Once in a lifetime

%

of family business leaders cite creating a legacy as an important personal long-term goal

%

say all family members involved in or affected by the business have similar views about the company’s direction

%

say they’re looking to ensure the business stays in the family

The great wealth transfer is underway as the founders and owners of Canadian private and family businesses exit the workforce in large numbers. For some, the COVID-19 pandemic accelerated the decision to leave, typically by passing the reins to successors in their families or selling the business to the highest bidder. This transfer—if started early enough and with the right support to navigate the complex issues involved—represents a once-in-a-lifetime opportunity for founders and owners to create the right outcomes for themselves, their families and the businesses they’ve worked so hard to build.

Successfully navigating a sale or transfer to the next generation is critical given the impacts these decisions will have. Two-thirds (67%) of respondents in our 2023 Family Business Survey told us that creating a legacy was an important long-term goal. And considering the significant contribution of private and family businesses to Canada’s gross domestic product and the large numbers of jobs they create, it’s important to the country that we get this right.

Sale or succession: Which path will you take?

Choosing whether to sell the business or transition it to the next generation is a complex decision that involves careful planning and consideration of a range of issues, from market conditions to tax, legal and operational impacts. But whichever path an owner or founder takes, a paramount consideration needs to be ensuring proper governance and communication within the family before deciding to sell or pass over the reins to a successor. This builds cohesion around the family’s goals, establishes processes and procedures for making decisions, sets out clear roles and responsibilities and, ultimately, helps reduce the likelihood of family conflict.

Our research suggests many families are aligned. According to our 2023 Family Business Survey, 59% of respondents said all family members involved in or affected by the business have similar views about the company’s direction. But our survey also found some gaps in adopting formal practices that set the foundations for good governance, with just 30% saying they have put in place a family constitution or protocol and 43% agreeing that the family’s values and mission for the company are articulated in written form. It’s also important to look at structures, like a family council, to separate matters specific to the family from the business.

By considering complex family dynamics up front, it then becomes easier to navigate the key elements of preparing to sell or transfer the business, which we explore in more detail below.

Sale

Succession

Navigating towards a successful sale of your family business

For owners and founders looking to exit, the market for high-quality family businesses remains healthy. While higher interest rates have affected the valuations and the broader environment for selling a business, family enterprises remain attractive to the many buyers looking to deploy capital. Both strategic and private equity buyers continue to look for merger and acquisition opportunities, not to mention the increasing role of family offices in the deals landscape as they pursue more sophisticated asset classes to preserve and grow their wealth.

You only sell your business once, and for many owners the sale represents the culmination of a lifetime’s work. For this reason, it’s worth putting in the time and resources to get it right and achieve all of your objectives.

Key steps include:

You know your business better than anyone, but valuations are often a subjective process, and perceptions will change depending on who’s looking at them and when. This means potential buyers for your business are weighing your company’s scale, strength, risk profile and expected earnings against the growth and risk dynamics of the market.

In order to make informed decisions, you’ll need to know your company’s market value range. That’s why it’s important to establish a baseline valuation as you plan and prepare for the sale process.

For the best results, allow adequate time to determine your key objectives and make sure you understand the sale process before going to market.

You should give yourself two or three years—and sometimes more time—to think about and prepare for an exit, as there are various operational, human resources, commercial, financial and tax aspects to take into account.

You want a buyer who will pay top dollar for your business, but price shouldn’t be your only concern. You’ll often have other key objectives the sale has to meet, for both you and your stakeholders. Finding the right buyer is only possible when you have thoroughly considered your personal and business objectives, from liquidity and sale price to employee concerns.

If you want to maximize value, make sure your company has growth potential with some plans, like new products or geographical expansion, in the works to get buyers excited. Take a step back to look at your business from a buyers’ perspective: Are there sound plans in place to execute on your new initiatives, and what are your ideas, prospects and strategies around growth and innovation?

You may think that everything will be easier once your business exit is behind you—but every major change involves a period of adjustment. In many cases, especially when the buyer is a private equity firm, the deal will include a post-sale period in which the owner will remain involved to support the transition. The transition should also account for key stakeholders like the management team, some of whom buyers may be keen to keep on board to ensure continuity of the business.

It’s also important to think about what life looks like for you personally after you exit. Leaving the company you built can have a significant impact on your sense of purpose and identity, so consider the short-term and long-term goals you want to achieve with your spare time as well as what your new focus and passion will be.

