FAMILY ENTERPRISE SUCCESSION PLANNING
- PASSING ON THE LEGACY -

Presented by Rick Gendemann, CA
Partner
November 7, 2013
Family Enterprise Succession
Passing on the Legacy

Outline for Today’s Session
 Introduction and Background
 Goals and ...
Family Enterprise Succession
Passing on the Legacy

Outline for Today’s Session
 How to Plan and Execute the Business Tra...
Family Enterprise Succession
Passing on the Legacy

Introduction and Background
 Family businesses in Canada employ over ...
Family Enterprise Succession
Passing on the Legacy

Over 40% of family businesses will experience ownership change
in the ...
Family Enterprise Succession
Passing on the Legacy

Challenges Facing Business Family Succession
 According to a Pricewat...
Family Enterprise Succession
Passing on the Legacy

Challenges Facing Business Family Succession
 Lack of common vision b...
Family Enterprise Succession
Passing on the Legacy

Challenges Facing Business Family Succession
John L. Ward’s 6 Biggest ...
Family Enterprise Succession
Passing on the Legacy

Challenges Facing Business Family Succession
Peter Leach’s Four Challe...
Family Enterprise Succession
Passing on the Legacy

•

•

Changes in leadership of the business may be expected or unexpec...
Family Enterprise Succession
Passing on the Legacy

How will planning for succession help?
• A succession plan should be a...
Family Enterprise Succession
Passing on the Legacy

Goals and Objectives of Family Enterprise Succession
 Create long ter...
Family Enterprise Succession
Passing on the Legacy

Differences Between Family Business and Family Enterprise
 Family bus...
Family Enterprise Succession
Passing on the Legacy

Differences Between Family Business and Family Enterprise
 Family ent...
Family Enterprise Succession
Passing on the Legacy

Family Enterprise Characteristics
Healthy Family Enterprises

Unhealth...
Family Enterprise Succession
Passing on the Legacy

Family Enterprise Paradox:
The Three-Circle Model
Ownership

Family

B...
Family Enterprise Succession
Passing on the Legacy

Three Circle Model


Different family members may stand in
different ...
Family Enterprise Succession
Passing on the Legacy

Family Enterprise: Three Dimensional
Development Model
Business
Axis

...
Family Enterprise Succession
Passing on the Legacy

Key Elements of the Family Enterprise
 Understanding of the unique fa...
Family Enterprise Succession
Passing on the Legacy

Key Elements of the Family Enterprise
 Recognize the differences betw...
Family Enterprise Succession
Passing on the Legacy

Key Elements of the Family Enterprise
 Using family genograms as a ke...
Family Enterprise Succession
Passing on the Legacy

Process of Transition for the Family Enterprise
 Need to reinforce wi...
Family Enterprise Succession
Passing on the Legacy

Process of Transition for the Family Enterprise
Strategic planning (fo...
Family Enterprise Succession
Passing on the Legacy

Process of Transition for the Family Enterprise
Best Practices: Succes...
Family Enterprise Succession
Passing on the Legacy

Best Practices: Successful Family Businesses
Board of Directors
 Acti...
Family Enterprise Succession
Passing on the Legacy

Best Practices: Successful Family Businesses
Family Constitution
Artic...
Family Enterprise Succession
Passing on the Legacy

Best Practices: Successful Family Businesses
Family Meetings
 Regular...
Family Enterprise Succession
Passing on the Legacy

More Thoughts on Best Practices







Strategic planning
Encour...
Family Enterprise Succession
Passing on the Legacy

How to Plan and Execute the Business Transition
Let’s look at the fact...
Family Enterprise Succession
Passing on the Legacy

What is the Current State of the Business
Need to perform a SWOT analy...
Family Enterprise Succession
Passing on the Legacy

SWOT Analysis will then:
 Identify the current position of the busine...
Family Enterprise Succession
Passing on the Legacy

What is the Family Vision for Succession
5- Star Planning Model
“Famil...
Family Enterprise Succession
Passing on the Legacy

What is the Family Vision for Succession
1) How does the strong entrep...
Family Enterprise Succession
Passing on the Legacy

