The human element: Manage succession with an approach that goes beyond the numbers

Transferring a family business requires strategic planning and well-executed preparation. Beyond the numbers, owners will need to address family dynamics, intergenerational wealth transfer and emotional ties to the business. However, one-third of the respondents to our NextGen Survey 2022 say their family business has no succession plan or are unaware if one exists.

Many owners don’t fully understand how challenging it can be to sell or transfer their business. Here we outline four critical considerations for Canadian private companies and family business owners as they look to the future. These are: (1) start the succession conversation sooner rather than later, (2) set the next generation up for success, (3) be aware that changes in ownership affect non-family members too and (4) plan for post-transaction roles.

Start the succession conversation sooner rather than later

Owners should begin talking about the process long before they execute. If you’re the sole shareholder and decide to enact a transfer, start by telling the key people on your management team. There will be many new demands during the process, and you won’t be able to do it alone.

The decision is typically more emotional and complex for a family business, so discussion needs to begin several years before a transaction. Part of that discussion can involve exploring the many options for the structure of the transfer or sale.

The conversation may need to address the income requirements of family members and how those will be met equitably. Conflict often happens when some family members are involved in the business and others aren’t. Tax and estate planning should also be discussed and put in place well ahead of a transaction, and they must align with your business transfer or sale strategy.

Set the next generation up for success

Clear, honest communication is essential. Sometimes family members mistakenly think they understand each other—but they don’t. For instance, in some cases, the next generation believes they’ll inherit the business, but the owner doesn’t share this belief and puts the business up for sale with little consultation. In other cases, the owner assumes their children will take over the business, but they have no interest in running it.

There can be a lot of pressure involved in taking on a family legacy, so new leaders will need to be surrounded by capable management and have the right skills to carry on that legacy. This process can take years, so preparation needs to begin sooner rather than later.

These can be difficult discussions, as family dynamics that have played out over previous years can create conflict. But resolving those conflicts is essential because dysfunction and tension can often be seen or felt by the other party to the transaction and may put the sale or transfer in jeopardy.

Be aware changes in ownership affect non-family members too

Family-owned businesses aren’t the only companies in which the human element is so important. Companies can have a “family” of managers who have been with the company for many years and have worked alongside the owner to help build the business. These people need to be supported during and after the transfer.

In cases where the management team has grown with the business, key managers may also consider retirement when the founder retires. To get the best valuation for the company, take steps to ensure continuity in the management team and develop a process for transferring the knowledge of departing managers.

Prior to the transaction, it’s critical to clearly define what the roles and responsibilities of family members will be during and after the transfer. Conflict can arise between shareholders and professional management of the business if roles and responsibilities aren’t clear and appropriate governance structures aren’t in place.

Plan for post-transaction roles

Owners often feel strong emotions over the transfer of a business. The owner and the company need to determine how much of a role the owner will play in the future.

Sometimes during transitions, founders don’t entirely hand over control to the next generation and attempt to partially manage the business or undermine new leadership. Founders need to trust the plan and allow the new managers to make decisions and occasionally make mistakes, as the founders likely did when they were growing the business.

Owners also need to understand that while the transaction itself can be executed in less than a year, the entire process may take two to three years from the time they discuss it with key management or other family members to when they transition post-transaction. They’ll likely be asked to stay on for some time after the transaction closes, unless they’re not actively involved in the operation of the company.