This plan could save your business
What could be more fulfilling than owning your own business, diligently building up a network of fine employees and a select clientele, patting yourself on the back at the end of each day and, best of all, at the end of your career, handing over the results of all your hard work to your son or daughter? Er… your son and daughter? All three sons? Or your nephew Rupert because none of your kids know anything (or want to know anything) about the restaurant/printing/retail business you built from scratch?
You don’t have to be an Eaton or a McCain to think ahead. If you have a thriving business and no firm plan to pass it on to your successors, it can be devalued by a forced fire sale or – best-case scenario – a blip that sees profits drop dramatically when you drop the ball. Says Fred James, an estate planning specialist with CIBC Wood Gundy in Calgary, “Family businesses account for 70 per cent of all businesses in Canada – that’s 60 per cent of the workforce – but less than 15 per cent make it to the third generation.” It’s a case of what he calls “heir today, gone tomorrow.” Worse, cautions James, “If you don’t have a ccession plan, your estate planners will include Revenue Canada [now Canada Customs and Revenue Agency] and the probate courts.”
No joke. According to a 1999 survey of family-owned businesses across the country by the University of Waterloo in Ontario and the accounting firm of Deloitte and Touche, 27 per cent of Canada’s business leaders will be ready to retire within one year, 29 per cent in four to eight years and 22 per cent in nine to 13 years. Ninety per cent of the respondents indicated that their family controlled the business, and yet two-thirds of them have no written succession plan. Why not? Although it must be done in co-operation with seasoned key advisers, James says, creating a succession plan is not brain surgery. “It’s one per cent technical and 99 per cent emotional.” So-called soft issues are often more daunting than tax concerns or buy-sell agreements. A refusal of business owners to accept the inevitable – retirement and mortality – and a reluctance to alienate some family members by choosing one as the successor are major contributing factors in the age-old ostrich syndrome.
Find a leader for the team
Because family businesses are an all-consuming hybrid discussed at both the supper table and the boardroom table, says corporate and estate planner Leon Lewis of North York, Ont., the investigation and resolution of family issues should be as much a part of the succession plan as the actual ownership of shares. A team leader, a trusted professional who is often an accountant but also a mediator, can help.
Toronto public accountant Bob Rolfe is one such team leader. He currently counts 80 small business owners ranging in age from 45 to 70 among his clients. Rolfe has great respect for them. “The small business guy is a bit of a workaholic,” he says. “Their companies are patriarchal. Their employees become family, too. And often, when they aren’t in school, their children spend their summers hammering nails.” Still, ahead of the kids and the employees, and before he gets into the nitty-gritty of life insurance and tax issues, Rolfe’s advice is to always put the business first. Give up the idea of automatically crowning the oldest son (Lewis calls this the loyalty philosophy) or an equal split between heirs (the democratic philosophy). “That’s a mistake,” Rolfe says. Choices for successors must be based on capability, period. Says Rolfe, “I tell parents if they want to divide up their assets equally, they must look at their entire estates. For instance, maybe they have a cottage that could be left to one son instead of half the business.”
Another issue James deals with is the reluctance of owners to let go. “Transitions are hard,” he says. “A lot of owners say, ‘I still want to make the decisions even though I want my son to run things day to day.’ Ego plays a big part.”
Next page: Ego or pride?
Estate planner Leon Lewis disagrees, “It’s not ego – it’s pride. I have a case where a man worth millions of dollars wouldn’t do a succession plan. His underlying motive? He wanted the business to collapse when he died.” Sometimes, owners don’t really know what they want. Many professionals have to be part psychologist to draw them out. Says Lewis, “Usually accountants are the key people. They can usually quarterback a plan of action.”
By comparison, the how-tos of a succession plan are often pure logic and good old-fashioned know-how. Basically, a succession plan outlines the results of discussion, information-gathering, evaluation, skill and creativity all related to income, shares and assets.
A sound succession plan will also ensure that the retiring owner will have sufficient funds to live in comfort. Talented professionals on the team may include accountants such as Rolfe, lawyers, insurance agents, estate planners and management consultants. What they are trying to do is construct a sound written plan that will help the business continue to grow and the family continue to benefit, even if family members are not involved in its day-to-day management.
Make an inventory
Getting started is the biggest hurdle. First and foremost, says Rolfe, a business owner needs to do an inventory of all personal assets. He needs to make sure there is liquid cash in case of any emergency. Then, he must sit down and make a will. “If there is no will, everyone’s in trouble,” Rolfe cautions.
Owners should be mindful that if they leave the company to a spouse, there are no capital gains tax consequences until that spouse dies. Then, survivors will pay 22 per cent above an exemption of $500,000. That’s why Rolfe advises owners – if they expect an heir to absorb a large tax hit – to take out life insurance, which heirs can use to pay off Canada Customs and Revenue Agency. Without insurance, successors may be forced to sell off assets or borrow money to pay debts, both of which could put the company in financial jeopardy. Says Rolfe, “A guy who has been in business for 25 years may owe $25 million in taxes. Many people are not aware of how expensive it is to die.”
Owners may want to draw up a buy-sell agreement. Such an agreement among non-relatives – such as a business partner – is usually clear-cut, says James. “If you are not related, it means capital changing hands. When one partner buys the company, the money goes to the other partner’s estate. The new owner pays the business debt.” When plans are developed, all key managers – non-family and family alike – must be consulted and kept up to date. In a family, such agreements will address business, legal and tax issues, according to Lewis, and permit both active and non-active family members to reach their objectives. For example, disinterested parties may be able to take a buy-out if owning the cottage instead doesn’t excite them. So-called exit strategies are provided to cover disability, death and disputes. And disputes do occur – even in the most affable family businesses.
Acrimony can ruin relationships at a much more modest level. “In dysfunctional families, ugliness does come out in times of change,” says Lewis. “That is why this whole area can be very delicate. It is about the health of the family’s business, the health of the family and the health of the economy. It is very important.” Says Fred James, “Small business owners have made a contribution to society. Handing that contribution on takes vision. Anyone who does not have a plan must start to develop one now – before there is an emergency.”