Home Month and Year November 2022 Succession Planning is Critical

Succession Planning is Critical

Failing to plan is planning to fail


In Edmonton, and throughout Canada, there is a strange business contradiction. While a majority of business leaders agree about the importance of a succession plan, fewer than half actually have one and among those who do, only 8 per cent have a detailed, formal succession plan in writing.

There are many reasons to back-burner a succession plan; mostly business related but also some simple flukes of human nature. Things like crisis management and putting out fires, day-to-day operations, strategizing for success and some good ole’ procrastination.

Stats and number-crunching underscore that succession planning is not only vital for a business’ success but are important aspects of Canada’s competitiveness and economic prosperity.

“Succession planning is absolutely critical, not just for corporations, but also for farms and small businesses,” says Nicole Osolinsky, partner, Tax, at KPMG in Edmonton. “The key word in succession planning is PLAN. It requires intention. Failing to plan is planning to fail. Making no plan is still a decision. Without thoughtful intention around succession, there is a much greater chance of not being successful.

“But there are common reasons why some business owners procrastinate and hesitate. Some of the most significant reasons are a lack of capacity, as business owners are too busy working in the business to work on the business. Another is a lack of clarity on how to make progress and where to find the right support to help work through the succession process. There may also be some fear of the process since it’s such a crucial decision.”

She adds, “Business owners are fantastic operators and entrepreneurs, but that does not mean they automatically are comfortable with the skills required to work through a succession or leadership transition.”

While business leaders agree about the importance of eventually transitioning the business and a sound succession plan, only a minority are doing something about it. According to the Canadian Federation of Independent Business (CFIB), “The approaching retirement of the baby boomer generation means that the business landscape is poised for a dramatic shift. Some 72 per cent of business owners intend to exit their business within the next decade, with over $1.5 trillion worth of business assets to be transferred to a new generation of business owners.”

Recent KPMG polling shows that 37 per cent of 500 small and medium-sized business leaders plan to retire in the next five years. CFIB research also notes that 72 per cent of owners plan to exit their businesses within the next 10 years, transferring the businesses to a new generation of owners.

“Succession planning often falls to the bottom of a business owner’s to-do list,” Osolinsky points out. “While we all know the importance of having a plan in place, the details and execution cause many to procrastinate. The real cost of failing to plan is more than financial. There is usually a relationship cost driven by frustration among family members and generations and there is an energy cost as financial and relationship tension is stressful, versus an intentional and well-planned succession process, which can be energizing. And, there is the cost of employee anxiety. Employees can be caught in the middle of tension and left unsure who is in charge.”

Despite the consequences, many businesses still procrastinate about succession planning,” she says. “First, an entrepreneur’s passion leads them to work in the business, not on the business. Planning does not make it to the top of the to-do list. Second, there is the intimidation about how to start and fear of opening up conflict or difficult conversations that they may not know how to navigate. That is where a professional can help – to facilitate the process and facilitate those important conversations.”

According to CFIB research findings, it’s undisputed. Whether business owners decide to exit or transfer ownership of their business, having a succession plan is critical for a smooth transition. CFIB notes, “Succession planning is the process by which a business owner chooses the best exit strategy for them to successfully transition into the next stage of their life. Succession plans can be informal or formal in nature. A formal succession plan sets out the process and schedule for a business owners’ exit. An informal plan is more ad-hoc.”

The business owner’s initial big decision, of course, is whether to sell the business to family, to employees or an outside buyer. CFIB stats show that more than 48 per cent of business owners plan to sell the business to buyer(s) unrelated to their family. About 25 per cent intend to sell the business to employees and 25 per cent plan to sell to family.

Legacy and other human nature/family reasons very much impact the succession planning and the transition of a business. Succession planning advisors resoundingly agree. Two of the most important considerations of a succession plan are preparing the business to prosper without the founder having to control things or even be in the office; and, family aspects of succession can get tricky.

Osolinsky cautions that the family needs to consider their definition of success and what that looks like. “Success could mean maintaining a business which supports their community with employment and their product or service, and providing career opportunities for their family members. The family may also see more opportunities for economic gain than liquidating and dividing up the proceeds. These can be some of the other reasons to retain the family business, beyond financial or legacy reasons,” she says. “Generally, family harmony is desired, but if it could disrupt family harmony, it should be a factor to consider. A transparent process of assessing the roles that require succession (like the CEO, board chair, owner or other roles) and the skillsets of possible candidates can alleviate this. All the parties may not like the answer that comes from the process, but evidence of a process is often appreciated.”

CFIB stats and trends point out that seven in 10 business owners agree that the two-plus years of pandemic disruptions have changed their thinking about continuity, succession planning and how they plan to retire or exit their business. The CFIB survey documents the new, post-pandemic business reality that 42 per cent of business owners will retire later because of the COVID fallout and 57 per cent estimate that the value of their business has dropped. Many business owners are delaying their succession and retirement plans. A majority feel that the value of their business has gone down because of COVID broadsides.

However, various contemporary factors translate out to positivity about succession planning.

“Perhaps it’s a factor of age and demographics and also a ripple effect of COVID, since many took time to self-reflect,” Osolinsky adds. “A recent report by KPMG Enterprise and the STEP Project Global Consortium detailed the regenerative power of family businesses. It outlined that potential next-generation successors are currently being educated on how to take calculated and responsible risks in order to keep the founder’s entrepreneurial spirit alive. They are key elements to the success of family businesses.

“Many next-generation family members are voluntarily coming forward to be involved in the business – they have a strong desire to be connected with the business and to continue its legacy.”