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Succession Planning: Start in the Right Place

Home Blog Articles Succession Planning: Start in the Right Place

Arguably, when it comes to family business, no topic is more important than succession planning. It is vitally important for future of both the family and the business. Yet, quite frequently, the succession planning effort begins at the wrong place.

Stephen Covey popularized the phrase, “begin with the end in mind,” and it is hard to argue with the wisdom of his statement. However, when it comes to succession planning, what is the end that we should have in mind; and when thinking about this critical topic, where should we start? Let us consider the options.

A strategic planner might say that planning for the future of the business is the first priority. Ultimately, they are right, at least in one sense, because if the family enterprise fails, the need for succession planning becomes irrelevant. Without a vision for the future, a family business is at risk of working on details which may not serve the real objectives. Looking at the big picture would be a logical starting place.

Some may say we should start with considering what the owners or the elder generation would like to see happen to the business. After all, they are the ones who own the business; we should ask them what they want to see happen in the future.

However, if you ask a tax advisor, you will hear that planning to minimize taxes when transitioning from one generation to the next is essential. Skilfully choosing the most tax effective strategy is critically important to avoid foolishly squandering all that has been achieved by the business over many years.

A financial expert may suggest that the key to succession planning is to proactively assist the elder generation to plan withdrawals of some of their resources from the company. This is will allow “mom and dad” to enjoy their well-earned retirement years. In addition, they might point out how important it is to create an environment where the successor generation can begin to run the business with more autonomy. This can only happen if everyone is confident that any miss-steps in the business will not cause financial hardship for the elders. Failure to create this situation has often been the “Achilles heel” of many good succession plans.

If we asked human resource professionals where to start, they would likely emphasize the importance of training and mentoring for successor candidates.  Whether the would-be successors are family or non-family, grooming future leadership for the business and the family is essential.

As I have considered these options for where to start in the succession process, I would agree that each and every one of these considerations is important. In fact, beginning the process with any of these priorities would be constructive, and will lead to some good results and potentially a good plan. However, the story with succession in my family illustrates a common and risky oversight not considered above.

In our family, my siblings and I were beneficiaries of an “estate freeze”. While this was good tax planning, we were never consulted about whether or not we wanted to be partners with each other. In addition, we were initially made co-owners with our cousins, again through a series of estate freezes. Never, in nearly twenty years of being co-owners, were any of us, siblings and cousins, asked if we wanted to be business partners.

An involuntary shareholder arrangement, such as the one created in my story, is a host for many problems. Often, family who inherit shares may not see the responsibly that comes with the ownership of the company. When the younger generation are not involved with the business operation, often they will not be as committed as their parents to the ongoing concern of the business. Alas, many who wind up in this situation get caught up in political debates over power, rather than thinking about the health of the enterprise.

In contrast, Fred and Ron Mannix (Manalta Coal, Alberta) were asked by their father many years ago, if they were interested in owning the family company. When they said they were, he gave them the responsibility to develop a co-ownership agreement and a strategy for the future, which they were to submit to him for approval. It took 5 years and much iteration, but they eventually created a plan that met their father’s approval, and the shares in the company were transferred to Ron and Fred.

Asking the next generation what they hope and dream for in their lives may be the optimal place to start the succession planning process. If they are interested in owning the family enterprise, then considering how this could be accomplished becomes a path worth exploring. If they are not interested in owning the business, either as a “sibling team” or as individuals, then the stage may be set for either a sale of the business or going public.

The next generation can typically be the last to be consulted regarding succession. The parents and their advisors will often assume that they will want to own and operate what may be passed down to them. Seldom are siblings asked if they would like to be in business with each another, or if they are interested in learning what it takes to become knowledgeable owners.

With many business families it is difficult to start a conversation about future ownership. This is quite concerning, given how critically important this topic is. The subject is seldom raised for several reasons.

There are many other succession matters to be dealt with, and the professional advisors working with business families have other priorities to attend to. Few individuals have been trained and have the experience to discuss ownership succession, and to assist in the preparation of future owners for their roles. Each profession often considers this matter to be the responsibility of another.

Mom and dad are certainly not trained to talk about “ownership” of the business with their children. They are typically too busy running the business to discuss ownership succession, and they are concerned about creating a sense of “entitlement” if they did. In addition, management succession is a more tangible and pressing concern, one that needs to be dealt with – so ownership succession is relegated to the background.

Nonetheless, it is time that the family members who are in business together started to have these conversations. In many of the family discussions I have been privileged to facilitate, the next generation has been invited to share their dreams for the future. After acquiring this information and creating a foundation, family businesses are then able to discuss the specifics of ownership succession for the family business.

There are many factors and many elements to review when considering the right place to start the discussion for succession planning.  When we begin with the end in mind, and we consider this to be who is going to ultimately own the business in the future, a wise place to start would be to ask the kids, “Would you like to own this one day or not?”

If the answer is yes, we can then invite and assist them to begin their training to become knowledgeable owners. Suddenly, all the other succession planning issues will be easier to sort out, and we might find that successor generations will learn to become knowledgeable intelligent owners! Starting in the right place should result in everyone ending up in a better place in the end!