Nearing 60, Charlie McKenna had what so many small business owners dream of: a vision of his company’s future, a reasonably solid handle on his own personal financial needs, and children-two sons, in particular-working at the family warehousing business who seemed capable of taking over when he decided to retire.

That’s the way it should be. Done right, succession is an orderly process, not a dramatic event. Founded in 1950, Mississauga, Ont.-based McKenna’s Warehousing & Distribution had survived one generational transition, and Charlie wanted to make sure both his company and his family made it through the next one intact. Sure, there were squabbles about how equity and management responsibilities should be divvied up among the five McKenna kids. Better to work them out now, Charlie thought, than to have unresolved conflicts play themselves out in the business later.

But Charlie’s plans went awry when his youngest son, John, took him aside one day and laid out a formal offer to buy the company. John had the acumen and the passion necessary to run the business, but he was just 23 years old. And Charlie wondered how his other children would feel about the business going to one person.

“All the discussion about who would take over the company after my dad retired was wearing me down,” recalls John McKenna. “I saw my proposal as a solution. Of my brothers and sisters, two of us were really qualified to run the business. I was on the operations side, and my oldest brother, 12 years my senior, was in sales. We each had management roles, but ultimately, I knew controlling ownership would come down to just one of us. I wanted it to be me.”

Charlie wasn’t so sure. He sat on John’s offer for a year.

“Then my brother left the company,” the younger McKenna explains. “I went back to my dad and said let’s get on with it. I want to buy the entire thing. He was more receptive. The first time around, I think, he felt conflicted about what was best for his children and his business. With my brother gone, he felt more comfortable with what I was proposing.”

To an ambitious and astute next-generation manager, there is a huge difference between running the family business and owning it, says Don Emerson, a partner at the Toronto office of Grant Thornton, a management consulting firm. It’s something parents who want to distribute equity equally among their children would do well to remember.

Children who are active in the company see their interest in it as their livelihood, and tend to want to reinvest in the business with a view to having it grow and prosper. Children who aren’t active in the business may see their stake as a source of income through dividends. A parent-owner preparing for retirement may have a similar financial objective, but at the same time he may be scaling back his day-to-day participation in the business.

“That parent risks being seen by his children as wanting to harvest profits, do less work, and not make a decision that might ruffle some feathers,” Emerson says. “That’s a bad mix. He might be better off selling the entire company to the child who is best suited to run it, leaving other assets to siblings who as aren’t involved with the company, and then just retiring.”

The actual sale of a company usually is one of the final stages of a formal succession plan for the business, and the heart of any retirement and estate plan for the owner, Emerson says. “If the sale is intended to provide retirement income, it’s best to work to the financial needs of the person doing the selling,” he explains. “There are lots of ways to structure a transfer of ownership-your accountant, lawyer, and insurance advisors can help you manage the complex tax and legal issues associated with whatever path you choose.”

McKenna struck a buy/sell agreement with his father, a popular arrangement in which the owner holds a promissory note for his children, who pay over time using company profits. The price must reflect fair market value. “It worked out well. It gave my dad a steady source of income,” McKenna says, “and me the means to pay him off in four years.”

Charlie, now 70, held on to the 100,000-square-foot warehouse, space he rents to John’s company. It’s a stream of additional income and an asset that can be distributed among the family after Charlie dies.

“One thing my brothers and sisters agreed on was that we wanted my dad to be comfortable in retirement financially and emotionally,” McKenna says. “You have to respect that this place is his security and source of family pride. That’s a lot to trust to anyone. Even your own son.”