Contemplating a succession? Here are five points to consider

One thing HBO’s smash hit Succession taught us about succession planning is that it can be a messy affair. Though Logan Roy, the domineering patriarch/ anti-hero of the show, would never win any father-of-the-year awards, at least he was trying to identify his successor – let’s not think too much about his methods.

The point is, succession planning is important. While recent research from the Canadian Federation of Independent Business (CFIB) predicts nearly $2 trillion (with a T) worth of Canadian business assets will change hands over the next decade – CFIB called the 2022 study Succession Tsunami – fewer than one in 10 business owners have a formal succession plan in place. That’s bad. Like, very bad. (For the Succession fans, it’s Cousin Greg as CEO bad.)

There is no question that the succession process is a daunting one, and the size of that challenge alone can cause owners to delay. The CFIB research found one in four owners said it’s hard to know where to start. But ask the experts or read the literature and a unanimous message quickly emerges: planning and preparation is essential and the sooner the better. For anyone contemplating succession, here are five key points to consider.

Just do it!

Okay, nobody said this verbatim, but it is a clear theme. According to the CFIB study, 54% of respondents said they were unsure how to find a buyer, and 43% said they were struggling to value the business. Another significant cohort (36%) feel they just can’t find the time. 

“Given the magnitude and complexity of the process, business owners may also be too busy running their business and simply do not have the time needed,” says Laure-Anna Bomal, an economist for CFIB. “As such, they may avoid or postpone their plans.”

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And some feel their business is so complicated that nobody will understand their circumstances. That almost certainly isn’t true. “The owners of the businesses feel that their situation is so unique that it would be difficult for anybody to appreciate what their situation looks like,” says David Fabian, Canadian EY private leader. “The reality is that while each situation is unique, there are a lot of common themes, from one family to the next, or one estate to the next.”

Minimize the tax impact

Not having a clear succession plan in place could lead to a big tax problem when children inherit a business from a deceased parent. “As a rule of thumb, the tax on death is going to be about 25%,” says Fabian. That could be a big bill to pay if the business does not have the liquidity to pay for it. “You’ve got a business that is worth X, but it doesn’t necessarily mean you can just take that money from the business,” he says. There are ways to minimize or even avoid this problem, but it requires planning. 

“Having a will, identifying executors, talking to your children, talking to your accountant all help,” says Fabian. “An estate freeze can be helpful in the process of planning and succession that often will alleviate tax on death, and it will pass high-value assets on to next generations and avoid large taxes on death,” he says. But it must be put in place before the owner dies.

Don’t only think of the children

It’s not easy, but business owners must ask themselves if their child or children are the right people to take over. “It shouldn’t be assumed that because you have children, you’re necessarily going to pass the family business along,” says Fabian. “We often see that the next generation doesn’t have the skill set.” In those cases – if the most important objective is to ensure the continuing viability and health of the business – professional management should be brought in. 

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“Those Friday night dinners can become very uncomfortable,” admits Fabian. But family members must be reminded that the goal is to ensure the long-term viability and health of the business, and the best course is to hand it over to professional management. 

It’s good for the economy

In the absence of sound succession planning, more Canadian businesses could be sold off to private equity or gobbled up by larger corporations. EY observed this post-COVID, a period that saw the valuation of many businesses increase across the economy. “We had dozens of our clients sell their businesses at values that they never could have dreamed about,” he says. It’s good for the family, but it may not be great for the rest of Canada. “A lot of small businesses in Canada have exited recently and that consolidation in the long run is probably unhealthy for the consumer,” he says. “The consumer will have less and less choice.”

The COVID effect

CFIB’s research showed the pandemic had a significant impact on the succession plans of Canadian businesses: 39% of owners changed their business exit date because of COVID, with about 17% accelerating their timeline and 22% delaying it.

For those getting out sooner than they planned, overwhelming stress, changing customer expectations, supply chain disruptions and staffing issues were all common factors.

“On the other hand,” says CFIB’s Bomal, “owners who delayed their exit were influenced by the accumulation of pandemic debt, lower than normal sales, or business growth… and owners wanting to keep their business longer to reap the benefits.”

This article first appeared in Canadian Grocer’s September/October 2023 issue.