What are the Strategic Questions to be Addressed
Summary of Six Key Ar...
Family Enterprise Succession
Passing on the Legacy

Strategic Question # 1: Performance
“ Do you want to be an
enterprisin...
Family Enterprise Succession
Passing on the Legacy

Defining the Concept of Enterprising
“ The spirit of enterprising is o...
Family Enterprise Succession
Passing on the Legacy

Long-term Wealth
Creation ….. Requires a New Mindset
Family Ownership ...
Family Enterprise Succession
Passing on the Legacy

Enterprising Families Domain
Acceleration
Strategic Investor
Thinking
...
Family Enterprise Succession
Passing on the Legacy

Strategic Question # 2: Vision
“ Does the family have a compelling vis...
Family Enterprise Succession
Passing on the Legacy

Values Driven Leadership
•
•
•
•

Values
ROE
Accountability
System Int...
Family Enterprise Succession
Passing on the Legacy

Strategic Question # 3: Strategy
“ Does the family understand its fami...
Family Enterprise Succession
Passing on the Legacy

Defining Familiness
“Familiness” is the unique bundle of resources
a p...
Family Enterprise Succession
Passing on the Legacy

Managing Your Familiness

-

Competitive
Disadvantage

Competitive
Adv...
Family Enterprise Succession
Passing on the Legacy

Strategic Question # 4: Governance
“ Does the family have the organiza...
Family Enterprise Succession
Passing on the Legacy

Thinking Like Shareholders
Ownership
Directorship
Management
1.
2.
3.
...
Family Enterprise Succession
Passing on the Legacy

Strategic Question # 5: Leadership
“ Does the family have the leadersh...
Family Enterprise Succession
Passing on the Legacy

Systems Leader – System Management
Actions

Assets/Firm
Outcomes

Acti...
Family Enterprise Succession
Passing on the Legacy

Strategic Question # 6: Relationship
“ Does the family have the relati...
Family Enterprise Succession
Passing on the Legacy

Relationship Capital
The relational reserve of trust, loyalty, positiv...
Family Enterprise Succession
Passing on the Legacy

Creating the Action Plan – A Written Deliverable
After having gone thr...
Family Enterprise Succession
Passing on the Legacy

Creating the Action Plan – A Written Deliverable
 The succession plan...
Family Enterprise Succession
Passing on the Legacy

The Final Product: A Formal Succession Plan….
 The final decision to ...
Family Enterprise Succession
Passing on the Legacy

Review of Key Points and Observations
 Family enterprise concept
 Fa...
Family Enterprise Succession
Passing on the Legacy

Review of Key Points and Observations
 Assessing where the business i...
Family Enterprise Succession
Passing on the Legacy

A Few Closing Quotes
“If you don’t know where you
are going …. Then an...
Family Enterprise Succession
Passing on the Legacy

A Few Closing Quotes
“The plan is nothing,
PLANNING is everything!”
- ...
Family Enterprise Succession
Passing on the Legacy

Closing Comments
Thank you for your time today. I hope this session ha...
Family Enterprise Succession
Passing on the Legacy

Notes Page
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Rick Gendemann, CPA, CA - Family Enterprise Succession Planning - November 7th, 2013

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Presentation by Rick Gendemann, Partner, Manning Elliott LLP - Family Enterprise Succession Planning for FVCAA Conference Day

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Rick Gendemann, CPA, CA - Family Enterprise Succession Planning - November 7th, 2013

