Growth By Acquisition
Plan for Long-Term Success
Nothing lasts forever. Indeed, the 20 million family business owners in North America must - at some point - leave their companies to the next generation of leaders.
A transition of this nature can make or break the future of the company. A sound succession plan ensures that the business will continue to thrive and deliver the financial rewards the owner desires. Without succession planning, business owners are putting their companies — and their own financial futures - at risk.
For many owners, leaving the company is inconceivable. They think that no one else can run the business like they do. Or that there are too many challenges only they know how to handle. Or that the business simply can’t survive without them.
Progressive owners see opportunities instead of obstacles. Taking the time to train new leaders, address problems and get the business in shape for sale or transfer is the only way to ensure that both the owner’s needs and the business’ needs will be met satisfactorily.
One key factor is the owner’s long-term goals. Is it important to optimize value in the company so that the owner can sell for maximum profit to support a certain lifestyle? Or is the owner more interested in leaving an ongoing legacy and thriving company for his or her heirs or key employees?
The answers to these questions may take a while to discern, and may change over time. But while pondering these big issues, owners can also focus on more concrete factors:
When? Many financial professionals say that succession planning should begin the day a company opens its doors. While this may not be a reasonable goal for most owners, the idea behind it is a sound one. It takes time and effort to create a plan and get everything in place to make it work. Three to five years is an appropriate amount of time, but ten years is even better.
Who? It’s a good idea to assemble a team of advisors to guide the transition process. Owners should start by talking to their accountants, who can "quarterback" a transition team of professionals, including an attorney, tax advisor, estate planner and insurance agent. Depending on the timing, other family members or key company executives may be brought into the process. Confidentiality should be maintained so that employees, vendors and competitors don't jump to conclusions about the future of the company.
What? There are two basic succession paths. One involves transitioning the company to family members, typically the owners’ children. If this is the path, the owner must identify a capable, interested successor, get him or her ready to take over the company, and create a plan to allow the next generation to begin making decisions. Or, if the children are too young or inexperienced, the owner may need to identify an interim successor to move the company forward until a family member is ready to take over.
Of course, the transition to the next generation must be structured in a way that makes sense from a tax standpoint. An outright gift (as opposed to a structured, tax-efficient transfer) could have onerous tax consequences.
The other paths involve selling the company to an outside third party or to key employees. In either case, it will take time to identify potential buyers or set up a purchasing vehicle for employees. When the time comes, it is important to structure the deal in a way that diminishes the owner's tax burden.
How? Regardless of which path is chosen, owners have to get the business ready for new leadership and get themselves ready to start a new chapter of their lives. Sometimes it's easier to identify what the business needs for long-term success than it is to identify what the owner needs for long-term contentment. A new setting, a new hobby, a new schedule - these are just some of the things that owners might want to ease into as they prepare to leave.
The bottom line is that it takes time and effort to create a succession plan that meets the goals of both the business and its owners. Be sure to start early to ensure a good outcome.
Our firm can help you create a succession plan that works for you and your business.
Are You Prepared?
According to a recent survey by the Canadian Association of Family Business, approximately 71 percent of family business owners plan to transition their companies in the next decade, but only 6 percent have a plan in place to do so.