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Here are the answers to the top succession planning questions that were asked. In most cases, similar questions have been grouped together to offer a more complete response to a particular topic. We have archived our more specific questions, feel free to peruse through them.
 More specific questions
| | 1. Realities of family business succession | | 2. Leadership transfer | | 3. Family business succession methods | | 4. Transition in the non-family organization | | 5. Transferring ownership | | 6. Selling a business | | 7. Buying a business | | 8. Encouraging owner to plan transition | | 9. How BDC can help you with business transition |
| | 1. Realities of family business succession | Q. What are the chances of a business successfully passing on to the next generation and the generations after that?
A. Succession success rates have not been very good historically, but promise to improve slightly as more focus is put on sustaining the family business. The rule of thumb is that about 30% of Canadian family-owned businesses successfully pass on to the second generation. A meagre 10% move to the third generation and succession rates after that are below 5%.
Some forces that act against businesses being passed on within the family include:
- They are really self-employment businesses. Many businesses, especially those involving sole operators or very small numbers of employees, are "temporary" businesses in that they are not meant to be lasting, or to act as some kind of legacy.
- The business is built to be sold. A common business strategy is to build a business to a point where it becomes an acquisition target for a larger business.
- There is pressure to turn strong businesses into publicly listed (on stock exchanges) corporations in order to finance growth. This usually requires outside management and often dilutes ownership by the family.
- Social viewpoints are changing. Many children no longer want to work in their parents' business, and prefer something more "interesting" or modern.
- Technological advancement is shrinking the lifecycle of businesses. According to some experts, it is unlikely that a business today will not last more than 30 years.
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| | 2. Leadership transfer | Q. How do you transfer leadership of an organization to the next generation?
A. Through careful planning. Leadership succession can be a difficult time for an organization as workers and managers alike are forced to struggle with uncertainty and other emotions that come with change. Sometimes that change is managed so badly that the organization or business fails.
Therefore, many organizations take a "whole business" approach to leadership transfer in which they view the change's impact on the entire business, not just on the leader and his or her successor. Usually, this is a sustained process that exists over a period of years and involves all stakeholders, including workers, customers, suppliers, governors (or boards of directors) and other interested parties.
The first step in this process is persuading the leader to prepare for an exit. For many organizations, this is an automatic process instituted by governing boards as part of proper management.
However, for many family firms it can still be a tricky prospect because, often, the founders or owners do not want to consider the possibility. This could be because they fear the business may not continue without them, they cannot identify a proper successor, they do not want to face the future, or simply they are too busy.
But succession planning is more important today than ever. Generally it involves a seven-step process:
1. Leader identifies and understands his or her personal dream and vision.
2. Those involved in the organization, if it is a family firm-family members must identify their own visions.
3. A strategic plan for leadership transfer.
4. Designated successors must be identified, prepared and trained.
5. Transition to new leadership must be undertaken, usually gradually.
6. Leadership or ownership must be transferred.
7. Leader or owner must have a well-thought-out estate plan. | Back to top of page
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| | 3. Family business succession methods | Q. How do we plan the transfer of our business to another family member?
A. Statistics show that the majority of business owners have very little in the way of succession plans in place other than a simple financial plan for their estate. There are many reasons why owner avoid succession planning:
- Feel that they are too young to retire and lack belief in the business' ability to generate enough retirement income.
- Refuse to accept the possibility of death or other kinds of exit.
- Lack faith in potential successors and so they put off planning.
- Potential successors in the family may be merely pretending to be interested in succeeding to the leadership role, and therefore are resisting the process.
- Confusing personal wishes with the business' needs. Owners may want a potential successor to take over management, but the candidate may not have the ability or the desire. Sometimes another owner is required to inject fresh vision and leadership.
- The successor preparation process takes some time and money, so some owners economize by postponing such planning.
Invariably succession planning begins with communication of the concept to the owner/founder, usually by a potential family successor, or someone they trust for advice such as an accountant, lawyer, or fellow business owners.
A common method for opening this communication is the institution of an advisory board to the business—which can be as formal or informal as the owner wishes. A board of advisors will supply the owner with a neutral perspective and can often be used to govern many of the steps involved in succession planning. In many cases, a consultant is brought in to help manage the process. BDC branches have on their roster several succession consultants. | Back to top of page
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| | 4. Transition in the non-family organization | Q. Does an organization that is not a family owned operation have to worry about succession? If so, what should it do?
A. Leadership succession is as important for non-family owned organizations as it is for the family firm. In fact, it could be argued that leadership succession of corporations and associations is more important because it affects the core of the operation's strategy for conducting business. So leadership succession becomes a core part of the operation's strategic plan.
Most corporations have governing boards of directors that are quite aware of this problem and insist that the company always have an up-to-date succession plan in place. And, increasingly, many associations and other organizations are insisting that a succession plan of some sort always be in place to guide the operation in the event of some unforeseen circumstance such as death of the leader.
