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The Ticking Succession Time Bomb!

1st February 2017 Jacoline Loewen

Ask these tough questions about succession planning before it's too late!

Business owners build great wealth by concentrating all their resources into their company. Over time, they will create significant net worth with this single investment. While they are young and in the building phase of their lives, the risk to their future life and to their family security is manageable. Eventually, however, it is inevitable that circumstances will change, and the owner will be forced to look at the options to sell. Obviously, it is better to sell when you are in a strong bargaining position.

Getting prepared years ahead of time will make an enormous difference to the price tag for the business, and subsequent wealth.

“The succession process will involve asking some tough questions and exploring scenarios that may not please all family members, shareholders, or senior managers, but it is necessary and prudent,’ says Larry Klar, partner the Succession Fund, which buys shares in small- and medium-sized businesses.

Before you get a valuation firm to give you an assessment of the value of the business, think about the transferability of the operations and what exactly is driving value, Mr. Klar says. He suggests looking at the following questions:

1. Do you want to sell the entire company eventually?

“Most businesses do not build their businesses with selling them as a top priority, but more should,” Mr. Klar says. Starting with the end in mind does seem counterintuitive and yet, just making that mental shift for decision making does make all the difference. It is a rare businessperson who looks at their own role and realizes that too much of the supply chain, personal goodwill, commercial value is tied up with them personally. To get a great valuation, the business should be not about Mr. And Mrs. Smith; rather, about the professionalized company – Smith Ltd. Transferability of the business will be critical.

2. Do you want to sell some now, then eventually sell the remaining ownership?

If there was one question that company owners should really explore, it is this one. Many owners sell the whole company because they do not want a partner questioning them. Owners get their elbows out and say, “I am too difficult to have someone else at the boardroom table.” Yet the owners who have the confidence to take on a partner and sell some shares often get a far higher payout from the subsequent transfer of shares.

3. Is it important to you that the ownership is retained for family/current management?

The owner and the next generation of owners will have an automatic, built-in conflict. The price for shares will always be wrong. For the owner, they want the highest price, while the next generation of owners want the lowest price. Having a succession plan that is transparent keeps out the surprises that damage long-term relationships.

4. Do you want the family to have control or would you consider minority equity ownership?

The family business that has professional governance is confident to take on this ownership structure and follow in the footsteps of leading family-owned companies such as Wal-Mart Stores Inc., BMW and Versace.

5. Is the incumbent group of family members and management capable of taking over the business and running it?

Many family-business owners want to pass the company to the next generation and the challenge is: at what cost? Does the next generation have the knowledge and pep? Companies with successful successions, such as Harry Rosen, Linamar Corp. and Sobeys Inc., have frequently had the awkward conversations about competence. Their next generation who want to be involved get the outside experience and MBA and engineering degrees, but also the truthful performance reviews.

About the Author - Jacoline Loewen is director of business development of UBS Bank (Canada). She is also author of Money Magnet: How to Attract Investors to Your Business. You can follow her on Twitter @jacolineloewen.  This article first appeared in Globe and Mail and has been reproduced with their permission.

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