This week my family experienced a relatively new adventure game while away on a trip to a wedding.
In a mock emergency, we were locked in to a room with a nuclear generator which was purportedly overheating. A series of puzzling tasks were required before we could unlock the inner room to the reactor core, turn off the offending nuclear device and then escape the dangerous room to the tranquility of the outside world.
The safety of the good citizens of the city was in our hands.
Creativity and puzzle-solving skills were essential elements to our eventual successful escape. The whole time, a clock was ticking loudly, and chilling voice recordings warned us of impending doom if we were to fail. If needed, we could buzz the intercom and ask our external consultant for advice, but the bulk of the escape plan was written by us.
We eventually got out, in typical dramatic style, with only a few seconds to spare.
As we approach retirement, or the sale of a business, we have a parallel, although less perilous, set of circumstances. We have a few clues, an overall goal, several minds to set to the task and the availability of outside help as much as needed.
In this set of business secession articles, we have covered a lot of ground.
We have addressed some of the more common topics that business owners and their families face when contemplating their succession. Ideally, addressing these issues should happen in an organized planning framework.
One of the main reasons owners inadequately plan their succession is the absence of this framework to which they can follow and refer to.
Starting with a framework ensures that important aspects of family business are properly addressed. It also inspires commitment from the family once they see the big picture of what is planned.
Steps to succession
No. 1 - Begin
Involve family members.
Conduct open and transparent communications.
Set up family meetings.
No. 2 - Evaluate and choose
Evaluate aptitude of next generation.
Evaluate business prospects through a SWOT analysis.
Use professional planning tools to gather preliminary information.
No. 3 - Implement succession plan
Rank options against succession vision.
Assemble advisory team.
Use professional planning services to assist with analysis.
No. 4 - Re-evaluate
No. 5 - Repeat
The above framework breaks out the planning into distinct yet closely related steps.
As we discussed earlier in this series, achieving a balance between family and business goals is very important.
Evaluate both family members and business participants in terms of their strengths, weaknesses, opportunities and threats analysis (the acronym "SWOT" is often used).
The issues brought to light during this family and business evaluation should assist you to refine your goals and identify succession options that you and your family could consider.
We recommend that you use your trusted professional advisors to evaluate each option based on its merits and risks/disadvantages as it affects the family.
This process of evaluating each identified succession option is an iterative process between goal setting and choice of succession path. Evaluations should reflect material changes in family and business situations as they occur.
Just like you need to create a plan to get into a business, you shouldn't rush your exit. No life-long employee heads in to retirement without a thorough look at his or her pension options. A business exit is at least as complex, likely much more so, and should be well thought out and planned for. We recommend giving yourself three to five years to plan when and how you'll exit.
Conclusion
Business owners and entrepreneurs are so passionately attached to the business they have created, bought, or inherited that it's hard to envision ever selling it or leaving it in someone else's hands.
While the succession planning process may trigger conflict, it can also boost family alignment around common goals. Also, while the dynamics in some families may conflict with their business's well-being, other families can be a great source of strength to their business.
One common concern is how to maintain family harmony during the process.
The "soft" (non-technical) aspects account for two-thirds of the success of a smooth business transition from one generation to the next. The keys include insightful personal reflection and fostering family discussion at an early stage.
The planning process will take time and effort and involve many stakeholders besides the next generation, but the outcome will eventually be well accepted and a cause for lasting pride.
Deciding whether to pass on the business to the children is an important question. There are actually two aspects that can be passed on: ownership and management.
Children may choose to remain responsible and proud owners while talented external managers are selected to run the business. Or the children could own and run the business.
Will transitioning the business to other family members create more value than selling it? Judge by criteria that include not only financial value but also emotional capital and a family legacy. The ability and desire to ask this question is what differentiates family business leaders from entrepreneurs.
The most fundamental question is when and how to start planning the exit from a business. For "when," it's never too early to start the thought process.
Opinions, where provided, are those of the writer and not RBC Dominion Securities. Readers should consult their own legal or accounting professionals before proceeding with a strategy.
Mark Ryan is an advisor with RBC Wealth Management, Dominion Securities, (member CIPF) and can be reached at [email protected].
