Succession in family business needs to be prioritized
by Dan Ilika
On the brink of intergenerational changeover, large number of businesses missing formal plans, study shows
A few years ago an unnamed member company of the Canadian Federation of Independent Business (CFIB) finally saw the changing of the guard as the second-generation took over its family-owned agriculture business.
The father, as owner and founder, had finally turned over the proverbial keys, giving his son access for the first time to the company’s books.
They had embraced succession and he was now at the helm of the family business.
Thing is, the son was 65.
Indeed, almost half of Canada’s family businesses anticipate an intergenerational transfer of ownership or management over the next five years, according to a recent KPMG Enterprise study, Family Ties: Canadian Business in the Family Way, though more than 80 per cent have no formal succession plan in place to manage family dynamics and prepare future generations to continue the business.
“That is one of the biggest issues in family business,” KPMG Enterprise partner Beverly Johnson said about the succession process. “It’s easy to procrastinate (because) there’s no crisis in your face.”
KPMG found two main reasons skip succession planning: They don’t know where to start and fear it’s going to open up a can of worms with their family.
“Those two things make it hard for people to put a plan in place,” Johnson said.
A similar study conducted by the CFIB in 2006 shows only 10 per cent of small businesses had formal succession plans in place, with 38 per cent maintaining informal succession plans and the remaining 52 per cent with no plan whatsoever.
While the numbers are troubling, newly anointed CFIB president and CEO Dan Kelly Kelly said much of it can be attributed to the fact many small business owners are in the business of marketing themselves, leaving little in the way of intergenerational ownership.
The question of future generations or other family members taking over management or ownership roles only further complicates the issue, as sentiment, pride and entitlement often cloud the issue.
“There’s no question family issues complicate things enormously,” Kelly said. “Emotion always plays … a significant role in succession but (it) plays a much heightened role if there are family members involved.”
According to the KPMG study, it’s not just current-generation ownership or management facing challenges in selecting suitable replacements.
Future generations, the study found, face a number of challenges they must overcome in order to succeed in the family business.
Owners-to-be must gain adequate experience, the right skill set and in-depth business knowledge while developing fresh ideas to help the company remain competitive.
“Often in a small business or family business environment (the) business owner may be used to doing things him- or herself,” Kelly said. “But if they never share that (knowledge) with the next generation how are they going to learn to take on those jobs when they come up?”
Kelly said it’s hard for family business owners to remain completely objective and neutral when dealing with children, spouses or other family members taking on the challenges of operations.
To help overcome those challenges, Kelly said family business operators can turn to experts or advisors to assist in the selection of the best-suited successor.
“Having some degree of outside scrutiny in the process can be really, really helpful and neutralize some family dynamics so you’re ensuring the best person (is) in place for the long-term health of the organization,” he said. “Succession can also be not just who’s running the organization but who’s taking over key positions.”
Small biz, big impact
Succession in Canada also represents a large economic issue, Kelly warns, as approximately 60 per cent of the nation’s population works for small businesses.
With a rapidly aging ownership contingent, Kelly said improper transfer of small business ownership impacts a large number of Canadians, and even the economy as a whole.
“They’re graying pretty quickly and if we don’t do this right … there could be giant economic dislocations,” he said. “(If) there’s a bunch of failures it has some economic consequences so we have to take this very seriously.”
KPMG’s Johnson said businesses and family members have options in implementing a plan that works for everyone involved.
“We’ve really found that what’s worked for the business families we’ve worked with is to kind of let that second generation come up with the plan, present it to the parents and help implement it,” she said.
According to Johnson, this approach can often offer a certain sense of security to older generations by showing that future generations are up to the task.
“The second generation doesn’t have to wait for the parents to get a succession plan going,” she said.
An alternative for those older generation business owners not ready to relinquish control, Johnson said, is to organize a plan that sees succession of management first.
“A lot of families find that easier to deal with because sometimes the existing owners may not be ready to transfer ownership,” she said. “Sometimes by transitioning management first … the ownership transition becomes less of a contentious issue because everybody kind of knows everybody’s abilities.”