February/March 2013

Family Succession Planning

Small and medium sized family businesses are vibrant and important contributors to the economy. Statistics will show that in many cases they are the lifeblood of our economy.

These businesses were founded by the originating generation, thereafter either continued successfully by the next generation, or in many cases failing because either the next generation did not have the capability to succeed or, tragically, no feasible succession plan was put in place.

During the past 40 plus years, we have had the opportunity to assist many clients develop strategies for a seamless generational transition. The process is not always simple; it requires a commitment by the client to participate, which is not always easy. Questions must be asked that are not always pleasant to confront. In a number of cases, clients procrastinate to act and we have witnessed devastating results, most notably protracted estate probate, litigation within families and the inevitable financial stress created by these activities. The end result is often a closure or distress sale of what was once a successful business.

How does one avoid such results?

We offer herein some questions for consideration. In this case study we are going to assume that the client is a family-owned and controlled business operating in Ontario. The principle shareholders and owners are either Mom and Dad, or their holding companies. There are three adult children, all married with their own children (grandchildren). Of these, one son (Bob) is active in the business. The other children are not active and not interested.

We shall say the most recent valuation of the business is at $10,000,000 (keep in mind value does not necessarily matter).

Mom and Dad are now into their twilight years, wanting to spend more time away and have complete confidence in Bob’s ability.

So you ask, what is the problem? Either transfer, sell or leave the business to Bob!

But what about Bob’s siblings? OK, then leave the business equally to all three of them!

Before taking any such action, Mom and Dad need to sit down with their advisors and develop a “plan of succession”, taking into account a number of issues such as:

• General plans for estate distribution at death of second parent.
• What are the intentions should Dad predecease Mom or reverse?
• Will generation skipping be a consideration?
• Health of family members. Is anybody likely to require long term health and financial care?
• If the business is to go to Bob, should that be pre or post-mortem of Mom and/or Dad?
• Tax implications of any desirable action keeping in mind that business planning should be paramount with tax implications an important but lesser consideration.
• If the business goes to Bob, what is left to “equalize” (if desirable) to the other children?
• Are there any “Key Personnel” who should be considered for special treatment? If so, when, what and how?

The list of questions goes on and on. The above are just a few examples of the many difficult factors that need to be addressed when considering a successful succession of your business.

What is of absolute importance is that, having spent so much time, effort and energy creating a successful business, why not spend a few hours preserving it?

We are always pleased to discuss these issues with our clients on a completely confidential basis.