By Nancy King, CPA, CA, TEP, Taxation Services
Profitability, growth and strategic matters are important to all businesses. However, family concerns and dynamics often complicate these issues for a family business, as the needs of the business may conflict with those of family members. This is particularly true when addressing the transition of the management and ownership of a family business.
While an effective succession plan must be tailored to the distinct characteristics of the business and family, key elements of a successful plan include:
- objectively determining if succession within the family is a viable option, through open communication with family members;
- developing an effective succession plan that is flexible enough to address changing circumstances; and
- co-ordinating the succession plan with retirement and estate tax planning.
Succession within the family
When transitioning a family business, it’s important for the next generation of family members to understand their role within the business, as well as how and when the succession will occur. It’s also crucial to objectively identify which, if any, family members are interested in taking over the business and whether they have (or can develop) the skills and experience required for the business to prosper through the transition and beyond. The current owners should discuss their succession plans not only with their advisers, but also with family members who may be affected by their plans – regardless of whether the members are actively involved in the business.
Some family members may make incorrect assumptions about when and how the succession will occur. Others may hesitate to voice concerns about the process for fear of causing strife within the family. Differing expectations and goals for the business among family members may lead to conflicts that worsen if left unaddressed. Challenges may also arise if there is more than one interested and capable successor and either a single successor is to be selected or a shared management or ownership plan is to be developed.
Delaying the succession planning process because of such issues may adversely affect the business and increase family conflict. Therefore, it’s important for family business owners to establish open lines of communication for family members to express their management and ownership goals – or lack thereof. A qualified outside business adviser can facilitate such communication among family members, which is key during the entire succession process.
Developing an effective succession plan
In order to develop an effective succession plan, key management and ownership issues should be addressed, including:
- the target timing to transition the management and ownership of the business and whether the transition will occur in stages;
- who will own shares in the business (e.g., only family members who are actively involved in the business) and whether treating all family members fairly means treating them equally;
- how the ownership transfer will be funded (e.g., whether the future owners will need to invest personally to acquire their interest in the business);
- what role, if any, the current owners will play in the business during and after the transition;
- whether and how the current owners will be compensated from the business after the transition; and
- the target timing to communicate the succession plan to family members and any non-family employees.
While the plan should be flexible enough to adjust to changing circumstances, clarifying these matters from the outset will help to develop an effective plan efficiently. However, even a great plan may fail if those affected by it aren’t properly informed about the plan or don’t buy in to the process. Introducing family members to the process as early as possible should help to determine and manage their needs and expectations, which is essential to a successful transition.
Co-ordinating succession, retirement and estate planning
Succession, retirement and estate planning are interrelated processes, which should be considered together. The financial retirement needs of the current owners may affect when they leave the business, as well as how the future business ownership is structured. Further, funding their retirement needs may put significant strain on the business.
An effective estate plan will maximize the value of the owners’ assets and minimize or defer tax upon their death. It should also facilitate an orderly transfer of assets to their beneficiaries. Accordingly, it’s important that the owners’ retirement and estate planning goals are consistent with their succession plan.
Consulting a qualified outside business adviser during the entire planning process allows family business owners to more effectively address their objectives and issues over time, as the adviser’s knowledge and experience can help owners to make better decisions for their business and family.
Watch: Shane King provides advice for the successful transition of a family business
Business in Vancouver presents the Business Excellence Series: Family Business panel discussion and breakfast October 15 at the Sheraton Guildford Hotel. For more information or to register for the event, visit our events page.