Succession planning for an organization is similar to that of the family firm. However, an important difference is that there is usually much more emphasis on how the successor will implement, or manage, the operation's strategy. Therefore, there is often an added importance to choosing the proper candidate for succession.
Whereas previously, the job invariably went to the second in command, or the next person in line, most organizations today thoroughly search within and without the organization for the best candidate. Also, this is increasingly becoming a more open process because there are many stakeholders involved with an organization, and they can become quite upset if they are kept in the dark about what the organization is doing.
For most organizations, the key to a successful leadership transition is for the leader to announce a date of departure, a thorough search to be conducted for a capable successor, communication be constantly conducted among stakeholders, and finally, a smooth transition to be made.
Increasingly, an advisory role is often found for the departing leader, who usually possesses wisdom that can help the successor.
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| | 5. Transferring ownership | Q. I'm starting to think about retiring. What do I do with my business?
A. Everyone who operates a business will reach a point when they wish to, or must because of health or age concerns, leave the business. This could mean retirement, sale of the business or simply winding it up and closing it down.
Collectively, these are known as exit strategies, and every business should have one. Yet, exit strategies are rare among small businesses, largely because most small business owners spend most of their time concentrating on starting and building their businesses instead of leaving them.
As with any strategy, exit strategy planning follows a predictable pattern. First, owners must identify a vision for the business – and for themselves – through some personal soul searching and information gathering. Then, once they have identified an exit, they must begin planning and executing what it will take to achieve that exit. Because exiting a business involves many steps, this process must begin long before the actual event takes place. Usually, advisors suggest an exit strategy begin at least 2 years before the exit.
Common business exit methods include:
- Passing the business to another family member. This requires identification of likely candidates and then training them to manage the business successfully. This could involve some time, depending on the complexity of the business.
- Selling the business. Businesses must be prepared for sale so that the owner can maximize his or her return. Simply making cosmetic changes to a business at the last minute and putting it on the market for sale often results in reduced return. Usually a sale requires a long-strategic management process, that produces evidence of growth potential and is attractive to potential buyers. In addition, likely buyers should be identified ahead of time, and alliances or overtures made before the actual event. A version of selling a business involves simply closing it and selling a client list, or "book", to a competitor.
- Management buyouts or employee buyouts. Often this is the first place owners, who do not have a candidate for succession, look to in order to pass on the business. Invariably, this method is used when the business owner is concerned with continuance of the corporate culture. Usually, in these cases there are legal processes, such as arrangement of shares, that must be taken care of first.
- Takeover or phased exit. This often occurs when an owner wants to leave a business, but does not completely exit. It is also a method for slow transference of a business to a new owner who is still undergoing a training period. With this method, the owner sells a stake in the business to a partner, and the stake grows as the partner takes on increasing managerial responsibility.
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| | 6. Selling a business | Q. I want to retire but don't have anyone in my family to take-over my business, so I will have to sell it. How do I do that?
A. Perhaps the first thing you should do if you want to sell your business is consult an accountant or lawyer regarding tax and estate planning implications of sale. Then, if you want to maximize the eventual sale to fund your retirement, you must ensure that it is a good business with some value. Then, find a lawyer or consultant who specializes in mergers and acquisitions to advice you on what is required to do this.
Sale of a business can be complicated and usually requires many tasks that must be completed in order to maximize return. There are several ways to sell a business, everything from using business brokers to canvassing competitors, to contacting industry consolidators and presenting yourself as a potential acquisition target. But each is different and requires differing amounts of involvement by the business owner and his advisors.
One thing to keep in mind when considering the sale of your business is timing. As with most sales situations, if you are in a hurry, you may not realize the return you hope for. Just as is the case with selling a house, the time you take to improve the property pays off in a higher sale price.
One way to improve the "property" is to put yourself in the place of the buyer, to recognize his or her needs, and then shape your business to fit those needs. Usually, buyers of businesses are concerned with:
- Business valuation, which can be determined through several different accounting methods such as comparable transactions, or discounted cash flow.
- Financing mechanisms such as share swaps, or shares and cash, that allow them to buy the business.
- Risk factors, elements of investigation that go into any investment. Keep in mind that buyers are really investors. These could include growth potential, industry conditions, operational problems, etc.
- Integration of the new owners with the existing business.
To find a buyer, most sellers first put out the word through their circle of acquaintances within the industry, consult advisors such as accountants and lawyers, who often keep an eye out for businesses for sale and they advise industry associations that they are interested in selling, and occasionally, engage a business broker.
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| | 7. Buying a business | Q. I want to buy a business and am thinking of looking for one where the owner is retiring. How do I find the right one?
A. Buying a business outright, or buying into a business as a partner or investor is a legitimate method of entrepreneurship for those who want to operate a business but do not want to undertake the difficult process of launching one from scratch. A variation of this involves franchising, in which a turnkey business operation is formed by a franchiser and then sold to various small business owners.
However, there are dangers in buying a business.
- It could be failing.
- It involves a partnership situation and the partners may not get along and/or have differing visions of the business' future.
- May not be what was promised.
- Buyer's purpose and strategy may change and no longer be appropriate for the business.
