Managing potential conflict and promoting a smooth process with proactive succession planning.
With statistics indicating that approximately 60 percent of Canada’s business owners (of small- and mid-sized enterprises) are aged 50 or over, business succession may be getting closer on the horizon for many.1 And when it comes to succession among business owners of all ages, findings from a recent study conducted by The Economist Intelligence Unit (EIU), sponsored by RBC Wealth Management, show that almost half have intentions or hopes of passing the business on to their children.
Yet while transferring a business to the next generation may often be viewed as an ideal scenario, the process itself can sometimes present a different set of challenges and complexities when family members and family dynamics are involved. The types of challenges may vary depending on circumstances, but according the EIU study, a main source of difficulty may be a misalignment in intentions and expectations between generations, and perhaps a lack of ongoing dialogue and early planning in that regard.
Based on the study findings, while 50 percent of younger individuals say they’re expected to take over the family business, many identify having other career goals they wish to pursue. And among the owner generation, more than half say that maintaining the interest of a family successor is a challenge, as there’s a strong overall belief that the younger generation would prefer to join the corporate world or start their own business rather than take over an existing family business.
“Succession planning is a challenge for any business but it takes on another dimension when the successors are your own family members,” says Mark Skeggs, Vice President, Business Owner Specialist, RBC Wealth Management Services.
When putting together a succession plan, Skeggs suggests that business owners and their families consider the following points to help ensure a smooth and conflict-free process.
Don’t underestimate the value of starting your family business succession planning process early. Advance planning can help make transitions easier and assist you in making better long-term decisions. As a business owner, start thinking about a suitable succession plan as early as possible.
Assemble a team of qualified advisors (legal counsel, tax specialist, financial advisor and business facilitator) to help you build your business succession plan. An experienced family business facilitator can help you discuss sensitive issues with family members, provide objectivity, find constructive ways to resolve conflicts and establish priorities in the succession process.
Identify the qualities you’re looking for in a suitable successor at the outset and then honestly evaluate the strengths and weaknesses of each candidate for the position.
You should ask yourself the following questions: Who demonstrates the commitment and leadership qualities I’m looking for? Do certain family members have more aptitude and interest in the business than others? Is there a suitable successor in the family? Can they work well with others who may also be involved in the business?
If there is no one individual who satisfies all of the criteria you have in mind for a successor, consider dividing the responsibilities of operating the business among multiple family members and creating clearly defined roles for each person. This way, each member has the opportunity to excel in his or her respective area of interest. However, when splitting responsibilities, be cautious of putting family members into situations where they are likely to compete with each other. Doing so may lead to hostility, which would be counterproductive for the success and longevity of the business.
Although it may not be possible to treat all family members equally, try to ensure that they are treated fairly. Given the differing levels of commitment that your children may have shown, should you divide the business equity equally between or among them? Should those who may not be involved in the business be treated equitably from a financial perspective? If so, it may be more palatable to family members if they understand that the ultimate decision is yours and that family members who are not involved are being treated generously to compensate for the fact that they have been excluded from the business.
Begin by writing down achievable goals for the business as a family. When a family establishes the long-term outlook for the business together, this will help to foster a team-oriented environment and will likely minimize any risk of conflict. Revisit these goals periodically and hold family members accountable for meeting these mutually agreed-upon goals.
Err on the side of over-communicating rather than under-communicating. In fact, once you have identified a successor, involve them in your succession plan and share your long-term goals with them and with any other family members who are involved. The gesture will likely be seen as collaborative and inclusive. By including your chosen successor, you can help them make an informed decision about whether they want to participate and, if so, to what extent. In addition, when you involve family members and discuss their concerns, such open communication helps to clarify everyone’s expectations about their roles and their commitment to making the transition a success. Their input can minimize potential conflict and help to maintain stability in the business and in the family.
Whenever possible, try to address issues as they arise in a timely manner and take an open-minded approach to resolving them. It is important to brainstorm a variety of possible resolutions and think outside the box. Devising new and interesting options together and moving away from authoritative decisions will create a sense of co-operative decision-making. So, have an open discussion about the potential solutions during your family meetings, weigh the options and combine elements of different solutions when possible.
Many forward-thinking families have gone so far as to implement formal governance structures, including regular family meetings and co-operative decision-making. Communication should be open and direct at these formalized family meetings, and all participants should be encouraged to suggest topics for discussion. Use the meetings as a time to learn what each person cares about and what their motivation is for their position. You may even want to consider inviting a business facilitator to ensure the preliminary meetings proceed smoothly and to attend when the issues discussed are likely to cause tension or hostility. You may also arrange for your team of objective qualified advisors to attend occasionally.
The process for managing conflict is as important as the outcome. If you choose a formal governance structure, this could include a shareholders’ agreement to deal with critical and sometimes uncomfortable questions such as remuneration, exit and entry, and death. In addition, to minimize the effect of any conflict on the company, the shareholders’ agreement could contain a conflict resolution policy. For example, your policy could require the use of mediation. If this process is not fruitful, the conflict could then be submitted to arbitration rather than to the courts. This procedure can help preserve the confidentiality of the company’s business, shorten the time it takes to resolve conflicts and minimize the costs of a dispute.
As you approach your retirement date, try to give your heir or heirs the lead in implementing the succession plan. This can improve the odds of a successful transition. However, you should have an ongoing role after the transition, perhaps in an advisory capacity, to ensure that the plan is carried out smoothly and in accordance with your objectives.
Conflict in a family business is expected, but if you can avoid the obvious pitfalls, communicate regularly, resolve issues in a timely manner and establish a clear process for managing conflict, this will help to increase the likelihood of keeping your business in the family and having it run harmoniously and successfully.
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