Beyond retirement: The importance of succession planning
It is a reality that most small-business owners don’t like to face: the day when it’s time to hand off the business. The latest business succession plan survey by TD Bank and Environics Research Group paints the numbers clearly. Very few of the 1.1 million small businesses in this country have a succession plan in place. The survey, released Sept. 24, showed that only one third of the one-in-10 Canadians who own small businesses have a succession strategy in place.
In one respect, it’s understandable. Owners can get caught up in the daily challenges of maintaining quality customer service, and keeping their businesses afloat and successful. However, not looking down the road is a mistake.
“With so many things to think about when starting and running a small business, it’s understandable that planning for the day you step away from it isn’t always top of mind,” says Dave Kelly, senior vice-
president, private investment advice at TD Wealth.
“But a succession plan can help you to maximize the value of your business when you do eventually hand over the reins, and the time to set up that plan is long before you actually retire.”
“Close your eyes and try to imagine what your last day in the office will look like. How do you celebrate it?” advises Tom Deans, speaker and author of Every Family’s Business.
Deans describes the statistics on the lack of business succession planning as “really alarming.
“Even if business owners do have a succession plan, often those plans are outdated. They haven’t been revisited,” he says. “A lot of these business owners view succession planning as an event — something they have do deal with and get out of the way. Then they leave the plan alone, and it gets outdated.”
It’s not that entrepreneurs aren’t savvy. On the contrary, affirms Deans, they’re very smart people. But they put off — and put off — succession planning. “It’s really avoidance that is what I’m talking about,” he says. “They know that dealing with the ownership is hard and it’s the easiest thing to delay, and they procrastinate about it.”
To Deans, this attitude of avoidance that he encounters time and time again when he talks to business audiences is mind-boggling. “It’s so predictable that every business owner on the planet is going to die,” he notes.
There are two distinct kinds of business succession planning — ownership planning and management planning — that have to be done, Deans explains. However, business owners often confuse the two.
Ownership succession planning takes into consideration who will control the business overall. Management succession planning means having a strategy for the daily nuts and bolts operations of the company. If you have identified an ownership successor but haven’t pinpointed someone qualified to take over the day to day operations, you have a serious problem, Deans says, because operations management is critical.
“Whether family owned or not, every business has key personnel that are the backbone of the company. Succession planning should be done for all roles that are critical to your organization,” says Dave Wootton, president of The Wootton Group LLC, an independent flooring consultancy based in Atlanta, Ga.
Wootton says there are five essential steps in management succession planning:
• Identify key roles in the business
• Identify the main skills and talents an employee needs to succeed in each of those key roles
• Assess employees and determine whether the roles can be filled internally, or whether there needs to be outside recruiting
• Develop plans for improving training and experience for every successor
• Continually monitor company needs and whether the candidates for succession roles whom you have pinpointed, are the right people
Deans adds, “There are some common themes that cut across every sector…and there are some businesses like service businesses where the succession plan is very dependent on personnel. Part of that thinking of the future is bringing on younger managers.”
George Leahy is one independent floorcovering business owner who’s proactively making sure his business, Fabulous Flooring in Moncton, N.B., will keep operating successfully once he and his business partner, Gary Williams, decide to semi-retire.
“We have a succession plan in mind,” Leahy says. “This is blood, sweat and tears. It’s not like I worked for Wal-Mart and then all of a sudden I retired and got my watch.”
Leahy and Williams opened Fabulous Flooring together in 2003 after being competitors for 20 years. They have built a successful local floorcovering business focused on customer service. Williams is in his 50s, and Leahy turns 50 next year. They’re grooming a 30-something staffer, to take over operations once they are ready to spend more time on the golf course.
“I’d like to keep it running long after we’re done putting in 60-hour weeks,” Leahy says.
Deans stresses that the key element of a business succession plan is a will. In Canada, 56 per cent of Canadian adults don’t have one, according to a survey by Lawyers Professional Indemnity Company. And in the U.S., Deans notes, 125 million Americans don’t have a will and many of them are business owners.
Deans bluntly states the outcome of this when those people are business owners. “No will, no estate plan, no succession plan. It’s as simple as that.”
If a business owner doesn’t have a will and dies, the business can be left in turmoil, Deans says. Determining who controls the business will be handled by the public trustee’s office. Controlling ownership will be turned over to the surviving spouse, who may have absolutely no experience with any facet of company operations.
Avoiding involvement of the provincial or territorial public trustee’s office should be reason enough for everyone to make sure they have a will, and for small-business owners in particular. “Public trustees use a very rigid formula that pays no attention to what the business owner wants,” Deans explains.
According to Industry Canada figures, small businesses make up 98.2 per cent of Canadian businesses. And, Deans notes, nine out of 10 are family owned. The floorcovering industry is no exception. Deans stresses that business succession planning is more challenging when a business is family run because there’s an emotional connection.
