Never Too Late For Succession Planning

Written By: Francis Roy
Vice-President and Regional General Manager
Federal Business Development Bank (FBDB)
Originally Published in the June 1992 issue of The Outfitter Magazine.

Ninety-nine percent of Canada’s 907,000 registered businesses have fewer than 100 employees, and 93% have under 20. Ontario’s 304,000 small and medium-sized businesses create 67% of new jobs and employ over half of the province’s workforce.

Who benefits from the struggles of small and medium-sized business owners? A July 1990 study by the American Institute of Certified Public Accountants found that fewer than one out of every four small business owners would leave the firm to their children if they had to transfer ownership within the next two years.

Of the small and medium-sized business owner/operators who would like to pass their companies on to their children, many come up against insurmountable obstacles. They discover, for instance, that their successors are not prepared. Often the business is liquidated at a discount. The best way to avoid such a situation is succession planning.

Timing Essential

The owner must choose the right time to pass on the business. The problems associated with succession can be kept to a minimum if the owner personally deals with those related to certain business policies and operations or to personnel management.

The business should be transferred to a successor during a period of stability rather than one of rapid growth. The owner/operator must pave the way by delegating responsibility to employees, whether they are family members or not. It is hard to replace the owner who runs the business alone.

The owner must also go to the trouble of drawing up a will or a family agreement that spells out the general nature of the relationship between the family and the business, particularly with regard to the ownership of shares, management succession, the rules for dividends, hiring, salaries and the promotions for family members and executives recruited from outside the family.

Choosing a Successor

How do you go about selecting a successor? Succession must be an integral part of the strategic planning process. This involves management making an effort to determine the future of the business and to specify the kind of person needed. The qualities of the ideal successor must therefore ascertained, bearing in mind that tomorrow’s needs can be very different from those of today.

If the business employs family members, the owner’s decision must be based on their competence and potential. If family members working in the business still lack the experience to assume a key position, the owner should have absolutely no hesitation in employing outsiders who can help train the children during a transition phase.

On the other hand, an owner with no relatives working in the business should feel free to pick a successor from either company executives or outsiders. Employees, customers, competitors, and anyone else involved with the business, should be informed of the owner’s decision in order to make it easier for the successor to take over.

It is important to remember that arranging succession is a lengthy process and that every business stands to gain by it.

(Reprinted from FBDB’s “Profits”, Spring 1992 issue, page 5)


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