Five tips for navigating transitions

George, the owner of a family business, was still at the helm when he died suddenly at the age of 79. He was running the show and had no transition plan in place. He had three daughters, a son-in-law, Ben, and grandchildren, some of whom had been involved in the business over the years. But without a plan, the whole family had added stress at the time of his unexpected death.

This was no small enterprise, either. George had built the business up over the years to its current $10-million value and 20 employees; he was the sole shareholder when he died. He and his first wife – the mother of his three daughters – were divorced at the time of her earlier death, so she was out of the picture. But to further complicate the situation, George was in the throes of divorce negotiations with his second wife when he died.

At the time of George’s death, Ben had been working in the business for 20 years. He could logically take over, but it was known in the family that George liked to be in control and never gave Ben a senior role because he feared he would “run the business into the ground.”

The chaos that ensued was uncomfortable for all, especially when a key employee announced his plan to retire within five years. On the family side, there was a will no one had previously seen.

It might sound far-fetched, but stories like this aren’t unusual. Family-owned businesses accounted for 6.9 million jobs in 2017 – 47 per cent of Canada’s private-sector employment and 37.4 per cent of its entire workforce. They generated $574.6-billion in revenue – more than 35 per cent of the country’s gross domestic product. Yet, in spite of their importance to the economy, only a small percentage of family-owned businesses have a detailed succession plan.

To help the many who have no well-defined plan, we consulted two experts who are both members of STEP, the global professional association for practitioners who specialize in family inheritance and succession planning, to come up with five top tips.

1. Planning and communication are key: “Ten years out isn’t too soon to start,” says Cindy Radu, family wealth transition adviser and co-chair of STEP Business Families Special Interest Group. “With the story above, when George makes decisions in isolation, there’s no communication within the family. If he’d asked, the youngest daughter and her husband might have stepped up. And did family members know they could be owners without being employees? That opens up a whole new dialogue.”
2. Establish employment policies and governance: Families need to figure out their policies. Are family members automatically part of the business? Putting governance structures, such as advisory and fiduciary boards, in place is a good idea. Build the structures that’ll meet the strategies and goals of the business.
3. Get the next generation working: Consider the skills interested family members will need to take over. Have them start working toward those. “Allowing them to place their own stamp on the business is important, but they need the skills to have the privilege of working in the family business,” Ms. Radu says.
4. Start planning from a tax point of view: “Generally, we first undertake an estate freeze, which caps the founder’s interest in the business at today’s values and allows the next generation to become equity shareholders at a nominal value,” says Pam Prior, a partner in taxation services at KPMG LLP. She says a family trust provides flexibility in the allocation of future equity among the family for up to 21 years. Next, she would calculate the taxes payable upon the founder’s passing and discuss how that tax bill will be funded. “You don’t want to have to sell the business to pay Canada Revenue Agency, so consider corporate-owned life insurance,” she says. “Without proper planning, there is the potential for double tax on private company shares,” Ms. Prior says. “The will and other estate planning documents need to be flexible to avoid this.”
5. Consider philanthropy as part of the plan: “At KPMG, we’re seeing more private business owners looking at philanthropy in estate planning,” Ms. Prior says. “It helps to reduce taxes and gives back to the communities that have supported the business over the years.”

Advertising feature produced by Randall Anthony Communications. The Globe’s editorial department was not involved.