“They (family business owners) completely underestimate how emotional and time-consuming it is to exit the business,” he says.
Wootton expands on this idea: “A family owned business is especially at risk of failing when its leader become incapable of serving and there is no ready replacement. The key is to identify people inside the family who are interested in and capable of taking on the mantle of CEO, or whatever the key position being vacated,” he says.
Deans adds the fact that people are living longer today than they did a couple of generations ago, and this “is a big problem” for family business owners. “They don’t have a heart attack and die at 72,” he says. “They have a heart attack at 72, get a stent, run a marathon and live another 25 years. And now junior isn’t in his 40s or 50s taking over the business; junior is 70.”
Also, Deans adds, the family successor is often wondering when “mom and dad, who’ve taken the cash flow out of the business, will move over and let me be a big person.”
TD Bank’s Kelly echoes this point: “As a small-business owner, you should talk to your family about your succession plans to make sure everyone understands what you want and why, and to find out if your family actually want to take over the business at some point.”
A 2007 study by the Family Business Institute noted that a survey of American family business owners found 88 per cent believed their family would still control the business in five years. But succession statistics, the report noted, show only 30 per cent of family businesses succeed in a second generation; only 12 per cent remain afloat in a third generation; and only a mere three per cent survive to a fourth generation or later. The report noted that Canadian family business owners seem to be more pragmatic than their American counterparts: only 64 per cent believe a family member will take over the business.
Families can be fractured in a business succession, even when there is a succession plan in place for a family owned business. CBC New Brunswick provincial affairs reporter and author Jacques Poitras illustrates this in a new book titled, Irving vs. Irving: Canada’s Feuding Billionaires and the Stories They Won’t Tell.
For all intents and purposes, the Irving family runs New Brunswick with an empire that spans oil refining, shipping, media, construction and transportation. Irving is the biggest employer in New Brunswick’s forestry sector, and half the province’s oil exports come from the
Irving refinery in Saint John.
However, as Poitras covers in his book, Irving family relations became family feuds with the business succession plan of empire founder K.C. Irving, who died in 1992. Instead of leaving his multi-billion-dollar empire in the control of his sons, Irving turned control over to an offshore trust in Bermuda. He’d taken up Bermuda residence in 1972 to avoid Canadian taxes. And to keep the New Brunswick business empire operating tax free, Irving stipulated that his sons had to live outside Canada. Today, there’s bitterness, feuding and estrangement in the Irving family, Poitras reveals in his book.
“The biggest challenge for family business owners is that they have to reconcile that emotional connection to the business,” says Deans.
In Canada’s agricultural past, he explains, it was common for farmers to grandfather the family farm to their sons. But today, just handing over the reins as a rite of passage is the worst way to plan business succession, Deans affirms. “It’s not like passing down the family farm.
“The business is not your legacy,” he says. “Your legacy is your family and the wealth you monetize from that business. If your kids want the business, they have to buy it from you. And that’s a tough message to deliver.”
Business owners tend to overvalue their businesses when it comes to succession planning, says Deans. “One of the great myths is that the price you get for your business is based on sales.”
The real measure of financial value is a business’s earnings before interest, taxes, depreciation and amortization, or EBITDA, notes Deans. “The companies with the best succession plans are the most profitable businesses,” he says.
This is because the owners understand the importance of profitability and the company’s value proposition, Deans notes.
Adds the savvy Leahy of Fabulous Flooring in Moncton, “With a business like this, we may think it’s the best business in the world. But if someone’s going to buy it, it’s worth your history, it’s worth your inventory, it’s worth your receivables. And you can’t put a price on goodwill. It is never worth what you think it is,” he says.
Deans says his “special mission in life” is to snap business owners out of both their complacency about business succession planning and their notion “that a buyer will knock on their door or that coincidentally around the same time they want to retire they’ll bump into someone with a big chequebook.”
“Implementing a succession plan exercise causes the company to look at its strengths and weaknesses,” notes Wootton.
Entrepreneurs put everything on the line when they start their own businesses. Leahy, for example, put it all on the line with a business plan written “on a piece of paper with crayons.” Building a successful small business demands an enormous amount of time, energy and effort. While 85 per cent of small businesses in this country make it through the first year, only 51 per cent survive past the five-year, high water mark. Deans firmly believes that when business owners have put so much time and effort into launching a business and making it successful, they need to be as serious and as dedicated about having their business remain properly managed and prosperously afloat after their time as owner has passed.
“My goodness, you’re going to die, you’re going to lose your business,” says Deans, “and the question you have to ask yourself is, ‘Who will run my business and take it to the next level, whatever that is?’
“When a business owner can answer that question and find the buyer either inside the family or outside of it, they leave a profitable gift to not just themselves but also to their family; to their employees so the transition can go in an orderly fashion; and they leave a legacy to their community because they’re not leaving another closed-up retail business.”