Passing the torch: Succession planning for family-owned businesses

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Family-owned businesses are a cornerstone of the Canadian economy. They contribute 48.9% of Canada's private sector GDP and employ 6.9 million people, accounting for 46.9% of private sector employment.

Despite their significant economic impact, many family enterprises face challenges developing a succession plan. Recent research from Family Enterprise Canada shows more than 60% of family enterprises are expected to change ownership within the next decade, with close to 40% undergoing transitions within seven years.1

Family businesses are called just that because they incorporate two important elements: family and business. Succession planning is about more than financial transactions – it includes maintaining harmony, preserving the family legacy, and ensuring success for generations to come.

We’ve had years of experience supporting family business owners with their wealth and risk management. Here’s what we’ve learned that can make the succession planning process a little smoother:

1. Start early

Succession planning is a complex process that requires time. Starting the conversation 5 to 10 years before the anticipated transition allows for:

  • Identifying and preparing successors: Assessing the readiness and interest of potential family successors.
  • Establishing clear goals: Aligning family and business objectives.
  • Implementing training and development: Equipping successors with skills and knowledge they’ll need.

Having discussions, asking questions and starting the planning process early helps get everyone on the same page and can mitigate risks associated with unexpected events, providing a roadmap for a smooth transition.

2. Clarify roles and expectations

One common challenge in family businesses is the overlap of family and business roles. It's essential to:

  • Define roles and responsibilities. Clearly delineate between ownership, management, and family roles.
  • Establish governance structures. Implement boards or advisory councils to provide oversight and guidance.
  • Develop formal policies. Create guidelines for employment, compensation, and conflict resolution.

These measures help prevent misunderstandings and ensure that business decisions are made objectively.

3. Address family dynamics

Succession planning often brings underlying family dynamics to the forefront. Open and honest communication – and regular family meetings – are vital. The good news? You don’t have to do it alone! It’s a good idea to work with an advisor, mediator and other professionals who can help facilitate discussions and offer unbiased perspectives. It’s also important to document your discussions and any decisions you make as a family, to help avoid confusion or potential conflicts down the road.

4. Evaluate the readiness of your successors

A significant concern among current family business owners is the readiness of the next generation to step into a leadership and ownership role. According to a study from Family Enterprise Canada, 51% of business owners worry the next generation isn't ready, and 39% believe they're not interested.2 But a separate study shows that 97% of younger family business owners are committed to preserving the family business.3

It’s encouraging to see younger generations loyal to the family business. Nurturing this interest and commitment can be a boon to the business, but it requires bridging the generational divide. Providing mentorship and education; including younger family members in strategic planning and decision-making; and recognizing the skills and contributions the next generation brings can help family members connect across generations, both personally and for the business.

5. Document the succession plan

Starting conversations early, asking questions and maintaining open, honest and close relationships with family members are important first steps to succession planning. But the crucial next step? Writing it all down! A comprehensive, written succession plan serves as a roadmap for the transition, helping everyone work together and move forward in the same direction.

Here are some important pieces to include in your written plan:

  • Outline timelines: Specify when and how the transition will occur.\
  • Define roles post-transition: Clearly state the roles and responsibilities of the next generation, as well as the ongoing involvement of the current generation.
  • Establish contingency plans: Prepare for unforeseen circumstances that may affect the succession.

As you prepare for succession and continue to have conversations, review and update the plan to keep it relevant and effective.

6. Implement financial strategies

Effective succession planning includes addressing financial considerations, and this is where we, along with other professional advisors, can help. Key considerations include:

  • Valuation of the business: Determining the fair market value for equitable distribution.
  • Funding mechanisms: Establishing buy-sell agreements and insurance policies to finance the transition.
  • Tax planning: Using strategies to minimize tax liabilities during the transfer.
  • Estate planning: Ensuring that wills and trusts align with succession objectives.

Working together with your professional advisors can help you take a holistic approach to succession planning. Leveraging professional expertise and taking a full-picture view will help ensure a smooth transfer of ownership when the time comes.

Passing the torch while preserving your family’s success

Succession planning is a critical process that safeguards the longevity of family-owned businesses. By proactively addressing both financial and familial aspects, families can ensure a seamless transition that honors their legacy and positions the business for continued success.

We're here to help you take a full-picture view of your succession plan and support you with solutions and strategies that align with your unique values and goals. If you’re thinking of passing the torch to the next generation, reach out. Let's build your legacy—together.

Sources

1. Statistics on Canadian Family Enterprise. February 21, 2022. Family Enterprise Canada. https://familyenterprise.ca/fr/resource/statistics-on-canadian-family-enterprise/. 
2. Half of family business owners concerned the next generation isn’t ready or willing to take over: Family enterprise foundation report. October 12, 2021. Family Enterprise Canada. https://familyenterprise.ca/resource/half-of-family-business-owners-concerned-the-next-generation-isnt-ready-or-willing-to-take-over-family-enterprise-foundation-report 
3. Younger owners most determined to preserve and sustain the family business: Family Enterprise Foundation Report. February 8, 2022. Family Enterprise Canada.  https://familyenterprise.ca/resource/younger-owners-most-determined-to-preserve-and-sustain-the-family-business-family-enterprise-foundation-report/