By NICK STEWART
While owners may find it difficult to look to the end of their career, a lack of succession planning can devastate a thriving business and tear families apart, according to Paula Riopelle, lawyer with the Riopelle Grenier Professional Corporation.
“The greatest neglect most businesses have is not doing this,” Riopelle, whose firm has practices in Timmins and Ottawa, says.
“People are often too busy building up the company to really contemplate leaving it, which is a mistake.”
Angèle Charbonneau, partner in the accounting firm of Laberge, Venne and Partners, warns that failing to prepare in advance can leave owners with too little time to develop and implement a plan. This may put them in a position where buyout offers from outside sources may be their only option.
“If this happens, they may not get the best value for their business,” she says.
Insufficient preparation can also leave owners with too little time to take steps that would help to reduce or eliminate potential taxation problems.
With this in mind, people need to realize that proper financial preparations and grooming of a successor can take up to 10 years, Charbonneau says. To help defuse any potential problems, succession needs to be seen as a long-term plan.
Riopelle agrees, adding that although some companies may be able to develop an official succession plan in a single year, the mental process should begin even in the early days of the business.
The first step is committing to the creation of such a plan, and while this may seem obvious, only 10 per cent of small and medium-sized businesses have one.
After establishing a strategic vision for the company’s future and setting goals, owners need to identify possible successors and evaluate their roles.
While children or family members are often the default choice, it’s important to keep in mind that they might not necessarily be best suited to lead the business. A pool of qualified candidates should be developed to provide a full selection of potential leaders, though the involvement of family often blurs the line between one’s head and one’s heart, Riopelle says.
As a result, family should be involved in the operations early on to help determine whether they have the capacity or even the interest of carrying the business.
Another important factor is involving a variety of advisors who are experienced in succession planning. Accountants and lawyers help to provide a perspective not only on the business’ true worth, but also on what steps may be most appropriate and how to pursue them.
One such step is an estate freeze. This is a popular option in today’s business world, as it effectively allows owners to transfer future business growth to their chosen successor while reducing tax liabilities upon their death.
Though there are several methods of doing so, many people choose to accept particular shares, known as “preferred shares,” in exchange for their common shares. These common shares are usually then bought by the successor for a small fee. This allows the owner to transfer the business to the successor while still retaining some control over it, as preferred shares allow for voting.
It also freezes or locks in the value of one’s net worth at the current rate while ensuring increases in share value, as well as any associated taxes, will go to the successor.
This system isn’t without its dangers, however, as making this freeze too soon may cause the former leader to run out of money during their retirement.
This means those considering this course of action also need to determine if they’ve accumulated enough to live on a fixed income, Riopelle says.