  1. 1. FAMILY ENTERPRISE SUCCESSION PLANNING - PASSING ON THE LEGACY - Presented by Rick Gendemann, CA Partner November 7, 2013
  2. 2. Family Enterprise Succession Passing on the Legacy Outline for Today’s Session  Introduction and Background  Goals and Objectives of Family Enterprise Succession  Understand Differences Between Family Business and Family Enterprise  The Process of Transition in a Family Enterprise Context
  3. 3. Family Enterprise Succession Passing on the Legacy Outline for Today’s Session  How to Plan and Execute the Business Transition – What you need to Consider and Address  Review and Summary of Key Points and Observations  Question and Discussion Period
  4. 4. Family Enterprise Succession Passing on the Legacy Introduction and Background  Family businesses in Canada employ over 6 million Canadians; an average family business employs over 18 people  Canada’s family businesses employ 4.7 million full-time and 1.3 million part-time workers  Total annual sales of Canadian family businesses: $1.3 trillion Source: BDO Dunwoody/ Compass Report on Canadian Family Business
  5. 5. Family Enterprise Succession Passing on the Legacy Over 40% of family businesses will experience ownership change in the next five years….   Less than 5% of those have a formal succession plan in place Is your client’s business or the business you work in part of the other 95%? 40 30 20 10 0 % of FB's w/Change in Ownership over next 5 yrs % w/a Succession Plan in Place
  6. 6. Family Enterprise Succession Passing on the Legacy Challenges Facing Business Family Succession  According to a PricewaterhouseCoopers Family Business Survey of 1606 family businesses operating in 35 countries  Lack of Family Strategic Plan: 62% of surveyed firms lack of strategic plan  Lack of Common interests: 44% of surveyed firms report family members have disparate interests Source: PricewaterhouseCoopers Family Business Survey 2010/11
  7. 7. Family Enterprise Succession Passing on the Legacy Challenges Facing Business Family Succession  Lack of common vision between interested parties  Lack of a communication framework for all parties involved  Difficulty dealing with conflicts Source: Canadian Financial Executive Research Foundation, 2011
  8. 8. Family Enterprise Succession Passing on the Legacy Challenges Facing Business Family Succession John L. Ward’s 6 Biggest Challenges 1) Maturing business life cycles and increasing competition 2) Limited capital to fund both family needs and business growth needs 3) Weak next-generation business leadership 4) Entrepreneurial leadership’s inflexibility and resistance to change 5) Conflicts among sibling successors 6) Disparate family goals, values and needs Source: Growing the family business; special challenges and best practices, John L. Ward, Family Business Review. (1997)
  9. 9. Family Enterprise Succession Passing on the Legacy Challenges Facing Business Family Succession Peter Leach’s Four Challenges 1) Lack of communication (conflict) 2) Family members’ employment in the business (Merits VS Entitlement) 3) Business transition to next generation (Succession) 4) Manage change in both the family and the business (changes) Source: Family Business Rulebook, 2008, Peter Leach
  10. 10. Family Enterprise Succession Passing on the Legacy • • Changes in leadership of the business may be expected or unexpected when they occur, but they will occur Neglecting to include a formal succession plan as part of the overall business strategy introduces uncertainty that could threaten the survival of the business % Not Surviving past 1st Generation % Surviving past 2nd Generation % Surviving past 3rd Generation % Surviving past 4th Generation • Given that 65% of family businesses do not survive past the 1st generation of ownership, largely due to poor succession planning, it makes sense to plan as early as possible
  11. 11. Family Enterprise Succession Passing on the Legacy How will planning for succession help? • A succession plan should be an integral part of the overall business plan document • It will clearly map out what must happen for current leadership to exit the business – how and when this occurs • Putting a formal succession plan in place will help the family business – – – – – Survive changes in ownership and continue as a successful entity Identify and address family issues before they become disagreements Maximize return and wealth preservation and minimize tax liabilities Ensure an orderly transfer of control and competencies Prepare the business and future leadership for transition
  12. 12. Family Enterprise Succession Passing on the Legacy Goals and Objectives of Family Enterprise Succession  Create long term “ family enterprising” that promotes transgenerational wealth and continuity planning  Creating a culture of “trans generational entrepreneurship”  Develop a process focused on preserving families and preserving family wealth for multiple generations  This level of thinking is much more holistic and focused on linking the overall family vision with the enterprise vision
