Succession planning must be an important consideration for local business owners

It’s quite possible that more small business owners in Canada are familiar with “succession” as a dramatic series that won 19 Primetime Emmys and is available to stream on Crave, then as a critical part in the life cycle of their business.

In basic terms, succession planning means considering how ownership of a company is transferred.

When done correctly, succession planning protects the business externally and internally. Since business is often built on relationships, should a CEO leave abruptly, the company may lose important clients, suppliers and other partners. Internally, careful planning ensures institutional knowledge held by one person is passed along before it’s too late. And, as Hollywood discovered, the sudden departure of a CEO can leave people guessing who holds responsibility for essential tasks, making governance challenging, and exposing the organization to hostile takeovers, and backroom deals. That makes for great television but not great bottom lines.

In business circles succession planning is the equivalent of the weather: everybody likes to talk about it, but often too few people do anything about it.

Financial planner Zach Shore from Edward Jones in Lindsay says it is not difficult, but vitally important to get your feet on the first rung of the ladder.

“The essential first steps are “understanding what your business is worth, assembling a professional advisory team, and identifying your successor early.”

When it comes to successors, according to a recent Canadian Federation of Independent Business survey, about 25 per cent of entrepreneurs plan to sell to sell or transfer to a family member. Forty per cent say they will sell to someone unrelated to them, and 15 per cent will turn over operations to employees.

That last number could be much higher if Canada follows a model adopted by the United States and the United Kingdom, known as an employee ownership trust.

The CFIB notes, “The U.S. and U.K. have introduced policies and tax incentives to encourage owners to sell their businesses to all their employees for fair market value (employee ownership). The way these deals are structured, employees do not pay out of pocket upfront. Instead, a trust is formed to secure a loan to purchase the company’s shares on behalf of the employees. Loans allow the owners to be repaid out of company profits over time.” About 53 per cent of owners said they would be more inclined to sell to employees under a similar model.

Such a system might help with what Shore says is the second phase of succession planning. Owners should next, “focus on reducing business risks and planning for tax implications, all while regularly reviewing and updating your plan as your personal and business goals evolve.”

Fenelon Falls businessman, Trevor White, has operated a few successful startups in his career, from driveway sealing to multi-crew custom home building companies. When he was starting out and had smaller operations, little thought was given succession planning. However, when he had a bigger operation, a life-altering accident meant he had to suddenly hand the reigns over to the best person he could think of at the time.

In hindsight, he thinks, “if you truly have some that wants to do it, they should walk beside you so to speak…shadow you in the business.”

That wasn’t the only time circumstances didn’t allow time for any kind of succession planning.

“I had a business that was doing well when I was approached by a development company to run two of their construction sites. I didn’t have anyone else to take over that business, and I had to make a decision quickly about the job offer. The money was better, and I didn’t have to deal with the stress of finding work, so I shut my business down. I didn’t really have a choice.”

If there is one thing everyone agrees on, it is that succession planning is extremely complex, far beyond what you think at first blush. There is valuation of assets to consider, employee severances, employees as liabilities, share values, changes to how non-compete clauses are currently being interpreted, capital gains tax, and even assumptions that certain individuals are interested in taking over when they aren’t.

Like planting an oak tree, the best time to plan for succession was 20 years ago. And the next best time is today.