Succession planning: Who will take over the family business?

Preparing for succession

If you’re a business owner in Canada, you may not have thought about succession planning. You might not see yourself retiring, or your children might be in their 20s and you don’t see them taking over just yet.

However, none of those are reasons to put off succession planning in the coming years.

Creating a succession plan is a great way to ensure you get the full value for your business and can pass it on in the way you had hoped. This is especially true if unexpected trouble arises, such as a health problem.

If you need to suddenly sell, you’re not going to optimize your company’s value and will probably leave your family with a larger-than-expected tax bill. The business will also have a hard time continuing its normal operations.

Having a succession plan at the ready is a good idea, even if you’re not planning to exit any time soon. It helps minimize turbulence while transitioning the business from one generation to another.

Business succession takes time

Deciding to step down

The process of letting go of your business is quite emotional. It can take a long time to come to a decision that you’re perfectly comfortable with.

Choosing your successor

You will have to decide who you want to pass the business on to—a family member, company insiders (members of your management, employees or both) or an outside buyer.

The ideal successor will want to build on your company’s success. Find out how they plan to ensure its growth after you’re gone. What projects do they have in mind? What’s their vision? Make sure you talk about it—if you transfer the business, you’ll have to accept that your successor’s vision may be different from yours.

Planning the transition

For entrepreneurs planning to sell their business, the best strategy is usually achieved by not rushing things and by taking the time needed to ensure a smooth transition. It can take up to five years and, in the case of a family business, as many as 10, depending on the firm’s size and complexity.

Involving the right professionals

Give yourself lots of time to both plan and execute your succession. Be sure to consult early and often with key advisors, such as the following:

• banker and other financial partners
• accountant
• lawyer
• advisory board (if applicable)

You may also want to hire a consultant who specializes in business successions.

Securing financing

Financing for the transition is key, especially if it involves an internal successor who doesn’t have a lot of capital to invest. You may have to use a mix of financing, including the following:

• the buyer’s investment
• vendor financing
• a term loan
• mezzanine financing

Maximizing your company’s value

Remember that you’ll need time to optimize the sale value of your company. This means making sure it has good growth prospects, a record of profitability and a solid balance sheet. You’ll likely need to invest in the business, as well as remove personal expenses from the books.

Successors need coaching

If you plan on selling your business to a family member or manager, it’s vital to prepare them for a smooth transition.

It’s rare for a second-generation family member or manager to be able to step into a CEO role without active mentoring. The training process can take years—your successor will need time to learn how all parts of the business work and to build relationships with customers, employees and suppliers.

Your HR department or manager can help your successor take over the reigns of your business. They can define roles and responsibilities, identify training requirements and set up mentoring or job shadowing.

Be prepared for a non-family member to take over

Make sure your son or daughter wants to take over from you. You’re asking them to dedicate the rest of their careers and lives to this company.

If there’s no obvious family or management successor, consider looking for an outsider who is a good fit. You can invite them to work with you in the company during a coaching period, with an eye for them to eventually acquire the business.

You’ll need to identify the successor’s knowledge and skill gaps and then work with them to establish a plan to rectify them. This can be through formal learning, informal job shadowing, and mentoring by you and other team members. The person can also gain on-the-job experience by working in various roles in your company.

What you’ll need to think about when selling your business

Part of good succession planning is preparing for the sale, with many things to keep in mind:

• A formal plan will need to be drawn up. It will help you avoid disagreements down the road.
• Your selling price should reflect the fair market value of your business, even if you’re selling it to your children.
• Discounting your price should be discouraged because you will generally need the funds for your retirement.
• Plan on how you might help the buyer finance the transition. It could mean using a mix of vendor financing, buyer equity, term loans and mezzanine financing.
• Consider valuation, financing, tax considerations and the legal structure of the new business
• Set out a timetable for the transaction.

How to transition your business once it’s been sold

A phased exit usually allows for a smoother transition. You could gradually step back from day-to-day management in stages as you transfer responsibility and ownership.

Consider how much, if at all, you want to remain involved in the business after the transition, so you can structure the transaction accordingly.

Ideally, if you’ve done your succession planning right, you should be able to leave your job fully.

Continuing to participate in company activities, including chairing the board of directors, could prevent the company from growing under new management. The person replacing you may redefine his or her role as head of senior management, and you’ll have to accept this decision.

Prepare your successor to the best of your ability and then have faith and confidence in their decisions.

Next step

Find out more tips for preparing your exit strategy by downloading our free guide, Preparing Your Exit Plan.