In our August blog, we wrote about Steve Ivacko’s recent receipt of the Family Enterprise Advisor (FEA) designation, via the Family Enterprise Xchange and the Sauder School of Business at UBC. This program helps families in business (and the advisors to those families) to get a better handle on the unique challenges they face.
This month’s post will focus on what typically happens in the context of succession planning, and how this exercise is evolving into continuity planning. If you want to understand this evolution, please read on!
A Google search on “Succession Planning” will yield a surprising variety of players. Many call themselves “trusted family advisors” and their services include:
- Head hunters – Who will perform an executive search for the next “leader” of your family business. This could include an assessment of family members for suitability as well as others in the marketplace.
- Insurance agents – Who suggest simple or elaborate structures to minimize the tax on your demise. These structures are based on several assumptions and often have an attractive investment component.
- Tax advisors – Who reorganize companies to introduce family members as shareholders, put ownership in trusts and write new wills. Often, a private foundation will fill out the philanthropic piece.
In many cases, the advisor’s solution to the succession of a family business is a “transaction”. Ron, being a tax guy by trade, can explain the traditional succession planning process and the missed continuity planning opportunity. Here ‘goes!
Jim, a successful 70-year-old owner of an operating company (Opco), has a wife, daughter, and 2 sons – he visits his tax advisor (usually by himself) for a bespoke succession plan. From a strict tax lens, a common succession plan will likely consist of an estate freeze that fixes the value of Jim’s portion of the business (thereby capping his tax bill on the second-to-die of him and his wife), and transferring any future growth in the company to his kids (maybe even using a family trust). If you’re interested in more of the details, please see our previous series of blogs on the topic.
So, the lawyers will prepare all the legal documents, the accountants will file all the tax forms, of course bills will be rendered, and the transaction-based succession plan will be complete. Over time, Jim will drip out his plan to his family. On paper, it appears that Jim’s family is set.
But the reality is far from it – and this is where the concept of continuity planning come into place.
Steve’s FEA training looks at Continuity Planning as a multi-generational continuum of putting together not only the above-mentioned succession transactions, but also includes over-arching family governance plans by which long-terms decisions will be made, how disputes will be resolved, and how the governance plan will be executed and adjusted over time. Essentially, this type of planning poses several questions to ensure Jim’s legacy continues. As an example:
Jim assumes his sons want to run the business and that his daughter will not have an interest. Has Jim had a conversation with his family to see if they’re even interested? Do they even want to be in business together? When do they take over the reins? Jim’s demise can be many years away, and the tax deferral is only a small part of the equation.
What are the rules around the skills required to be working in the business? Do you get a management role just because of your last name? Lately, we have seen that children rarely want to run a family business. Why would a Queens MBA want to run a plumbing supply business in Delta when their buddies are Bay Street investment bankers?
What are the criteria around family working in the business – do they need to be a CPA, engineer, experience outside of the family business first, etc.? We recently consulted with one multi-generational family where none of the current family members met their own established criteria! With disinterested and underqualified family members at the helm, this business will not be long for the world once the founders are gone…
What happens if the decision is to sell the business. This is essentially trading one asset – the business – for another – cash. Is the money kept in one pot, or is it split amongst the family? What is the governance around investing of the funds? Managing a big pot of money is a business in itself, and one requiring a very different skill set than selling plumbing supplies.
What about philanthropy? Does the family have a shared vision for donating? Will the grandkids know why grandma was so passionate about a specific cause? Have there been conversations to align family values with philanthropic interests? How much of the legacy is put aside for donations?
These are all major decisions that need to be made before Jim and his advisors implement any of the transactional tools. They require family discussions and likely many family meetings to come up with a plan that ensure Jim’s hard work survives many generations to come. By buying insurance or doing an estate freeze before having these discussions, you’re putting the cart before the horse. Otherwise, the risk of fulfilling the old “shirtsleeves to shirtsleeves in three generations” prophecy is very high.
Over the next few blogs, Steve will showcase his FEA training and put some colour to these and other questions so that a succession plan evolves from being just a series of transactions to also encompass decisions and governance tools that become the continuity plan for a family and its business.
In the words of the time management author Alan Lakein “Failing to plan is planning to fail.”
Our estate planning posts consider estate planning issues at a high level. Before you commence any form of estate planning, please consult with tax and legal advisors.