How to Pass Your Business to Your Kids

It pays to think ahead as succession is something that can really sneak up on a business leader. Planning well in advance of when you plan or need to transition the business to someone else is key, particularly in terms of ensuring that a feasible and complete succession plan has been developed, as well as avoiding dangerous crisis situations, in the event that a business leader is unable to manage the Company for whatever reason, with no qualified successor in sight!

A good place to start when considering succession of a family business to children is to assess the level of interest and presence of the necessary qualifications in potential successors.

 

Ask yourself the following questions:

 

  • Are your children currently active in the business?
  • Do they have a long-term interest in remaining active in the business?
  • Do they have the necessary skills and experience to hold a position in the business?
  • Are they qualified to hold senior positions in the business, such as the important role of business leader?

 

Some family businesses operate on the basis that simply being a family member is sufficient qualification and for really basic positions, this may be acceptable. However, in the case of the business leader position, or specialized positions, such as the Chief Financial Officer, having the necessary qualifications is a must. In today’s competitive business world, the cost of not requiring family members to have the necessary qualifications can be significant, including costly mistakes and even failure of the Company, all to the detriment of the family.

If you determine that your children are not active in the business or do not have the necessary interest or skill level to do so, the best option may be to find another party to be your successor. Options include transitioning the business to your management team or someone outside of the business (i.e., sell the Company).

In the event that succession to your children appears to be a feasible option, you should next consider the role/responsibility and financial issues related to doing so. Every succession situation has role/responsibility issues and financial issues from the perspectives of both the departing business leader and potential successors. Key areas to address and understand in these areas include the following:

 

From the perspective of the departing business leader:

 

  1. Role and Responsibility Issues
    • What are the qualifications for the business leader position?
    • Is specialized training or education required to hold the business leader role?
    • What are the skills that are expected to be required in the future?
    • Is an ongoing advisory or contract role in the business for a period of time after succession necessary to facilitate a smooth transition?
  2. Financial Issues
    • What are the post-succession income requirements of the departing business leader?
    • Is the departing business leader in a position to facilitate succession by receiving payment for their ownership position over a period of time (i.e., a “vendor take back”)?
    • What would be the financial impact on the departing business leader if the succession failed?

 

From the perspective of a potential successor:

 

  1. Role and Responsibility Issues
    • Do potential successors have the necessary skills, experience, and qualifications to perform the roles in the business, including the position of business leader?
    • Do potential successors have a desire to hold the business leader role?
    • Do potential successors require additional training, development, or education in order to be able to assume more senior roles?
    • How long would completing a professional development plan take?
    • Would there be “gaps” in the management team going forward and how could these gaps be filled?
  2. Financial Issues
    • Do potential successors have the financial resources to facilitate a transfer of ownership (i.e., pay for the shares)?
    • Do potential successors have a desire to undertake the risks (and rewards) of ownership?
    • Are there potential funders available to provide the successors with the necessary capital to undertake a transfer of ownership, in the event that a vendor take back is not an option?

 

Not only is it important to ask yourself all of these questions to determine whether or not your children are really a viable succession option, it is also important to consider your options more broadly. What is the future outlook for the industry in which your business operates? Can the business be expected to have a profitable future, or is it really “time to sell”? Is it a better option to keep the business in the family or would a better option be to sell the business now and benefit from the proceeds of the sale?

If your primary responsibility is to operate the business on a day-to-day basis, the issue of succession may seem quite overwhelming, particularly in terms of finding the time.

 

Qualified advisors can help you move forward by:

 

  • Providing executive coaching to help you consider your succession options, assess the potential of family members as successors, and develop professional development plans;
  • Establish the necessary legal structure and tax planning, including family trusts, estate freezes, and necessary agreements;
  • Forecast your post-succession income requirements and plan accordingly;
  • Assist potential successors in terms of financing requirements and achieving professional development requirements; and
  • Mentoring the new business leaders, to raise the likelihood that the transfer of ownership is a successful one for everyone involved, including the business.

 

Generally speaking, these tasks are not likely to be completed by a single advisor; rather, an advisory team including an investment advisor, lawyer, and a business advisor who can work together to assist you in terms of succession planning and the transfer of ownership. In the event that you choose to sell your business, you will then have an established group of advisors who can help you understand the intricacies of the sale process and bring in additional advisory resources as required.

Although this may sound like an involved process (and it is), be glad that you have a business that is established enough to require succession planning. That’s why you worked so hard to build it, right?