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Exit Planning: Succession plans for family businesses

Ian MacFadden
Ian MacFadden - Contributed

BY IAN MACFADDEN

If you’re the owner of a successful family business, you will eventually be faced with decisions about how to transition ownership when the time comes for you to step away.

There are many variables to consider and decisions to make. Making preparations sooner rather than later will ensure there is sufficient time to get it right, for the benefit of you and your family. And the longer the lead time, the greater the likelihood of a successful transition.

The success rate for generational succession is notoriously low. The accepted “rule of thumb” is that only 30 per cent of family businesses survive the second generation of ownership and 15 per cent make it through the third generation. Poor or non-existent planning is often cited as the main reason for these outcomes.

The 2014 Deloitte Family Business Survey, which reached out to 120 family-owned Canadian companies concluded that four in every five family businesses will not be adequately prepared for succession.

It can be difficult for an owner to face the prospect of handing over the business to someone and moving on to an uncertain retirement. And it can be equally difficult and uncomfortable for family members who work in the business to engage in the process with objectivity. Owners typically fear the loss of control and worry that a new owner will want to make changes to the business they have taken years to build up. Choosing a successor from among competing family members vying for the opportunity can be an emotional minefield. And so it comes as no surprise that most owners procrastinate on this decision, even while the business moves inevitably toward the transition event.

The most critical decision for a family business owner will be the selection of a successor. If there is a logical successor in the family, has this individual been adequately groomed and mentored for the challenges of running a business? Do they have the maturity, experience and skills required to take the company forward? Have they performed well in their previous roles? Do they have the support of the family as well as non-family employees? If there is no obvious family successor the best thing for the entire family may be to sell the business to a third party. Although it would spell the end of the family enterprise, it would mitigate the risk of endangering the business by putting the ownership in the wrong hands.

Not to be deterred, there are many examples of successful transitions for family businesses. What they tend to have in common is a commitment by all family members to be fully engaged in the process, working toward decisions that are good for the continuity of the business and the harmony of the family.

Ian MacFadden is co-founder and Partner of exitRITE Planning Services. His column appears the first Thursday of each month. You can reach Ian at ian@exitrite.com or go to www.exitrite.com

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