July 2001 volume 5, issue 2 

Eighty to ninety percent of businesses in Canada are family-owned. Despite the desire of most owners to pass their hard-earned legacy on to their children, only three businesses out of ten survive to the second generation, and only one out of ten to the third generation. Why do so many dreams of succession fail? The primary reason is lack of systematic succession planning. A well-thought-out succession plan can ensure short-term and long-term success for the business, give economic independence to the retiring generation, provide a fair ownership arrangement for the heirs, maintain harmony in the family, and minimize taxes associated with the ownership transfer.

A succession plan begins much earlier than many owners believe, ideally long before the intended retirement date. Owners need to find answers to such complex questions as:

• Will I maintain some involvement with the business after retirement?
• Will I need to be bought out up front, or over time?
• Can I give the business to my children before my death, and what are the tax implications?
• Will I need to change my life insurance and my will?
• How will my retirement affect my spouse’s interest in the business?
• How will my retirement affect the responsibilities and morale of my key employees?
• What is a fair arrangement for those of my family members who will take over the business and those who will not be involved?
• What is a fair arrangement for the grandchildren?
• Is there a family member or successor fully trained to take over?

Open communication is vital to the success of the plan. Owners should not assume that they understand the wishes of the other members of the family. Obviously, a frank sharing of each relative’s ideas and wishes needs to be handled in a sensitive manner. Also, the expertise of a professional advisor is crucial to the structuring of the succession plan. Depending on the complexity of the business, the skills of a tax advisor, a lawyer, an insurance agent and a banker may be required . This team should be led by a family succession planner with extensive experience in facilitation and intergenerational business transfers.

When I begin to help a client with a succession plan for the business, I usually try to meet with the client and spouse first to help identify objectives. It’s usually easier to discuss the possible outcomes in this private meeting. Also, the information I gather in this preliminary meeting provides me with the facts I need to gather research from other experts such as lawyers or bankers. Then the next meeting should involve the members of the family, children and their spouses, where difficult issues can usually be discussed openly and amicably. This meeting should be held in a comfortable surrounding that puts the family at ease; there should be an agenda to keep the discussion on track. The chair of the meeting should be the family succession planner.

Once a strategy is drafted, the foundation for the succession plan is in place. But it’s important to realize that it should be revisited on a regular basis as changes occur within both the business itself and within the family. Births, deaths, marriages and divorces can change the complexion of the arrangement, as can legislative changes in tax and family laws. Family members may become or cease to become employed within the business. The business may grow or shrink, or parts of it may be sold off. The existing will and insurance coverage will likely need to reflect changes in the succession plan.

If you own a business and are contemplating retirement, I urge you to resist the temptation to put off making a decision to plan for your succession. Sometimes clients worry about the sensitive nature of succession planning and procrastinate in developing one. However, leaving no succession plan is detrimental to the health of the business and only leads to unnecessary stress and possible conflict in the family, should you pass away.

For more information on the Wilkinson & Company LLP program for family succession planning, call your Client Services Partner today.

Jerry Silverthorn, CA, TEP, (1942-2005) was the Practice Leader of the Forensic Division of Wilkinson & Company LLP , and a specialist in the area of farm estate and succession planning. Born in Dunnville, Ontario on a family farm, he owned a pure bred Limousin operation in Prince Edward County since 1977.