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Posted on March 1st 2009 in Commercial Law

Is Your Family’s Business Ready for the Hand Off?

“…it is difficult to pass a family business successfully from one generation to the next if family, financial and legal preparedness do not exist.” –Canadian Journal of Policy Research
In 1999 Deloitte & Touche and the University of Waterloo published the results of a survey that considered how ready Canadian family-owned businesses were for the change in leadership that was coming. What they found was that despite the fact that 78 per cent of family business leaders planned to retire over the next 15 year less than 25 per cent had any sort of long-term strategic plan. In fact most had not even identified a successor.

Unfortunately eight years after that survey, the lack of preparedness for a smooth transition remains high. If you want your family business to survive into the next generation, it is important that you begin thinking about succession now. In fact, proper planning with a long lead time cannot be overemphasized.

In this article we provide you with a general overview of the success planning process. In a future article we will discuss the importance of integrating the business’s succession plan with tax planning for your retirement as well as the distribution of your estate.

Why Plan?
Most entrepreneurs hope their business will be a lasting legacy. However, without a well-thought out plan, this is unlikely to occur. A proper plan will lay out what should happen in the event of the business leader/owner’s retirement, illness and death.

The Steps
While every succession plan is unique and will be tailored to the individual business, there are several common steps that go into the creation of any solid succession plan.
1. Information gathering and deciding on the viability of keeping the business in the family.
2. Developing the succession plan including a timeline.
3. Implementing the succession plan.

Information Gathering
Many owners dream of passing their business onto their children. Therefore, the first step in the succession planning process is to find out if any of the children are interested in taking over the business. (What if none are? What if more than one is interested?) Next you have to determine if they are qualified to take over. These issues require serious family discussion and you may want to bring in an independent advisor to assist in this phase.

If family succession is not going to work, you must consider other options if your business is to continue beyond your leadership.

Developing the Plan
Once you have taken the time to gather the necessary information, you can begin the actual work of drafting a plan. The following are some of the key decisions that will have to be thought out.

o Who is going to take over the leadership reigns?
o What additional training and experience will the successor require before taking over the leadership?
o When will the changeover take place, including when the transfer will begin and when it will be completed?
o What role will the current leader play after he or she is no longer responsible for the day-to-day operations?
o How will the change in leadership be communicated to third parties including, non-family executives, employees, suppliers and customers?
o What will happen to the current leader’s shareholdings?
o How will the current leader’s personal financial situation be secured?
o What is the contingency plan for unexpected events such as the illness or untimely death of the current leader?
o What legal vehicles will be used to carry out the succession?
Implementing the Plan
Once a sound plan has been created you must then implement it. If it sits on a shelf gathering dust, your work will have been for naught.

Your family should be fully aware of the contents of the succession plan. The plan should be available to those who will be directly affected by the transition, including key employees, customers and business contacts.

One of the most important keys to a successful implementation is to ensure that the person chosen to succeed will be ready to take control at the appropriate time. Your successor should participate in the business by working in different areas of it and should be allowed to take part in making business decisions. In addition, your successor should meet the main business contacts.

Another important aspect of a smooth succession is to effectively deal with the principal non-family employees. You want to ensure that they will stay during the transition and that they will respect your chosen successor. You also want to treat them fairly, though not necessarily equally, regarding compensation and ownership.

Finally, you should review your succession plan at least annually. It should be revised to address the changing circumstances of the key players.

Thorough and thoughtful succession planning is an important, though often overlooked key, to the long term success of a business. Succession planning requires time and commitment and the help of outside professionals.

Howard Steinberg has worked with family-owned businesses for many years. He would be pleased to answer your questions and to assist you in this process.

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