To find a business for sale, you should first look within an industry you know. It can be quite an obstacle to operate a business in an industry where you know little about. On the other hand, some distance from the day-to-day skill sets used in a specific business may allow you to take a more business-like approach and avoid the "self-employment" trap.
Once you have decided where to look, you can:
- Approach your contacts within the industry. Tell your network of advisors and business associates what you are looking for and ask for suggestions.
- Approach business owners. You may find a business appeals to you and you would like to operate it. If so, why not approach the owner and offer to buy it? The owner may not have been planning to sell, but an offer is a great motivator.
- Approach industry associations. If you know the industry in which you want to operate, consult associations concerned with that kind of business. Also attend trade shows and conventions and chat with various vendors for some business intelligence. You may discover they know someone who is interested in selling.
- Join business networking groups. Local Chambers of Commerce, or in bigger cities, Boards of Trade, are usually nerve centres of business and are therefore good places to find out if a business in your chosen industry and region is for sale. Similarly, other business networking groups usually can supply intelligence on other businesses.
Lastly, when considering buying a business, also consider the needs of the seller so that you can strike a deal in which everyone is happy. Generally, sellers are concerned about the business' valuation, the emotions involved in relinquishing what is often a life's work, taxes, potential disruption of the operation, and post-sale risks, such as failure of the business to provide a retirement income.
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| | 8. Encouraging owner to plan transition | Q. How do you encourage someone to step down and nominate a successor to help out with the organization?
A. It is always difficult to convince a reluctant owner to plan a succession, largely because there are so many emotions connected to a business that has been founded or managed for some time by that owner. The business owner is in an emotional position similar to "empty-nest syndrome", the feelings that parents experience when their children leave home.
Also, most business leaders have personalities that are versions of the "warrior" combination of leader/manager. Business owners have placed their personal capital and families' financial future at risk to achieve success based on individual initiative and merit, and often feel that the business cannot survive without them. As with all kinds of planning, individual emotions, fears, and day-to-day worries also complicate the picture.
Usually the best way to "encourage" someone to begin succession planning is by simply asking the owner about his or her own mortality: "No one is immune from tragedy, death, or retirement, so what happens if you are not here to lead the business?" These are immediate concerns, but they often lead to thinking about larger issues such as who will succeed the CEO when he or she retires or decides to slow down.
These questions should be asked at an appropriate time, perhaps in general management discussions, when business planning, or when conducting visioning exercises – times when big-picture thinking is encouraged. These are not issues to be discussed when the leader is routinely putting out fires and dealing with details.
Also, find the appropriate person to ask these questions. Most owners don't listen to just anyone, so the questions should be asked by someone the owner trusts and respects. If this is not a trusted lieutenant, employee or family member, then it should be an outside advisor such as an accountant or other financial advisor, lawyer, consultant, or board member.
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| | 9. How BDC can help you with business transition | Q. What is BDC's role in transition planning. What can they offer entrepreneurs?
A. Businesses rarely remain the same for long periods of time. The marketplace is continually changing, and these changes are coming ever more quickly. Similarly, entrepreneurs who operate these businesses are also changing more quickly. The result is that many businesses are almost always in some form of transition.
Dealing with this transition has most commonly been termed "succession planning". This term is used less today, however, because it usually meant passing on the torch to a family member and this is less common than it once was. The life of a business today, according to management guru Peter Drucker, is shrinking rapidly and is now approaching 20 years. This means that business "succession" today is more about exiting a business - or handing it over to someone else, within or without the family -- as it is about passing it on to a child.
Transition options
Today, business advisors talk more about planning for a "transition" in the business's ownership than they do about succession. Generally, there are 3 options for an entrepreneur who wishes to exit from his or her business:
Family transfer used to be most common and involves passing the business on to children or some other family member. While easier in many ways because the business operations have likely been taught to the new owner, family transfer can also be tricky because it can involve many non-business emotions.
Management buyout or MBO happens when the management team purchases the business from the owner. MBO's are becoming more common because they help ensure business continuity, retain "company knowledge" and experience, and ease the transition process for existing clients and business partners.
Selling the business is probably the most popular method of exiting a business, because it can be simpler and less emotional than family transfer and many children today do not want to operate the businesses their parents have been involved with for many years. Also, sale often provides a retirement fund or financing for a new business start-up. In fact many businesses today are started and built by entrepreneurs simply to be sold. However selling a business requires extreme control because it involves much research and planning about such things as valuation, corporate cultures, continuation of the business vision and other issues.
BDC's Role
It is in this planning for transition - which usually begins many months, sometimes years, before the actual event - that BDC can help. It not only helps finance business transition, it has adopted a role as the provider of transition consulting services to increasing numbers of business owners who are looking at exiting their businesses.
A BDC consultant can:
- Help clarify objectives
- Evaluate business and exit strategy options
- Review financial implications
- Help resolve conflicts and confusion
- Help organize a transition
For more details on BDC's transition services, please visit the *bdc*transition planning section. | Back to top of page
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