According to a white paper completed by the Family Enterprise XChange Foundation, family businesses account for a very large portion of Canada’s private sector companies (over 60%), and are responsible for nearly half of all private-sector employment. Family businesses are crucial to the Canadian economy, and protecting their stability and ongoing success is essential. Part of ensuring health longevity for a family business is to consider and implement a comprehensive succession plan to transition the business to the next generation without negatively impacting any aspect of the business, and ultimately, helping it grow.
If you want your family business to survive through generations, you need to turn your mind to succession planning early. In this article, we will discuss some key tips to keep your family business within the family and help build on the business’s success in the process.
Start Planning Sooner than you Think.
If you want your children to take the reins of the business, you need to incorporate succession planning into the larger business plan. Every person involved should have a clear picture of the role they currently play, and any changes to that role anticipated in the future. From the time younger generations are brought into the business, you should be documenting each person’s duties, compensation, and share ownership, along with any other relevant information. This will help to keep everyone aware of their responsibilities and avoid conflicts in the future. Changes can be made as needed, but the more transparent and flexible is your succession planning is, the smoother the ultimate transition will be.
Apart from the family members, it takes a team of dedicated and hardworking people to make a business successful. So, the succession plan should also include identifying capable and talented employees who will act as the backbone of the business in your absence, by providing support and knowledge to the incoming generation. Further, giving leadership positions to talented and deserving non-family members can promote loyalty among employees. Practice good governance by making a supervisory or advisory board that includes only non-family members.
Transferring Management and Ownership of a Corporation are Two Different Things.
When you start a business as an entrepreneur, there is no clear demarcation between your personal assets and business assets. Many people eventually remedy this by incorporating their business. Ownership of corporations is dictated by share ownership, which needs to be considered when planning for the company’s succession. If you have four children and wish to transfer ownership to each of them, yet only two will be taking on an active role in running the company, you will need to consider how to transfer both ownership and management in a way that is fair.
Giving equal ownership shares to all family members might appear reasonable, but it is not fair to members running the business. The dormant family members will be unjustly enriched, as they will provide no real function. One option would be to give active family members a larger equity stake through an uneven distribution of shares. If you are worried this could lead to conflict, you can opt for voting and non-voting shares. This will allow for equal distribution, while giving active family members more decision-making power, making it easier for them to manage the business.
Ensure the Next Generation is Well-Trained and has Sufficient Experience.
After establishing a plan for the transfer of management and ownership, you need to focus on training your next generation on successfully running the family business. Usually, one does not require any formal education to run a business, but too often a new generation takes over the reins with little formal experience, creating organizational challenges.
It is a good practice to make your children work somewhere else for three to five years before they join the family business. This will give them insight into what it takes to run a successful business, free from the additional complications of working with family members. After they’ve gained some outside experience, it may be helpful to have them experience working across various divisions within the family business to give them a broad perspective that will aid them when they ultimately take over.
Consider Whether your Children have the Same Passion for the Business.
No matter how badly you want your children to take over the business after you retire, be objective and take the time to assess whether this is what they want to do. Despite all the planning and training, sometimes children are not as passionate as their parents about the family business. If this is the case, it is wise to look to other relatives or connections who can bring the enthusiasm necessary to take over the business and manage it successfully.
Seek Help and Advice from Experienced Business Consultants.
Before taking any concrete steps toward succession planning, seek help from a professional who can guide you through the process. Work with an experienced business consultant for the formulation of the succession plan and transition of the family business. They will provide direction and help implement strategies necessary to a successful transition and help you communicate the legal and financial aspects of the family business to the next generation.
Contact Edelkoort Smethurst CPAs LLP in Burlington for Strategic Succession Planning Advice for Family Businesses
Making a comprehensive succession plan is vital in keeping the family business within the family and helping to ensure its longevity. The business consultants at Edelkoort Smethurst Schein CPAs LLP can help prepare and effectively implement a succession plan for your family business. Speak to one of the experienced tax practitioners and business consultants at Edelkoort Smethurst Schein CPAs LLP before making any hasty decisions.
At Edelkoort Smethurst Schein CPAs LLP, we advise businesses on a variety of issues, including winding up and succession planning. We work directly with business owners as well as small and medium accounting Firms to implement tax planning strategies and achieve the most favourable tax results for small business owners and their families. If you would like to discuss how you can make a tax plan that will better benefit your family and/or business, contact us to schedule a consultation. Please reach out to us online, or by phone at 905-517-2297.