Making Transitions

To put into scale how big of an issue succession planning is in Canada right now, consider that in the next five to 10 years, 70 per cent of today’s businesses will change hands. Or, as Grant Robinson, director of the BDO SuccessCare Program, likes to phrase it, “Three out of four businesses will have reached retirement age in the next one to two car leases.”

Robinson addressed an audience of food processors at a recent State of the Industry event hosted by the Guelph Food Technology Centre (GFTC). He works closely with family businesses across Canada and has a compassionate view of why succession planning is at the bottom of many people’s priority lists.

“Succession to most entrepreneurs sounds like dying or neutering,” he said. “But most businesses transition hands many times.”

It feels negative because succession implies retirement, which is defined as taking something out of use, said Robinson. People see their friends disliking retirement, and the view permeates. There will come a time when your business will be sold, voluntarily or involuntarily, and everyone will have two options for that sale: inside or out. At its bare bones, this decision seems straightforward, but Robinson noted that it could take 10 years to make the choice.  

“There’s no downside to getting ready to make an inside sale because you can always make the outside sale,” he said.  

According to Robinson, less than 50 per cent of businesses have a succession plan, and around 80 per cent want to keep it in the family, but only half of them think it’s a reality. Currently, around 30 per cent of businesses successfully transition through to the second generation, while less than 10 per cent survive the third. In dollar values, demographics suggest that $1 trillion will change hands in Canada in the next decade. Seventy per cent of wealth transitions in families are unsuccessful and 60 per cent of families failed to consider the effect of a communication breakdown within their business.

Starting with this last point, there are some strategies that can prevent a communication breakdown during the transition of your business to the next generation and focus on preparing for an inside sale.

YOU LEAD THE WAY
The positive mental approach is to treat the future of your business as a transition rather than a succession, said Robinson, adding that most entrepreneurs have transitioned their business many times without realizing it. Most importantly, this is an initiative that you need to lead.

Robinson’s GFTC talk outlined several different considerations you will need to take into account when planning for the next generation, such as the well-being of family members, continuing a profitable and successful enterprise, and establishing a cohesive ownership and vision. It is helpful to develop a plan to transition all types of capital as well: physical (equipment), social (staff) and intellectual (the business environment of competition, consolidation or decline). For you to make a smooth transition to the next adventure in your life, you need to ensure their business can thrive without you.

FACTORS TO CONSIDER
In preparing for an inside sale, don a “we” focus and take into account the dichotomy of business and family life.

The principles, values, history, relationships, moods and personalities of those involved are an important factor to consider. On the other hand, there are the structural realities of common interests and facts between the involved parties (which Robinson noted are negotiable because perception is reality). Bear in mind that 96 per cent of family business transition plans fail to find a positive outcome by focusing on the past, and 70 per cent succeed by focusing on the concrete side of common interests and facts.  

Getting everyone on the same page is critical, Robinson stressed. Eighty per cent of transition planning is communication on subjects like policies for family promotion, accountability, responsibility and authority (the latter being the one that is typically not addressed). Everyone needs firm rules about how people will exit the business. Therefore, it is advisable to create documents that support paying for people entering and exiting the company in ways that don’t harm the business and provide direction on topics such as compensation – in essence, the components of a shareholders agreement should be addressed.

Meetings should be conducted with an agenda with an open conversation with fellow employees about areas of concern. If you fail to find the structure on your own, bring in family council or an advisory board.

However unpleasant to think about, this is a good time to be transparent about what is in your will.

“Avoid the golden handcuffs. Don’t force kids to be in the business or to partner with each other,” added Robinson. “Don’t let your kids find out what you’ve done through the will unless a Ouija board works because there’s going to be questions.”

IDENTIFYING INTERNAL SUCCESSORS
In preparing for an inside sale for your business, the purchaser may or may not be family. In Effective Succession Planning/Ensuring Leadership Continuity and Building Talent from Within, author William J. Rothwell outlines a 10-step plan for developing internal candidates for promotion:

• Step 1: Identify the key position(s) for which the individual is being trained and ensure the person is aware and interested.
• Step 2: Determine how much time is available to develop the person for their new role.
• Step 3: Figure out which skills he or she still needs to learn by thinking about it as a performance appraisal, but from the vantage point of the position he or she is being groomed for.
• Step 4: Be specific about the learning objectives you determined in step 3. Decide what equipment, education or what else will be needed to close the information gap. How will you measure the learning objectives and under what conditions must the person perform?
• Step 5: Lay out the learning strategies needed to achieve step 4, and be aware that here may be things needed such as time away from work for further training, mentoring, or experience with specific equipment.
• Step 6: Develop clear measurements and provide feedback on progress as concrete evidence of accomplishment.
• Step 7: Determine how performance evidence will be validated: Through passing training? Oral testing?
• Step 8: Review the plan with others, such as a spouse, peers or colleagues.
• Step 9: Carry out the plan with an eye on time span and consider the consequences of failing to implement the plan.
• Step 10: Evaluate where the person stands on the outcomes when you look at the goals.

STAYING POSITIVE, USING RESOURCES
There are many reasons why exiting your business is a terrifying prospect. First-generation entrepreneurs put everything into the business, said Robinson, and then can end up 60 years old and on allowances. He has seen many cases of typical entrepreneurs having a specific type post-business ownership experience: Ninety days after the business is sold, the phone stops ringing and they go a bit stir-crazy. Eighteen months later they start investing in things they know nothing about. If you know someone doing these things, rest assured they are not alone.

Although small business owners may be reluctant to admit it, their identity is wrapped up in their business and this is one of the biggest exiting issues, said Robinson. If it is a lifestyle business, there is essentially nothing to sell but the equipment. If the business is professionalized and there is a team that can run it without you, then there is an entire business to sell. The decision may be to sell off the equipment and close up shop, and that is perfectly OK. It seems fair to say it’s best when that happens voluntarily.

Remember, the transition of your business rests on your leadership.

“If left to the spouse and kids to sort it out, that’s where people spend tens if not hundreds of thousands of dollars on accountants and lawyers,” said Robinson.

There are resources to help you along the way – the BDO website (www.bdo.ca) has a Discovery Questionnaire intended for family/stakeholders to answer and then discuss the results together. The Canadian Association of Family Enterprise (www.cafecanada.ca) also has a variety of resources at its disposal. Remember, you are far from alone on this journey!

“Because everybody is unique, we are very much the same,” said Robinson.

Laura Aiken is a Toronto-based full-time editor at Annex Business Media and has been a working journalist for over 10 years.