Keeping Business All in Family: Start Succession Planning Now to Avoid Problems Later
THE FINANCIAL POST - Special Report - June 17, 1991
CHOOSING a successor is often a sore point for many corporations, but it's even tougher for family-run enterprises.
How do you tell your sons or daughters, for example, that they won't cut it as head of the business? Or how do you deal with the sibling rivalry that has broken out among your children, each of whom wants to be your successor?
It's no wonder only 30% of family enterprises continue as family operations into the second generation, and only 10% by the third.
"When you miss a generation, and you don't get another family member at the helm by the next generation, you usually sell the business," says Aron Pervin, president of Pervin & Company Inc., a Toronto firm that specializes in family business consulting.
Then there are the tax implications. Changes made to federal legislation in 1988 mean the heirs of businesses held in family trusts are liable for a "deemed realization" of capital gains. The changes prevent the indefinite deferral of capital gain from the business, and in some cases the heirs may find they can't afford to pay the taxes, says Gordon Sharwood, president of the Canadian Association of Family Enterprise.
It may force some heirs to bail out.
While the odds of keeping the business all in the family may seem daunting, it isn't impossible. It takes a lot of planning on the part of the owner, a great deal of diplomacy and innovation.
Each situation different
Each situation will be different, depending on the size and financial strength of the company, and the ability and ages of the children, says Patrick Fennell, president of SpencerStuart & Associates Ltd., executive-search consultants in Toronto.
If there's only one possible child successor, and that child is of the right age and fully capable of handling the job, the choice is easy.
Unfortunately, that's seldom true, but it was in the case of Kingsmill Foods Company Ltd., a Toronto-based, baked-goods and beverages company with about $5 million in sales.
The company started by William Kings-mill in 1947 is now run by his daughter, Dorion, who took over as president in 1983. Her father groomed her for the position after it was clear she was interested. It also helped that she had some business back-ground through her experience at Royal Bank of Canada, where she went through its management for women program in the 1970s.
Even with this background, she still had to learn how to run a company from her father, who remains with the firm as head of its research department.
"He let me make mistakes - not serious ones - but he did let me make mistakes and pull myself up. We talked a lot. Dad and I talked a great deal, and the family talked and would meet regularly.
That helped keep other family members involved, though Kingsmill says there was no sibling rivalry for the top spot between herself and her sister, who is now a magazine journalist.
At 42, Dorion Kingsmill still has lots of time before she thinks about her successors. Husband Stephen Stuart, a lawyer and business school graduate, serves as company chairman.
They have three children under the age of eight, and Kingsmill says she isn't going to press them to remain within the firm when they grow up.
"But if they do want to join the company, that would be great."
Kingsmill agrees smooth transitions from one generation to the next may be exceptional.
"It's really tough, but if you can do it successfully, it's really fun. What better person to work with than with one of your parents or one of your kids?"
That's the ideal scenario. But there are also many pitfalls in picking one child over others as your successor.
Fennell says one possible solution to consider may be to rotate the presidency among the qualified children, one year at a time. One may emerge as the natural leader and either buy out the other siblings or reach some kind of working agreement with them.
Of course, if the sibling rivalry is too strong, this may cause problems.
"There's no magic answer," Fennell admits, "because you're dealing with people and egos."
Marvin Martenfeld, a partner with the independent business services division at Price Waterhouse in Toronto, says a number of entrepreneurs don't want to create family friction by choosing one child over another, so they sell off the company, and give each one a share as part of family inheritance to do with as they wish.
Such was the case with Murray who owned Koffler Stores Ltd. the franchised Shoppers Drug Ltd. chain. Martenfeld says one of reasons Koffler sold his company to Imasco Ltd. in the late 1970s was he didn't want to choose one child over another to replace him.
At that point, too, Shoppers Drug Mart was being run by professional managers Koffler had brought in to help the company grow.
It's often the case that a family will have to look to professionals to run things, even if there is a son or daughter who will eventually take over.
In such a case, though, it must be made very clear to the outside profession that the top job won't be open to them. Fennell says this is important to avoid misunderstanding when the time for succession arrives.
In cases where the owner still wants to keep the business in the family even if no immediate successor is at hand, Pervin recommends setting up a family council. It would work something like a board of directors, but with limited influence.
"If anything, it would be a family's advisory board to the board. It would be the family's forum to give recommendations to the board, but you let professional managers run the business."
Another solution may be to give each family member non-voting preference shares in the company. They remain part of the organization and earn money from dividends, but the company's day-to-day operations remain in the hands of professionals.
But what happens to those shares when the shareholder or the owner dies?
Clear instructions are needed to account for this eventuality.
Pervin says an estate plan can deal with some of the problems by stating to whom a family member may sell shares.
To avoid losing control of the company by having the majority of shares fall into the hands of non-family members, he says provisions can be made to give the family members right of first refusal before the stock may be sold.
This way, "the business owner can significantly limit the opportunities for outside investors to purchase an interest in the company," Pervin says.