October 1, 2005
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Did you know that family businesses employ more than 60 percent of the Canadian workforce? If you own a family business and you are approaching retirement age, you should be aware that only one third of family-owned businesses will pass to the next generation and less than half of those will pass to the generation after that.

One of the reasons why succession is often difficult is the necessary relationship between the family and the business, whose respective interests may be very divergent. The first entails family values, heritage and tradition. The second imports the transition of business assets and power to a third party. Bringing the two together is the challenge, so it is best to start early with your business succession plan.

If you are the founder of the business, you have to be able to visualize the control of the business in the hands of those members of your family who will succeed you. Those who follow you must be able to adapt to the family dynamics because they are woven tightly into the fabric of your business.The concepts of family loyalty and protection are juxtaposed against the economic realities of the business. It does not take long to figure out that one is often the antithesis of the other. You will have experienced this yourself in building the business.

If you wish to retire from your business, you need a plan. First on your agenda is to identify the member or members of your family whom you can objectively visualize as the new leaders of your business. You must sort out this issue while you are alive and well in order to determine whether your chosen ones are willing to take over – and whether they are willing to deal with other members of the family who may have had aspirations to power but do not bring to the table the necessary qualities to take over the business from you. Sometimes this task is very delicate because the aspiring successor may be your spouse or your own children. If you have several children who may have worked from time to time in your business, you may have to make some hard choices. In this regard a consultant is often helpful to set up formulas for objective evaluation and to carry out impartial interviews of other employees and managers in your business.

Sometimes you are able to decide who will succeed you, but not where to place them to ensure the smoothest transition and maximize the chances for success. Your family ties may blind you to the appropriate solution so the objectivity of a consultant is important.

Once the choices have been made, you need to bring your successors into their new roles as quickly as possible. Introduce them to the advisors whose wisdom and advice you have respected in building the business yourself. Your heirs will need these people more than ever, but they will also help you assess new corporate directions and the role you will play during the transition. Since you have already determined to bring your family into your business, you will need these consultants to help establish links between the family members and your faithful employees, who have helped you get where you are today.

Cultivating the non-family employees who may have had aspirations of their own is critical to your succession plan.You may come to the realization that the business would, at least for the intermediate future, be better administered by the non-family employees, especially at the managerial levels, at least until your family members can gain some appropriate experience.

Deliberately diluting the management of your business with inexperienced family members is a recipe for failure. Above all else, clarity of communication is crucial when explaining your vision of the future to family and non-family members alike. Their choices can then be governed accordingly.

You also have a duty to convey your thoughts to the child or children who will not be joining or continuing in your business. They need to be brought onside so that they can see that they will be treated equitably after you are gone.

If you cannot objectively visualize how your business will function under the eventual control of your heirs, when you need to consider a sale to a third party. Chief candidates are your key personnel.A common method of achieving this goal is for you to assume an ongoing consultative position in your business, which pays you a salary and allows you to monitor the affairs of the business until the full price is paid out to you. In this way you can actively ensure the future of your business as well as maximize the capital return to you. As far as your heirs may be concerned, cash as always is still king.

NOTE TO READERS: This article is for information purposes only. Please consult your lawyer before taking action on information provided in this article.

John Johnston is a partner with the law firm of Nelligan O’Brien Payne LLP (www.nelligan.ca), with offices in Ottawa, Kingston, Vankleek Hill and Alexandria.

[This article was originally published in the October 2005 issue of Fifty-Five Plus Magazine.]

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2017 Nelligan O’Brien Payne LLP.