  13. 13. Family Enterprise Succession Passing on the Legacy Differences Between Family Business and Family Enterprise  Family business is generally viewed as a situation where one or more family members collectively own operating business assets  Operation and direction of the family business may or may not be taking into account the family goals and objectives  Family business typically operates with business interests at the forefront of decision making and future direction
  14. 14. Family Enterprise Succession Passing on the Legacy Differences Between Family Business and Family Enterprise  Family enterprise concept is addressed at a higher level Family Enterprise Operating Business Assets (Family Business) Financial Assets Real Estate Assets Family Heirloom Assets Philanthropic Assets
  15. 15. Family Enterprise Succession Passing on the Legacy Family Enterprise Characteristics Healthy Family Enterprises Unhealthy Family Enterprises Communications are open and clear Poor communication Family has the ability to resolve conflicts Family is unable to resolve conflicts Goals and values of the family are clear Goals and values of the family are unclear High trust between family members Low trust between family members Boundaries between family and business are clear Boundaries between family and business are unclear Succession is planned early Little thought to succession planning Functioning independent board of directors No functioning board of directors
  16. 16. Family Enterprise Succession Passing on the Legacy Family Enterprise Paradox: The Three-Circle Model Ownership Family Business Source: Tagiuri, R. and Davis, J.A. (1982) Bivalent attributes of the family firm. Working Paper, Harvard Business School, Cambridge, MA.
  17. 17. Family Enterprise Succession Passing on the Legacy Three Circle Model  Different family members may stand in different circles of the three-circle model  Family members in different circles may have different perspectives towards the same issue  Management of different perspectives is essential ! Ownership Family Business
  18. 18. Family Enterprise Succession Passing on the Legacy Family Enterprise: Three Dimensional Development Model Business Axis Maturity Maturity Expansion/ Expansion Formalization Family Axis S Start-Up Controlling Owner Young Business Family Sibling Partnership Cousin Consortium Ownership Axis Entering the Business Working Together Passing the Baton Source: Kelin E. Gensick et al., Generation to Generation: Life Cycles of the Family Business. Harvard Business School Press, 1997
  19. 19. Family Enterprise Succession Passing on the Legacy Key Elements of the Family Enterprise  Understanding of the unique family dynamics of family owned businesses  Understanding the family enterprise as an interactive system between the family, business and ownership systems  Understanding the life cycles of the individual, the family, the business, and how different life cycle phases affect the family enterprise model
  20. 20. Family Enterprise Succession Passing on the Legacy Key Elements of the Family Enterprise  Recognize the differences between family enterprise strategy and non-family enterprise strategy  Development of family vision and family enterprise strategies that match and support this vision  Assessing the resources of the family enterprise, financial performance and capital, competencies of family members, leadership skills, entrepreneurial skills all in the context of the “family, business and ownership systems”
  21. 21. Family Enterprise Succession Passing on the Legacy Key Elements of the Family Enterprise  Using family genograms as a key tool in understanding family relationships and history in a family enterprise President Jack (Dad) Age 68 Betty (Mom) Age 66 Office Mgr. John (son) Age 44 Sally(wife) Age 43 Sales mgr Family bus. Teacher Phil (son) Age 23 Liz (dtr) Age 24 Cathy (dtr) Age 17 Production Family bus. University Med School High School Mary (dtr) Age 41 Controller Family bus. Don (husband) Age 40 Bob (son) Age 37 Employed Engineer Restaurant Owner
  22. 22. Family Enterprise Succession Passing on the Legacy Process of Transition for the Family Enterprise  Need to reinforce with the family that this is a “process” and not simply a transactional based system of various advisory services  Need to create an understanding for the business owner(s) to have a long-term view to promote trans generational wealth and continuity planning for the family enterprise  Clear strategy is essential for multigenerational transition  Early and sufficient succession planning is essential to the success of the family business
  23. 23. Family Enterprise Succession Passing on the Legacy Process of Transition for the Family Enterprise Strategic planning (formalized and documented) is needed to balance the Family Business Dilemma for successful transition Family Goal Business Goal Family needs and wants Business requirements and opportunities Control Careers Capital Conflict Culture