You may also find yourself with a sudden influx of wealth that you’ll need to decide how to invest, distribute and pass down to the next generation. And don’t forget about estate planning. Without proper planning, estate and inheritance taxes can significantly reduce the amount of wealth available for future generations.

Looking to learn more about preparing to sell your company?

Explore our top 10 tips for sellers of family businesses.

Top 10 tips

The keys to successfully handing the reins to the next generation

While selling the company will be attractive to some owners and founders, many will want to pass the torch to the next generation. According to our 2023 Family Business Survey, 65% of respondents are looking to ensure the business stays in the family. But other studies show many founders and owners have some work to do on preparing for the transition: our 2022 NextGen Survey found one-third of successors in the next generation said their family business had no succession plan or they weren’t unaware if one existed.

Good succession planning often means balancing business with emotions given the complex family dynamics at play. Some family members may perceive inequitable treatment in decisions around who takes over the business, and there may be disagreements between those who are passive shareholders and others who are actively involved in managing the company. This is a key reason why it’s important to bring the whole family together to align on a shared vision, values and purpose so you can build a strong foundation for ensuring mutual success.

As with selling your business, it’s important to start the succession process early, usually a minimum of three years in advance of the transition to address the various issues that can arise.

Key considerations include:

Natural hierarchies tend to emerge in families, especially in a business setting. Now that the next generation is preparing to take over, current owners need to listen seriously to the goals and aspirations of their successors. But while hearing from all family members is important, keep in mind that having a voice doesn’t necessarily mean someone has a vote on company matters.

When you’re planning, don’t stop at your successors. To the best of your ability, build a framework for how to ensure business continuity for generations to come. Your long-term strategic plans will help anchor your family business and provide the clarity and assurance the succeeding generations need.

Listening to the changing needs of the next generation

In our work with the next generation, we’ve noticed their needs and expectations are changing. While the COVID-19 pandemic and other events have led to many next-generation leaders taking on bigger roles in the family business, many are eager to contribute more but are seeing few opportunities to do so. Just 21% of Canadian participants in our 2022 NextGen Survey said they had led a specific change project or initiative within the business.

The next generation is typically keener to focus on important business trends and issues, like incorporating environmental, social and governance (ESG) matters like climate change and sustainability into operations and strategy. They’re also more eager for professional advice on their options, which could include alternatives to running the business as it currently exists, such as:

exploring what we call intrapreneurship opportunities to grow the business by expanding into new products or markets;

selling the business and using the funds generated to coinvest with other family members through a holding company; and

going out on their own as entrepreneurs by cashing out their share of the family enterprise in order to start their own business.

While these trends suggest the next generation is looking for more flexibility when they take over, the current owners may have a different view, which can create friction in the transition. This is yet another reason for current owners to engage proactively with the next generation to work out the many issues that can arise, such as the level of involvement of the founder after handing over the reins and clarifying how much control they’re willing to give up.

There’s also a need to address the training and opportunities the next generation needs to be ready to step up. And the next generation needs to be willing to do what’s necessary to earn their place at the top. This often involves:

spending time honing their business skills away from the family company so they can add new value when they come back;

respecting the knowledge and experience of the current leaders, and recognizing that as much as they can learn from the next generation, the opposite is also true; and

preparing a solid business case, backed by research, for any ideas or initiatives they’re looking to propose.

By your side for the moments that matter

While the issues are complex, the good news is Canada’s enterprising families are more aware than ever of the need to carefully plan for transferring wealth, whether they’re looking to sell to the highest bidder or pass the reins to the next generation. Every family business is unique, which makes it important for both the current and next generations to have the right guidance from a neutral third party to give them the full picture of the issues to address and their options for creating value.

At PwC Canada, we’re dedicated to the needs of Canada’s enterprising families. We have a long history of working closely with family businesses, and many of them continue to trust us from one generation to the next. They know they can count on us because we get that the business is often like another family member and we know that no two families are alike.

This is why we’ve invested in building a large community of solvers who are helping family businesses through their defining moments like succession, sale and transfer of wealth. We combine our deep insights into the complex dynamics surrounding family, ownership and the business with our technology-enabled solutions to help founders and their families navigate this once-in-a-lifetime opportunity. And with our expertise in tax, governance, transactions, legal matters and succession planning and our experience with engaging, supporting and advising the next generation, we can help them create the right outcomes from selling or handing over the reins of the family business.

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