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Planning, Not Panicking, is the Key to a Successful Succession

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Succession happens for every company, whether the owners are ready or not, as Deborah MacPherson, tax partner and tax business unit leader, and Nicole Osolinsky, tax partner, with KPMG’s Edmonton office point out. It’s better to plan than to panic – especially for entrepreneurial Baby Boomers.

“Entrepreneurs are a special breed,” says Osolinsky. “They are all in, focusing on the business. It can be hard for them to pull themselves out and think about what life looks outside of that. It’s not a failure on their part, it’s just in their DNA.”

“Then,” she continues, “a critical event happens like a death or serious illness. The thought at that point is, ‘What do I do? Run around and find a buyer? Can the kids step in? What if they don’t want to or aren’t ready to run the business?”

MacPherson adds, “They often get an unsolicited offer out of the blue. That is also a trend. That is usually when people start to realize that maybe there is life after the business to think about.”

Both point out that “transition” is a better word for the procedure than “succession,” because there are so many paths the transaction can take.

“Succession sounds final and feels like a hard line in the sand. Transition sounds more like a change into a different role whose identity is still attached to the business,” explains Osolinsky. “A transition is what it means to go from managing a business to managing family wealth. One path is looking at an exit strategy that might involve a sale, another is involving children in the business or eventually passing it to family or a management group.”

“Transition makes them feel involved and is encompassing,” agrees MacPherson. “It could be a sale, partial transfer, or even just new management.”

The number one thing to remember, they advise, is that life happens whether you are ready or not – so plan before you have to panic.

“If you don’t plan, things don’t necessarily turn out the way they should,” says MacPherson speaking to when succession is triggered by an unexpected event.

“Crisis mode equals loss of value,” adds Osolinsky. “Plan ahead so if a crisis does happen, you can reduce the amount of stress, not just on your family members, but also for your employees.”

When should entrepreneurs start planning for succession?

“Today!” says MacPherson emphatically. “The best time was probably three years ago; the next best time is now. You always want to think about the succession, be it an exit or a transition. You want to be in control.”

Osolinsky confirms, “We tell our clients to think about a sale three to five years before you want to take action. This gives you enough time to truly model the sale, get the best calculations, prepare for financial results, clean up income statements, organize data, and so on. It allows you to work through everything while still keeping your eye on the business. In a rush, you focus on the deal and your eye is off the business.”

She continues, “It’s not just what you sell for, it’s also what you get to keep in your jeans. Planning means a better after-tax result. Having professionals help you through the process gets you there.”

“There is so much to think about that you can’t let it happen naturally and hope for the best,” advises MacPherson. “For example, what if a founder has three children, but only one is ready to lead and take charge? That is a real issue when it comes to transferring the business to family, and working through those dynamics can take around three to five years of focused thinking and planning.”

Osolinsky agrees saying, “In the event of a death, stress, grief and conflict amongst siblings are common. What if nobody wants to carry on and they want to sell? These are all things that should be considered ahead of time.”

KPMG creates customized long-term transition strategies for business owners so whether succession is triggered by design or an event, the process can go as smoothly as possible.

They explain, “In terms of selling, a pre-divestiture plan helps you prepare for all elements of the sale including calculations and compiling information. We have the ability to model various scenarios such as what if we sell for X? Should we sell for shares? Assets? How can we reorganize the business now for the best after tax position? This helps give you some perspective into possible options and helps you drive the deal when you go to market, and what you want it to look like.”

“For family businesses we help with governance, legacy planning, post-sale, financial education of the next generation, amongst other things. We have professionals who can help navigate the complexities of family business and family dynamics, professionals who take the time to understand the driving factors amongst the various stakeholders involved. We can then provide guidance to help ensure your family dynamics are not impacted by decisions made in the family business.”

KPMG advisers have been helping family businesses in the Edmonton area for over 90 years. Reach out to an adviser today to understand how KPMG can help you at 780-429-7300 or www.kpmg.ca.

One company that planned ahead and used the guidance of KPMG for a successful transition was Silverberg & Associates Inc. (o/a Silverberg Group).

“Silverberg Group was founded in 1996 by brothers Doug and Scott Silverberg, says Kim Silverberg, whose role in the company was general counsel. They grew the business to be the largest group insurance brokerage in Alberta. The brothers had great vision and saw that the industry was changing. In order to keep growing the business and offering more for their clients, they were going to have to invest a great deal of time and money in software, technology and manpower. They were not opposed to doing that, but were also looking more seriously at offers from national and multinational companies that had already made these investments. These offers also made good sense for succession planning as the brothers were approaching their 50s. The offer had to make sense both for the business and for their families.”

She notes that the process was “time consuming and stressful,” pointing out that, “It removes focus from operating the business and took everyone out of their comfort zone. Having professionals that can guide and help manage the process is absolutely necessary.”

The advice from Silverberg for other companies thinking about succession planning is this: it is never too early to begin planning.

“It should also be an ongoing process to meet and plan with professional advisors. Family dynamics change and so do rules and regulations. Good planning takes time and we learned that some plans have to be put in place long before any offer has been made.

“Be prepared to invest a lot of time in the process. The focus of decision makers will be on the offer or transaction and not as much on the business. Make sure the right people and processes are in place so that the business can continue operating; not all offers become closed transactions.

“It is imperative to have exceptional professionals on your side. Do not agree or accept terms before getting advice on the structure of the transaction. Small suggestions from professionals can have large consequences. For example, deciding on whether or not to sell assets or shares can have very wide variances in net proceeds at the end of the transaction depending on your pre-transaction planning. It is complicated! Get good advice.”

She concludes, “You must also be cognizant of the costs of those professionals. Be upfront with them about their fees. Remember that they must be paid even if the transaction does not move forward.”

Another succession example is seen in Bob Dale Gloves (BDG), whose transition includes the third generation of the family.

“I had always hoped that Brad would want to take over some day, but it wasn’t until he finished his business degree and still showed a very strong interest in being a part of BDG, that I realized my dream was coming true,” says Denis Dale, president, of his son Brad, vice president.

He continues, “The biggest gift of remaining a family business is culture. Having a partner join that wasn’t a part of our family would bring a different set of values. With family, I can leave my visions with my son to take into the future and I feel safe in the trust I have in him to not take advantage of that. It allows me to continue the legacy my father built years ago.”

His son is excited to be part of the succession plan, and to remain with the family business, saying, “I knew when I was around 16 years old that the family business was where I needed to be. Watching my father as an idol, I worked hard in every aspect I could to be like him some day. I had worked for a year in the warehouse after high school to get some experience and learn from the bottom, and then worked as a team member in every department: purchasing, marketing, operations. Then I was back in university to finish my studies before starting full time at BDG around the age of 22.

“Keeping the values set at the start of a company to follow your long-term vision is one of the main advantages for running a family business. Both my father and I trust each other indefinitely to obtain the same vision and we are both committed to the success of this company.”

Whether your succession plan is a sale, a transition, or movement within the family business, the key is to involve the right professionals and to start the process now.

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