The worst possible way to plan a succession is to neglect to do so. Founding CEOs and presidents get caught up in day-to-day operations thinking there will be lots of time for estate planning. But not...
Passing the torch: Family-owned trucking company Meyers Transport was recently passed down from owners Evan (left) and Larry (right) to their daughters Jacquie (second from left) and Natalie (second from right).
The worst possible way to plan a succession is to neglect to do so. Founding CEOs and presidents get caught up in day-to-day operations thinking there will be lots of time for estate planning. But nothing is certain in life and failing to start the process in a timely manner can leave heirs and the business in the lurch.
Cameron Turner, Canadian partner for CDI Global, points out that the consequences of having no succession plan in place can be dire. “You’re automatically giving 25% of your company to the government when you die,” he says.
Careful succession planning, on the other hand, can assure the company is passed on to enthusiastic and capable hands, and save a whole bundle of tax at the same time.
Founders, elders, and patriarchs or matriarchs often have a clear idea of who should take over the company, but all options should be on the table. The heart wants to keep the business in the family, but is it the best option? It can’t hurt to consider selling, even to a competitor -it might be the best move in the circumstances.
“What if you come to the realization that there’s no-one to take over the business?” Turner asks. “Selling the business doesn’t happen overnight, it might take a year or two or maybe three, and it’s important to have someone in your corner. It’s far better to plan an exit strategy rather than leave it to the estate.”
In some cases none of the progeny might be interested in taking over the business. In others, a candidate might be waiting in the wings but is still too young and inexperienced to take the reins. In the latter, you will need to put a good management and mentoring team in place until the heir-apparent is ready to take control.
Regardless of the scenario, best practices indicate the need to form a good advisory team that should include, at the least, a tax accountant and a succession lawyer. This is key, according to Don Bain, senior advisor to the Mackie trucking family of Oshawa. “Make sure the succession is water-tight,” he suggests. “We’ve all heard about famous families feuding over an estate, and you don’t want that to happen.”
Wenda Yenson, who specializes in wills and estates with Dickson, MacGregor and Appell, believes that succession planning incorporates both “hard” and “soft” issues -the hard issues being the legalistic process and the mechanics of the plan itself, while the soft issues are the personal and emotional ties between family members.
Needless to say, it’s important to communicate with all the heirs and try to involve them in the plans. Holding family meetings to provide periodic updates is a good idea -that way no family member should feel left out of the process.
Family dynamics have to be considered and intuited.
Try to head off conflicts between co-managing siblings before they get started. As well, intergenerational tensions can arise in management styles between the patriarch and the incoming new leaders. Good management guidance from a third party can provide assistance through these turbulent waters.
Brian Wilson, an estate lawyer with Wilson and Vukelich, suggests that the succession plan should be looked at holistically: only those siblings involved in the business should be part of the company plan.
“You don’t try to mix the ones that are involved with the ones that aren’t…typically once you give power to those not involved in the business, then there’s trouble,” he says.
Wilson suggests the non-trucking heirs could benefit from the inheritance of other assets from the estate like cottages or homes, but giving non-involved siblings a slice of the trucking business could cripple the business of capital at some future date.
There is no one succession formula, but some elders choose the 51% solution wherein the senior executive maintains voting control while his or her shares are frozen in value at a fixed rate. That way, the senior feels he or she can maintain some say in the business, particularly if the new generation is taking it into risky ventures.
The recession of the last three years makes this a particularly attractive time to freeze controlling interest shares. The company’s value can be assessed at a low rate and any future growth will go towards the shareholders and heirs.
Among the first things to do is to establish the fair market value for the company.
This includes a thorough analysis by an outside party of the company’s true value. Some company heads might be surprised that their businesses are not worth as much as they thought, but all liabilities and assets have to be weighed against each other.
Next, a date has to be set at which time the owner’s shares will be frozen. The owner then can step away from the business turning it over to a managerial team and/or the younger generation. But letting go of the reins can be difficult to do.
Mark Seymour, CEO and president of Kriska Transportation of Prescott, Ont., recalls that his father made him president in 1994 when his dad intended to distance himself from the company but had a hard time doing so.
“We certainly had our challenges. It was a case where he was ready to go but not willing. For a succession to work properly both parties have to agree that the new generation is ready to take over and the older one isn’t reluctant to let them,” says Seymour.
Despite the fact that the frozen shares will not increase in value, succession planning also has to consider the tax hit that will inevitably be levied with the passing of the elder family member.
This can be a huge cash strain on a business which may already be making hefty payments to a bank.
To hedge against this eventuality, one strategy is to take out life insurance on the senior executive. The life insurance payout should at least mitigate the tax hit that comes with his or her passing.
The problem is that some of the elders may have difficulty getting life insurance because of their age or a medical condition -insurance premiums can be astronomical in these cases.
This is yet another reason to start thinking about a succession plan earlier rather than later.
Succession plans should be customized to the situation. In some cases, it might be a team of management from your own company that wants to take over the reins. The succession plan could then stipulate a time period in which the prospective new owners could be allowed to raise funding and bring partners on-board.
Canadian trucking companies and suppliers to the industry are heavily weighted with family ownership, and it’s not always the boys taking over. After 37 years of running the business, Evan and Larry Meyers of Meyers Transportation Services Group of Belleville have recently passed the torch to daughters Jacquie and Natalie respectively. Jacquie Meyers now serves as president of the company while Natalie Meyers assumes the role of chairperson.
Ross Mackie, CEO of Mackie Moving Systems of Oshawa, has had his four sons working for him since they were 12. They started out washing trucks and today all four work in management roles in different parts of the business learning the skills that will enable them to take over leadership roles when the time comes. On the other hand, some family companies stipulate that heirs are required to gain outside experience by working for another business before they can assume managerial duties in the family firm.
Angelo Ciciretto, owner of Markham Equipment Sales, has taken a unique approach to succession. He currently has two sons working in the family business, and offered them the opportunity to earn a stake in the group of companies as soon as they joined.
“The concept of having vested interest in the direct success of our businesses has paved the way for our growth from 1997 when my first son, Michael, came into the business and even more so since 2000 when my second son, Jason, came on-board,” says Ciciretto. “My sons are adaptive, university educated and have brought a fresh perspective toward managing a business. This new approach has
enriched our businesses and strengthened us as family management team.”
Whatever the particulars of a family-owned business, it’s important to get good advice and start the succession process early.
Some money will have to be spent on developing a solid plan, but the tax savings and peace of mind in doing so will far outweigh the original investment.
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