Question
I am considering succeeding my business to my son, what things should I consider prior to doing this?
Answer
In order to ensure a company’s success, it is vital to prepare an effective business exit plan but, remarkably, seventy percent of family-owned businesses in Canada fail to succeed to the next generation.
Business owners often avoid planning due to the number of emotionally charged issues that are associated with passing on the torch; however, retiring from a business does not have to be a difficult experience.
Proactively taking the right steps now will help to ensure a smooth transition, leading to greater financial security for retirement.
When planning, there are many things to consider, especially the method by which the business is passed on. By consulting with an expert, a business owner can determine the best approach within the scope of his or her unique circumstances.
Lacking the correct knowledge, many owners will unintentionally make choices that are to their companies’ detriment.
For example, when a business owner gives shares of a company directly to a successor, that owner is putting their financial security in harm's way, especially if he or she is relying on the revenue generated by the company for retirement.
However, by giving a successor shares, by way of a Trust, a business can be effectively protected against bankruptcy, divorce or a lawsuit. When a trust is used in conjunction with an estate freeze, not only are assets protected, but unnecessary taxes may also be deferred or avoided completely.
Another important factor is ensuring you communicate your sucession plan with those involved. Otherwise, your plan may go against the expectation of those involve, creating issues once it is put into effect.
For example, we once had a case where a wife-and-husband team, running a successful family business, had begun to plan their retirement strategy. They had two adult children, one working in the family business and the other employed in a company abroad. The child that worked abroad had never expressed any interest in the family business. Consequently, this led them to assume that she was not committed to its future.
Upon interviewing the two children, we discovered that the exact opposite was true. The child currently working within the family business intended to end his involvement once the parents were no longer part of the day-to-day aspect of the company.
By contrast, their daughter was very passionate about her family’s business. In fact, her education had been pursued in expectation of continuing-on her family’s legacy.
Our clients concluded to give their son a cash settlement upon their passing. Currently, the daughter has begun training under her parents in order to succeed the business.
Due to the daughter’s innovative business practices, the family business has been projected to grow quite substantially. Had they left it to their other child, who was uninterested in carrying on this particular legacy, the family may not have achieved the same outcome.
Succeeding your business requires very strategic planning and how you choose to succeed your business impacts multiple stakeholders - family, employees, business partners, etc. As such, it is always recommended that business owners consult a professional before making any decisions regarding their businesses succession.
