A Starting Point – Part 3 of 3
Succession planning is not a one-and-done conversation for business owners. Much like the work of building the actual business, it is an ongoing, sometimes shifting, process.
Owners sometimes start with one fixed view of how they wish to see the business transition, only to pivot when market forces or family dynamics suddenly shift their plans. Still, there remain many owners who do not make any concrete plans either way, leaving their businesses (and families) in confusion when they pass or otherwise have to exit the business unexpectedly. Why do some people avoid the inevitable? Is there anything advisors can do to help them?
This is the final post in a three-part series creating a baseline for succession planning discussions (see Business Succession Planning – Understanding Key Drivers and Basic Principles for parts 1 and 2 of the series). The goal is to give advisors a common framework and reference point for these discussions, so we can all better help individual business owners build their comprehensive succession plans.
The first two posts focused on understanding an owner's emotional motivation for succession planning, and how that translates to the options available to meet those goals. The next step is to put together the technical components that execute the owner's plan. This seems like the "easy" part (though even evaluating the technical components itself is a complicated task), but in reality, putting together a comprehensive plan is often still a struggle for advisors, even once they understand a client's motivations and can map it into the options available. Why? Because the motivations can intersect in often competing or opposite ways, and it often takes time to make sense of how to prioritize the various solutions available.
Putting the Options Together
Ultimately, it is the intersection of control and economic benefits that will dictate the planning available, but also desirable, for each business owner. For example, say a business owner expects all their children to remain involved in the business after they are gone. This owner may want to retain voting control (and often a sizeable portion of the enterprise value) until their death but may be open to slowly involving the children in the business in advance and may even allocate some growth to the children through a discretionary family trust or other similar structure. There should be a detailed discussion around control and whether it is to be truly held equally, or whether any delineation can be made, even around the types of decisions one child or another might have priority over.
Building exit options, including buy-out mechanisms, through a shareholders' agreement or specific conditions attached to the shares directly in the articles, will be important to give the children flexibility in the future. Thought should be given to the valuation and funding the purchase price. Sometimes, these conversations are best left to the children or next generation directly (with the owner's permission, of course). If the intention is for the children to be involved eventually, it can be easier for an owner to understand the need for them to decide between themselves how to deal with their interests, rather than the owner being the gatekeeper.
Giving the children a roadmap for how to consider third party offers should also be considered. Even if an owner is adamant that the business stay in the family, the reality is that many next-generation transitions cannot make it work. The change from one to many owners is difficult in the best of times and in the closest of families. Add any strife, hurt feelings, long-simmering disputes, or even simply differing views on the value and direction of the business, and it is easy to see how a sale to a third party may be most advantageous to retaining some sort of family harmony. If an owner refuses to consider the possibility of a third-party sale while they are alive, it again may be necessary to build in those mechanisms and delineate the process of evaluating and accepting third-party offers in a shareholder agreement or other corporate agreements and documents between the members of the next generation instead.
The key to all these discussions is to have them early and often while the owner is still alive, capable, and involved. It is imperative to understand the broader family and personality dynamics to help clients plan properly (or at all). Even if the next generation takes over negotiation of the post-transition landscape, these discussions are best had while the parties enjoy the relative stability of the owner's presence. It can be a unifying force to finalize plans while the owner is still able to enjoy the calm of knowing the next phase is taken care of.
In the end, the main message of this series is that advisors should not shy away from discussing family dynamics and understanding the broader motivations and implications behind transition plans (or lack thereof). Quite the opposite – it is only when advisors consider the real, multi-layered human beings in front of them as whole individuals that they are truly putting the best options on the table. Succession planning is not just a numbers and legal game – it is an emotional, difficult, but ultimately worthwhile process that advisors, including this author, are honoured to have taken part in.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
