Following the Footsteps

August 12, 2011
Written by Michelle Brisebois
Many Canadian parents can relate to having career dreams for their children that aren’t necessarily shared by their offspring. The emotional intensity around this issue multiplies when the career in question involves taking over the family business. Ironically, the topic rarely comes up, as aging business owners hope and pray that one of their kids will step up to the plate. Nearly half (49 per cent) of Canadian family business owners have not chosen their next business leader, exposing a lack of succession planning, according to the Canadian results of PricewaterhouseCoopers’ latest Global Family Business Survey. Among those who have done some planning for the future, many are making non-traditional decisions about their business. Some are planning to sell or choosing not to pass the company along to someone in the family. The study found less than half (48 per cent) of Canadian family business owners plan to pass their family business on to the next generation. This is a significant drop from the 90 per cent who planned to pass the business on to a family member in 2007.

The PwC study hypothesizes that the recent recession has caused many people to soberly re-evaluate their career goals. There’s nothing like a few lean years to make a business owner really start to look at their potential successors to gauge their true level of passion. Many business owners don’t like what they see. Compounding this issue is the fact that owners are retiring later, so the successor may themselves be in their 50s before they take control, an age when people are typically looking to gear down rather than take on a new challenge.

Grant Walsh, co-founder of the Centre for Family Business KPMG Enterprise, has helped many family businesses navigate these transitions in leadership. “Business owners often think they have to make the transition work themselves. In fact, it’s not their sole responsibility. The best step owners can take when it comes to handing the reins over to other family members is to let the younger generation be the ones to lead the process with advisor support,” sayss Walsh. In many ways, entrepreneurs view their businesses as though they are another child. They’ve nurtured the business, worried about it, protected it – there’s a lot of emotion associated with the enterprise. The key, says Walsh, is to have the younger generation come up with the plan for taking the reins. “The transfer of power can be broken into two phases. The first phase is management succession. Once that is addressed, who gets what shares financially (ownership succession) can be finalized. When a child becomes an adult and has indicated they have a desire to take over the business, the transition can begin as they take on increasingly responsible roles within the company.” It seems straightforward enough, he says, but how do you decide which child would be best suited to succeed you and how do you begin those discussions?

“Entrepreneurs can sometimes struggle to work effectively with other entrepreneurs,” points out Walsh. “Sometimes the child that’s really innovative and entrepreneurial would actually be happier going off to start their own separate business. They won’t wait around. The child that’s a good manager, organized with strong interpersonal skills, typically makes the better candidate for taking over the business. You want them to grow the business, not necessarily reinvent it.” It’s also imperative that parents engage in open dialogue with their children when sorting out a succession plan. If you want daughter Mary to take over the business, then tell her you think she’s got what it takes. Mary may be sitting in the office next to you, trying to read your mind to figure out if you want her to succeed you or not. As the current business owner, you also need to be honest with yourself about defining your “exit stage left.” Are you planning to walk away completely or do you envision continuing to work in the business part time? If it’s your intention to parachute in on occasion, then be honest with yourself and your successor. It can be frustrating to try to take over a business if the previous owner still wants to run the ship. It’s even more of a challenge when that previous owner has parented you through some of your “not so finer moments.”

“Parents remember us when we’re distracted teenagers who forget to take out the garbage when asked,” says Walsh. In fact, tension is a key source of a family business breakdown. In the PwC survey, about one-third of respondents said they experienced some to a lot of tension over: family members not consulting the wider family on key business issues (36 per cent); decisions about who can work in the business (31 per cent); and the performance of family members who are actively involved in the business (39 per cent). Though this kind of tension is so prevalent and damaging, only 27 per cent of respondents said they had conflict resolution procedures in place.

So if family and business are such challenging issues to balance, just what are the rules for a successful passing of the torch? “It starts with establishing a set of rules for succession,” advises Walsh. Decide when and how you’re going to retire. Assign your successor the task of developing a plan for this transfer of power. Walsh also suggests that the plan address such issues as who works in the business, the role of spouses, agreement that business will trump emotion, regular meetings to track the progress of the succession and financial compensation. “It’s imperative that this whole process is undertaken with the support of a financial advisor familiar with the unique issues related to family businesses,” emphasizes Walsh. This is a great course of action provided there are younger generations who wish to take over the business. What happens when nobody’s interested?

Many of the same rules mentioned above still apply even when a business is to be sold to a non-family member. “It’s still imperative that the business owner have those honest discussions with their children when they are adults and making career choices. It’s probably too soon to have these discussions when the kids are teenagers,” says Walsh. A good business advisor will be the best resource when preparing a family-owned business for sale to a non-family member. The new owners will need to know if the founding family members will walk away completely or agree to stay on in an advisory or management capacity to facilitate the transition.

Your dreams may not be your heirs’ dreams too. Even if your business transfers to a buyer outside of the family it may be for the best. Isn’t it preferable to see your business nurtured by someone who’s passionate about it? If the next generation truly wants to continue your legacy, give them support, encouragement and the freedom to make their own choices. You let go of the bike when they learned to ride as a child – it’s time to do it again.

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