It’s a stretch to call it the new succession but for generations, the classic handing down a family business, appointing successors and heirs and the continuum of legacy has been an almost sacred aspect of a successful business. Iconic succession stories like Walmart, Ford and the $30 billion succession commotion surrounding Rogers Communication are high profile examples.
In the local business world, it is a much different story.
Most family businesses handle succession under the radar. The traditional proactive succession planning approach prepares a pipeline of internal talent, minimizing disruption, improving employee morale and retention and ensuring the organization’s long-term stability and ability to meet future goals.
In Edmonton, with various new bowing-out options, succession planning is more important than ever.
“Family business leaders are required to navigate new pressures and persistent economic uncertainty,” cautions David Magdalinski, KPMG Edmonton, tax partner. “Factors such as a new world trading order, inflation and technologies like AI are shifting business strategies and putting greater focus on the skills needed to navigate and adapt to this complexity. Against this backdrop, a generation of family business founders and owners are assessing next generation readiness and accelerating succession planning. Edmonton’s KPMG professionals work with successful families to proactively prepare the business, the family and their successors for these important transitions.”
“Succession planning is not a one-time effort. It is an ongoing, interactive process,” he explains. “Effective succession planning involves identifying critical roles, assessing talent, developing leadership pipelines and ensuring institutional knowledge transfer. It aligns with organizational goals while fostering diversity and engagement. Metrics and benchmarks should be established to evaluate the effectiveness of the plan, ensuring it meets desired outcomes.”
Magdalinski cautions that, even with the best of intentions, common planning mistakes happen. Procrastination delays planning until a crisis forces the decision. Poor documentation can lead to confusion and disputes. Ignoring cultural alignment and overlooking knowledge transfer can mean a leadership shift without adequate mentoring or knowledge sharing.
Human nature also factors into business life; many business owners procrastinate when it comes to succession planning.
“Sometimes it is emotional barriers or practical challenges. Succession planning often requires discussions about retirement, legacy and the possibility of illness or mortality, which can be uncomfortable topics for some business owners. They may fear that planning for succession signals relinquishing their authority or control over the business, particularly if they have built it from the ground up.”
Magdalinski points out that business owners often feel they are consumed by day-to-day operational demands and succession planning, which requires long-term thinking, may seem like a task that can wait.
Increasingly, the succession planning process – identifying critical positions, assessing high-potential employees and developing skills to ensure a smooth leadership transition and continuity for the organization when the founder or leader leaves or retires – is also being redefined.
Employee Stock Ownership Plans (ESOP) and Employee Ownership Trusts (EOTs) are relatively recent alternatives, or complements, to succession planning.
For owners considering succession, ESOPs continue to offer compelling advantages. They are similar but different strategic tools for business succession. The main difference is that succession planning includes various strategies (selling to family, external buyers or employees), while ESOPs and EOTs are formulas for achieving efficient employee-owned succession.
An EOT differs from a traditional ESOP in that ownership is placed in a trust for the benefit of employees, rather than being held directly by individual employees. It is an effective way to maintain the company’s legacy and culture, offer tax savings and protect local jobs.
Canada passed new legislation in 2024 to enable and encourage the formation of EOTs.
Both ESOPs and EOTs are popular strategies for business continuity and transition after a founder or owner leaves. Both offer a transformative alternative to traditional ownership transfers by empowering employees as owners and securing a lasting business legacy.
However, the estate planner jury is out whether ESOPs or EOTs are the best path for succession and estate planning for privately owned businesses. The financial sector is tracking the growing trend of the diversity of businesses which are opting for them.
Succession plans are no longer just the stereotype of family-owned firms looking for an exit strategy. They are options for telecom giants, tech startups, professional firms and private equity sponsors to effectively plan succession and maximize new ways to share equity.
Edmonton is a respected trendsetter in the field of ESOPs and EOTs.
This February, Edmonton’s WJS Canada was rebranded as Taproot Community Support Services. In September, Taproot announced that it had transitioned to a new ownership model and the company became Canada’s largest EOT as well as the first in the social services sector. Under the EOT, all of the company’s 750 employees are now equal owners and receive dividends.
“Taproot has been an ESOP for many years, and we realized that we needed a new structure to solve a number of succession issues,” explains executive director Donna Phillips. “We wanted to expand ownership to as many employees as possible.
“A key aspect of the EOT model is that it is simple to include all employees as beneficiaries of the trust, reducing the administrative burden of tracking share transfers and certificates. Another advantage of the new model is that the government has included an additional capital gains exemption up to $10 million. We didn’t need all of that, but it was useful to several of our shareholders.”
She admits to some negatives, like the notion of giving up at least 51 per cent control to the employees. It requires a strong and separate management team with a governance structure that includes a board and some trustees.
“For a small company, this may be too much, but for a mid-sized company that is already used to some governance, the bar is not that high.”
As with most facets of good management, communication is vital.
“There are some common misconceptions from staff thinking that they can control management or that the personnel changes have to be approved by them,” she says. “This is not the case, as the management team continues to run the business and report to the board of directors.”
Stats and trending show that while ESOPs are established, and the EOT formula is growing, Canadian business is still in catch-up mode.
Taproot is only the third Canadian company (as of the time of this writing) that has transitioned under the new legislation, and it is, by far, the biggest. In the US and the UK, the model is much more popular, with over 10 per cent of transactions being to an EOT. Traditional ESOPs play a role in the company succession, but the option carries less favourability in Canada when compared to other countries.
As with conventional successions, legacy is important.
“The legacy of the shareholders who sold to the trust was a big motivating factor,” Phillips notes. “We had about 31 shareholders when the transaction was completed, with about 40 per cent of the shares being held by retirees. Our shareholders desperately wanted to expand ownership to as many employees as possible, and the EOT legislation made this a possibility.”
