Thinking about passing the torch? Here are six ways to ensure that your fortunes are set, your family is satisfied and your company succeeds
In 1992, Henning Freybe became a fifth-generation owner of the family business when he took over from his father. The president and CEO of Langley, B.C.—based Freybe Gourmet Foods recalls being handed the reins in the old-fashioned manner—with little advance planning. "It was absolutely loose and ad hoc," says Freybe, whose company sold $75 million worth of sausages and deli meats last year. "I definitely knew that I would not want to do it that way."
So, six years ago, Freybe started developing a succession plan for his son Sven, who joined the 350-employee firm in 1995 and is now vice-president. To quarterback things, he retained Willy Fournier, principal of Montreal consultancy Ajawaan. Freybe, 64, says the original goal was simple: "It was to lay out a framework that not only prepared my son and management team for taking over responsibility for the company, but one where we would look back 10 years later and say, 'We did the right thing.'" Now that the plan is in place, 35-year-old Sven Freybe will succeed his father as president in 2009.
The Freybes may have begun with a simple objective, but succession is a complex process that can inflict financial and emotional wounds. Just ask the Bronfmans, the McCains and the Billeses, who fought among themselves for control of the family firm. Still, many small businesses fail to take succession planning seriously. In a 2006 survey by the Canadian Federation of Independent Business, 66% of the owners of small and medium-sized enterprises said they intended to relinquish ownership or transfer control of their businesses within 10 years. More than 50% of the 9,300-plus respondents, however, had yet to develop a succession plan; 38% had only an unwritten plan; and just 10% had a formal plan in place. If you're like most other SMEs, then here's some expert advice.
CONDUCT A FIRE DRILL
To get started on planning your succession, decide how you will exit the business. Do you want to pass it on to a son or daughter? Transfer ownership to employees through a management buyout? Sell to a third party? Whatever the goal is, don't expect to "tax-plan" your way to succession, says Ian Hull, co-founder of Toronto law firm Hull and Hull. Yes, the financial aspects are important, but compared to so-called soft issues like massaging bruised egos, they're fairly straightforward. "People who transition businesses spend almost 90% of their time worrying about tax, and that's the biggest mistake they can make," Hull says.
Barry LaValley, founder of the Nanaimo, B.C.-based Retirement Lifestyle Center Inc., compares a succession plan to an insurance policy. Before getting into the hard numbers, he has his clients do a "fire drill" in which they ask themselves what could go wrong with the company today and how they would react. "Where I find that small business owners go awry over not planning properly is with the emotional issues they didn't think about, both for them and the people who end up taking over the business," LaValley says.
Another important early step is to get an independent business valuation. Hull warns that using your own accountant can taint the result for the kids, who may perceive the estimate as biased in your favour. "In the transition, the biggest problem is almost always the valuation," he says. "Communicate with your family and be transparent about the process."
Tip: To manage taxes effectively, start planning for succession the day you open up shop. "From a business standpoint, you may decide on certain steps that don't make sense in 20 years, and so you may revisit them," says Ian Hull. "But the ship is very hard to turn 10 years away from the transition—especially from a tax standpoint."
GET THE FAMILY TALKING
