Purpose: The purpose of succession planning is to prepare the business for future transitions in ownership and management. It is important to determine which or both of these areas you need to focus on.

Intended Result:  Succession planning takes a long time, involves several important steps, and requires working with a series of professional advisors. Starting today is your best option. The intended result is to maximize the value of a business transition in ways that protects the owner's wealth, provides adequate resources for future business continuity and expansion, and preserves family relationships. In a transfer situation to a family member, employee or third party, the value of the business will be maximized if the current owner is prepared for the emotional and financial issues of the transaction and if the management team is prepared to run the business without the owner's active involvement. Therefore, succession planning requires a two-pronged approach: Ownership; and Management.  Management transitions will be discussed in the Management Training section below. This section will discuss Ownership Transitions.

Structure: Ownership transitions often depend largely on tax structure and financing of the purchase and sale of shares. However, tax can not override the other important issues of business continuity and family relationships. If financing drains all excess cash from the business so new owners cannot invest in capital or expansion, then business longevity may be questionable. If the ownership transition still provides the founder or parent with voting control while the purchasers or siblings struggle to make payments, then this is a poorly structured deal that will harm the family dynamics. This process can take a long time, several years in fact. It takes time to refine your strategies, work with professional advisors, systematize your business, develop your management team, find a potential buyer and finance the transition. Beginning succession planning at the emergency room or funeral home is way too late.

A standard model of family businesses is the Three Circle model, originally proposed by Tagiuri and Davis in 1981. This model shows the relationships between family, owners and business managers.

The major steps in succession planning include the following:

1. Letting Go. It is a difficult emotional and personal decision for a founder to let go of the business they built from scratch. Transitions from first generation founder to anyone can be very traumatic. A lot of money has been spent obtaining excellent professional advice and developing plans when the owner was not yet ready to let go because his or her emotional and personal needs were not discussed and met. This is a very important step in the process. There are no statistics available as to how much succession planning originates in the hospital emergency room when a founder suffers a health crisis, but the situation is more common than people think. Waiting for the perfect time, or until a crisis forces your hand, seriously reduces the value of your business, eliminates many potential options, jeopardizes your family's wealth and risks the continuity of the business. There are stories of 80 year old founders still hanging on, and their adult children are working in the business preparing for their own retirement before the founder retires. It's your choice when you let go, not if.
2. Valuation of business interests. Most people wait too long and have an unrealistic sense of the value of their business, often their single largest retirement asset. Although there are three levels of valuation that can be provided by a Chartered Business Valuator, value is based primarily on the ability to generate excess cash flow. This valuation can also set the stage for internal changes that can improve the value. These typically include enhancing systems and processes, improving management's skills through training, and refining strategies that can improve profitability. These should all impact on increasing cash flow and on decreasing the amount of time an owner or investor needs to spend running the business.
3. Timelines. What are your timelines for exiting the business? The longer you have to prepare, the stronger you can position the business. This is critical given that seven of ten business owners plan to retire in the next ten years in Canada, according to a 2005 Canadian Federation of Independent Business study. In the next few years, there will be a glut of businesses for sale, fewer potential owners or investors to buy them, and high competition for financing dollars to fund transitions. Being prepared and maximizing the value of your business are critical.
4. Options. A business transition can include ownership transfer to a family member or selling to employees, a private third party, a competitor or a major consolidator. It is becoming more common for a founder to sell the business to a group of employees and family members who are active in the business. This larger group can pool resources to acquire the shares and can represent a significant leap forward in management succession by brining in several people at once who can step up to future leadership roles. Employees understand the business, its suppliers and customers very well. However, the employee/family group will have fewer resources (less cash!) than a competitor or consolidator. A competitor will realize higher strategic advantages from acquiring your labour pool and customer list. Whether the business is sold to outsiders, family or employees, the management team must be developed to take over management functions. These management roles are discussed below in Management Training.
5. Selecting a Successor. Whether you are keeping the business in the family or selling it to an employee or employee group, you need to select the future leader. The stakes are even higher if you are being paid from future cash flows. You would prepare a leadership profile with required skills, knowledge and abilities, and most importantly, attitude and commitment. The successor must understand your business, customers, suppliers, employees, and how they can steer this ship.
6. Tax and Legal. Transitioning ownership and voting control to others involves significant tax and legal implications for both the seller and the purchaser. Often, this ownership is a new experience for the purchasers, especially in the case of a management or employee buy-out. Therefore, additional time and resources will be required for this group to become familiar with their new responsibilities and risks. When ownership transfers from one founder or a husband-wife unit to a diverse group of employees, there will be a requirement to document processes and agreements to deal with protocols and future conflicts that were previously discussed over the kitchen table.
7. Financing. Financing an ownership transition is often more difficult than expected because the business is usually using its borrowing capacity to fund ongoing operations and expansion. Therefore, there is not a lot of borrowing power or surplus cash sitting in the business. As a result, the transactions often require a combination of vendor and subordinated debt financing to put the transaction together. It is in the vendor's best interest to receive as much cash up front as possible to reduce the risk of not being paid and to be able to invest the proceeds immediately. In management buyout situations, the managers may be limited in their cash resources to contribute pure equity up front and require additional personal and business financing.
8. Professional Advisors. Your professional team of advisors need to openly share information with each other and realize they all have an important contribution to make. The team will likely include the following professionals:
   1. Since succession planning is a process and not a single event, a succession planning specialist can quarterback the whole process with you. They will help you with the difficult steps of letting go, communicating with family and business members, work with all of your professional advisors as a collaborative team member, help you to ask the right questions and understand the technical complexities and language of the various specialties.
   2. Tax specialist or accountant to advise on tax structure, to coordinate the financial information for all advisors and analyze implications of various financing alternatives.
   3. Lawyer to advise on share structure, purchase and sale agreement, shareholders' agreement, legal risks and other legal issues.
   4. Financial planner to advise on strategies for protecting assets through insurance products and for determining investment strategies for sale proceeds.
   5. Lenders, bankers and investors. These groups will finance the transition from one owner to the next owner or ownership group. Their involvement helps to professionalize management because they require a clear exit strategy for their financing involvement, risk management for protecting their investments, and clear strategies and plans from management to grow the business and generate cash flow to repay their investments. Often, a mix of lenders and investors will partner together on a particular transaction. This provides a creative mix of resources and strategies that can benefit both the vendor and the purchaser and structure a transaction that could not have otherwise come together.

Questionnaire:

1=very poor. 2=poor. 3=below average. 4=average. 5=good. 6=excellent.

Using the above scale, how would your rate your company on the following:

1. We're prepared to ‘let go' as we understand that we control the timing of when succession will occur and not if it will occur.
2. We have an emergency succession plan documented and understood by key managers and advisors.
3. We know the value of our business.
4. We have an exit date.
5. We understand our family's interest in carrying on the business and have discussed this individually or as a group with all family members.
6. We have a written succession plan.
7. We have a full succession plan that identifies the successor, includes a management development plan to run the business, includes a tax plan, identifies financing sources and structures, and outlines how the new owners will carry on the business.
8. We've discussed succession issues with our professional advisors including our accountant, lawyer, financial planner, insurance specialist and banker.
9. We've communicated our succession plan in general terms and business continuity issues with our major customers.
10. We've communicated our succession plan in general terms and business continuity issues with our employees and managers.

To discuss your results to this questionnaire and how our services can help you prepare a succession plan, please call 866.537.9111.