Determining the future of your business.
May 7, 2014 By Laura Aiken
To put into scale how big of an issue succession planning is in Canada right now, consider that in the next five to 10 years, 70 per cent of today’s businesses will change hands. Or, as Grant Robinson, director of the BDO SuccessCare Program likes to phrase it, “Three out of four businesses will have reached retirement age in the next one to two car leases.”
Robinson addressed an audience of food processors at a recent State of the Industry event hosted by the Guelph Food Technology Centre (GFTC). He works closely with family businesses across Canada and has a compassionate view of why succession planning is at the bottom of many people’s priority lists.
“Succession to most entrepreneurs sounds like dying or neutering,” he said. “But most businesses transition hands many times.”
Succession feels negative because it implies retirement, which is defined as taking something out of use, said Robinson. People see their friends disliking retirement, and the view permeates. There will come a time when your business will be sold, voluntarily or involuntarily. You have two options for that sale: inside our outside. At its bare bones, this decision seems straightforward, but Robinson noted that it could take 10 years to make the choice.
“There’s no downside to getting ready to make an inside sale because you can always make the outside sale,” he said.
Here are some statistics from Robinson on the state of succession planning in Canada. Fewer than 50 percent of businesses have a succession plan. Around 80 per cent want to keep it in the family, but only half think it’s a reality. Currently, around 30 per cent of businesses successfully transition through the second generation, and less than 10 per cent survive the third generation. In dollar values, demographics suggest that $1 trillion will change hands in Canada in the next decade. Seventy per cent of wealth transitions in families are unsuccessful and 60 per cent of families failed to consider the effect of a communication breakdown. Starting with this last point, let’s look at some strategies that can prevent a communication breakdown during the transition of your business to the next generation and focus on preparing for an inside sale.
You lead the way
The positive mental approach is to treat the future of your drainage business as a transition rather than a succession, said Robinson, adding that most entrepreneurs have transitioned their business many time times without realizing it. Most importantly, this is an initiative that you need to lead. Robinson’s GFTC talk outlined several tips and objectives helpful to the transitioning entrepreneur.
There are several different considerations you will need to take into account when planning for the next generation, such as the well-being of family members, continuing a profitable and successful enterprise, and establishing a cohesive ownership and vision. It is helpful to develop a plan to transition all types of capital: physical (equipment), social (staff) and intellectual (the business environment of competition, consolidation or decline). For you to make a smooth transition to the next adventure in your life, you need to ensure their business can thrive without you.
In preparing for an inside sale, don a “we” focus and take into account the dichotomy of business and family life. On one hand, there are the principles, values, history, relationships, moods and personalities of those involved. On the other hand, there are the structural realities of common interests and facts (which Robinson notes are negotiable because perception is reality). Bear in mind, 96 percent of family business transition plans fail to find a positive outcome by focusing on the past, and 70 percent succeed by focusing on the concrete side of common interests and facts.
Getting everyone on the same page is critical, Robinson stresses. Eighty percent of transition planning is communication on subjects like policies for family promotion, accountability, responsibility and authority (the latter being the one that is typically not addressed). You need rules about how people will exit the business. It is advisable to create documents that support paying for people coming and going in ways that don’t harm the business and provide direction on things like compensation. Basically, the components of a shareholders agreement should be addressed.
Conduct meetings with an agenda and be prepared for an open conversation about areas of concern. If you fail to find the structure on your own, bring in family council or an advisory board.
However unpleasant to think about, this is a good time to be transparent about what is in your will.
“Avoid the golden handcuffs. Don’t force kids to be in the business or to partner with each other,” says Robinson, further noting: “Don’t let your kids find out what you’ve done through the will unless a Ouija board works because there’s going to be questions.”
Identifying internal successors
In preparing for an inside sale, the purchaser may or may not be family. In Effective Succession Planning/Ensuring Leadership Continuity and Building Talent from Within, author William J. Rothwell outlines a 10-step plan for developing internal candidates for promotion:
- Step 1: Identify the key position(s) for which the individual is being trained and ensure the person is aware and interested.
- Step 2: Determine how much time is available to develop the person for their new role.
- Step 3: Figure out which skills he or she still needs to learn. One way to create this list is by thinking about it as a performance appraisal, but from the vantage point of the position he or she is being groomed for. How well would he or she currently be performing?
- Step 4: Be specific about the learning objectives you determined in step 3. Decide what equipment, information, education or whatever else will be needed to close the gap. How will you measure the learning objectives and under what conditions must the person perform?
- Step 5: Lay out the learning strategies needed to achieve step 4. There may be things needed such as time away from work for further training, mentoring, or experience with specific equipment.
- Step 6: Develop clear measurements and provide feedback on progress as concrete evidence of accomplishment
- Step 7: Determine how performance evidence will be validated: Through passing training? Oral testing?
- Step 8: Review the plan with others. These people could be a spouse, peers or colleagues.
- Step 9: Carry out the plan. People have the best intentions but this step can be toughest to carry out. You need to keep an eye on time span and consider the consequences of failing to implement the plan.
- Step 10: Evaluate! Where does the person stand on the outcomes when you look at the goals?
Staying positive, using resources
There are many reasons why exiting your business is a terrifying prospect. First-generation entrepreneurs put everything into the business, according to Robinson, and then can end up 60 years old and on allowances. He has seen many cases of typical entrepreneurs having this post-business ownership experience: 90 days after the business is sold, the phone stops ringing and they start to go nuts. Eighteen months later, they start investing in things they know nothing about. If you know someone doing these things, rest assured they are not alone.
Although small business owners may be reluctant to admit it, their identity is wrapped up in their business and this is one of the biggest exiting issues, says Robinson. If it’s a lifestyle business, you essentially have nothing to sell but your equipment. If you professionalize your business and put in place a team that can run it without you, then you have an entire business to sell. Your decision may be to sell off the equipment and close up shop, and that’s perfectly OK. It seems fair to say it’s best when that happens voluntarily.
Remember, the transition rests on your leadership. “If left to the spouse and kids to sort it out, that’s where people spend tens – if not hundreds – of thousands of dollars on accountants and lawyers,” says Robinson.
There are resources to help you along the way. The BDO website (www.bdo.ca) has the Discovery Questionnaire intended for family/stakeholders to answer and then discuss the results. You can also turn to the Canadian Association of Family Enterprise (www.cafecanada.ca) and the Family Business Consulting Group (www.thefbcg.com) for more resources. Remember, you are far from alone on this journey! As Robinson says, “Because everybody is unique, we are very much the same.”
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