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Rick Gendemann

Partner at Manning Elliott Abbotsford
by Rick Gendemann
March 7, 2023

Business Transition Plan Part 2 – Your Succession Plan

Having a solid “Succession Plan” is essential for the survival of your business for future generations.
In Part One of “Developing a Business Transition Plan for the Next Generation,” our Manning Elliott team looked at ensuring the transition of your business’s ownership is a smooth one, carefully thought out and planned to every detail. We discussed the impact of ownership transfer on non-family members actively involved in the management of the business.
Using specific examples, we also examined: the fundamental need to transfer knowledge about running the business; setting the transition date well ahead of time; and the process of selecting your successor. 
In Part Two, we shift our focus to the vital next step of your succession plan: how to prepare your successor – and your family, and you – for the ownership transition.

In this post we’ll cover:

  • Assessing your successor’s business skills and acumen
  • Coaching, mentorship, and having an Action Plan
  • Further education and helping them improve their leadership skills
  • Funding your retirement
  • Creating a family board
  • Taxation and Estate Planning

Assessing Your Successor’s Business Skills & Acumen

Now that you have identified and chosen your eventual successor, the next step in your succession plan is to focus your attention on addressing that individual’s specific business skills and business acumen. 

The transition of leadership responsibilities from you to your successor is a crucial process in a successful succession plan. It is important for you to objectively analyze your successor to identify their areas of strength, weakness, or lack of knowledge. 
This will allow you to address their current readiness for the leadership role and clarify all of the responsibilities and skill set requirements needed by your successor. 

Coaching & Mentorship

Mentorship will also be required as part of your succession plan. You will need to map out an action plan to train your successor in good time before they assume leadership and control of the enterprise. This may take years to accomplish, which is another reason for setting your planned ownership transition date well ahead of time.

It is absolutely critical that you spend your time, energy, money, and resources ensuring that your successor is confident, skilled, and ready to take over and continue growing the business.

Be realistic, getting your successor groomed and ready takes time. Planning for this business transition process and mentoring your successor will likely demand several years, not months.

Education & Improving Leadership Skills

The future business leader may require a specific educational pathway to be obtained. It may take three or four years of study to prepare them with the requisite technical and practical skills required to be ready for the leadership role in your business.
You’ll have to factor into your business succession plan the funding of this educational process.

  • Will the business cover the necessary educational costs?
  • What about extra costs for accommodation and meals if the formal requisite programs are not offered locally?
  • Business and personal coaching may be required as an adjunct to formal study; these costs may need to be met by the business, too.

Once all the educational and upskilling needs have been met, you should consider having your designated successor work in and operate in various leadership roles within the family business or other similar, non-family business for a time.

This will give them valuable “hands-on” experience and familiarize them with the day-to-day responsibilities of a senior leadership role.

Please note that the above comments relate solely to the future leadership of the business operations and do not address future ownership transition to additional next-generation family members. It may very well be that your succession plan contemplates multiple family members becoming owners of the business. 

If this is something you are looking at it, it will be important to address the concepts and interplay between management and ownership of the business with the next generation so that everyone understands the differences between these. 

Each person will need to understand their position in the family business including their individual roles and responsibilities to one another going forward.

Funding Your Retirement Through Realization of Value From the Business

Most outgoing owners of a business want to fund their retirement from the transfer of the business, just as they would if they were to sell it to someone outside the family.
However, when transitioning ownership to the next generation, there often is not a significant realization of liquidity to the owner at the time of ownership transition. 

If you’re planning a transition to the next generation, you will likely receive very little cash at the time of transition.

Future Profits

The majority of your earned business value will be paid out over time from the future profits of the business. Often the payout is designed to provide for the owner’s retirement funding needs – which could be over many years.

As part of your succession plan, you must recognize the importance of making sure the business transition will be successful for the long-term sustainability of the business. Your retirement cash flow needs will most likely be reliant on the future cash flows of the business. 

The long-term success of the business is a very important part of Family Business Transition Planning.

When you start thinking of retirement, you’ll want to plan how such funding can be accomplished without adversely affecting the current cash position and future required cash flows for your business. 

Ideally, you’ll work this out in your succession plan well before your departure.

Aligning Your Financial Needs with the Profitability of the Business

The financial needs of both a retiring owner and their business need to be in alignment with the projected profitability and available cash flows that the business can generate.

To position your business to meet these needs, you may require further capital investment in the growth and development of the business before the transition occurs. This way, you’ll be providing for sufficient cash flows going forward.

Consider Setting Up a Family Board As Part of Your Succession Plan

If the business involves several members of the family, you may find it helpful to set up a family board. Members of this board will meet regularly and share information about the transition while it is being planned.

Interaction and involvement by the family members can smooth over any potential disappointments or feelings of being disadvantaged that might otherwise occur when choosing and deciding on a successor.

Together, the board can establish a family vision, values, and goals, creating a framework to provide the future successor with guidance and support.

The family board, working in conjunction with the successor, can play an important role in determining the direction and success of the family business for multiple generations to come.

Once you’ve set up a formal family board, ensure that minutes are taken at all meetings and circulated shortly after each meeting.

Minutes provide family members with the written support for the decisions made – and therefore the basis to minimize any conflicts or disputes that may arise at a later date about what was said or decided.

Your Succession Plan Needs to Address Taxation & Estate Planning Issues

The departure of you as owner, and the transition of your business to the next generation, almost certainly have taxation implications for everyone involved.

Estate Planning

As a business usually forms part of an owner’s estate, you’ll need to identify and address various estate planning considerations as part of your succession plan.

Effective tax and estate planning for any owner usually involves highly complex rules. It requires the attention of specialists with local experience and a good knowledge of all applicable tax and estate legislation. 

Trusted Advisors

You, your family, and your business will benefit from early involvement by your key trusted advisors to work with and guide you through the transition process.

Access to their expertise and experience during the process ensures every option can be explored – and the best execution of your succession plan to minimize and defer taxes wherever possible.

If you are thinking about or currently working on your business succession plan and need assistance, please contact Rick Gendemann, one of our Manning Elliott  business succession leaders. We look forward to the opportunity to connect with you to discuss your transition planning issues and address how we may be able to work with you and your family on developing and implementing your successful business transition plan.
Rick Gendemann, CPA, CA, is Business Succession Leader with Manning Elliott LLP. Rick can be reached at (604) 557-5760 or rickg@manningelliott.com