first generation makes it, the second generation maintains it and the third generation destroys it.
Smith recommends that if the succession plan will involve a family member taking over, it is best to have that family member be mentored or even have an outside party shadow the family member at work to provide an objective assessment of their readiness to take over. If some skills are lacking, then it will be necessary to put in place training and support to help them gain those skills and to be ready for that the day they take over.
“Another important piece that is overlooked is that emergency plan,” Smith says. “What happens to the business if something happens to the principal owner overnight, say a medical emergency or a death. Do you have all the right pieces in place and ready so the business can continue operating and there is no disruption to its operations or impact on the value of the business?”
None of this planning is hard to do. It takes time. Only remember, time passes, and one cannot postpone the inevitable. As Shakespeare's Richard II says: I wasted time, and now doth time waste me.