  24. 24. Family Enterprise Succession Passing on the Legacy Process of Transition for the Family Enterprise Best Practices: Successful Family Businesses Three Foundations  Board of Directors  Family Constitution  Family Meetings
  25. 25. Family Enterprise Succession Passing on the Legacy Best Practices: Successful Family Businesses Board of Directors  Active  Independent  Brings different perspective
  26. 26. Family Enterprise Succession Passing on the Legacy Best Practices: Successful Family Businesses Family Constitution Articulates and sets out the family’s:  Purpose  Values  Policies  Vision
  27. 27. Family Enterprise Succession Passing on the Legacy Best Practices: Successful Family Businesses Family Meetings  Regularly scheduled family meetings  Improve communication among family members  Build collective decision-making  Members can understand each others concerns and expectations  Build trust in each other  Build conflict management skills to reduce conflict among family members  Define shared values, shared dreams
  28. 28. Family Enterprise Succession Passing on the Legacy More Thoughts on Best Practices       Strategic planning Encourage changes Open information sharing Create and conserve capital Prepare successors for leadership Exploit the strategic advantages of family businesses (e.g. quick decision-making, invest on R&D to seek the reward of patient capital)
  29. 29. Family Enterprise Succession Passing on the Legacy How to Plan and Execute the Business Transition Let’s look at the factors that need to be considered:  What is the current state of the business  What is the family vision for succession  What are the strategic questions to be addressed  Creating the action plan
  30. 30. Family Enterprise Succession Passing on the Legacy What is the Current State of the Business Need to perform a SWOT analysis based around the critical areas of the business (review of strengths, weaknesses, threats, opportunities) Products and Services Marketing & Sales Vision Strategy Structure Culture People Systems & Processes Finance
  31. 31. Family Enterprise Succession Passing on the Legacy SWOT Analysis will then:  Identify the current position of the business in each key area  Identify those areas that need development before succession
  32. 32. Family Enterprise Succession Passing on the Legacy What is the Family Vision for Succession 5- Star Planning Model “Family Vision” PEOPLE PRACTICES Staffing & selection Performance feedback Learning & Development MEASUREMENT Metrics/ KPI’s Rewards STRATEGY Vision Mission/Direction STRUCTURE Project Structure Organizational Roles PROCESS Workflow Management Systems
  33. 33. Family Enterprise Succession Passing on the Legacy What is the Family Vision for Succession 1) How does the strong entrepreneur(founder) see transmitting leadership to a successor generation? 2) What does the business organization chart look like when the founding entrepreneur leads it? 3) How will the structure change when successors join the company?
  34. 34. Family Enterprise Succession Passing on the Legacy What are the Strategic Questions to be Addressed Summary of Six Key Areas       Performance Vision Strategy Governance Leadership Relationship
  35. 35. Family Enterprise Succession Passing on the Legacy Strategic Question # 1: Performance “ Do you want to be an enterprising family ….. or not? “
  36. 36. Family Enterprise Succession Passing on the Legacy Defining the Concept of Enterprising “ The spirit of enterprising is one that favours growth and leads organizations to investigate opportunity when expansion is neither pressing nor particularly obvious.” Enterprising is: The proactive and continuous search for opportunistic growth
  37. 37. Family Enterprise Succession Passing on the Legacy Long-term Wealth Creation ….. Requires a New Mindset Family Ownership Group: A unified family group with a vision for using their joint economic assets to create wealth across multiple generations Business Entity: A temporary collection of human and physical assets that are a vehicle for creating wealth at a given point in time • • • • • • • Relationship Capital Compelling Vision Unified Risk Profile Entrepreneurial Skills Execution Capabilities Professionalization Strategies and Structures
  38. 38. Family Enterprise Succession Passing on the Legacy Enterprising Families Domain Acceleration Strategic Investor Thinking Ownership Orientation Enterprising Families Domain G e n e r a t i o n a l Trans Generational Operational Business Thinking Preservation Managerial Orientation Entrepreneurial Orientation Strategic Orientation Source: Enterprising families domain, Family Business Review, 2002
  39. 39. Family Enterprise Succession Passing on the Legacy Strategic Question # 2: Vision “ Does the family have a compelling vision that encourages family unity and ensures long-term wealth creation? “
  40. 40. Family Enterprise Succession Passing on the Legacy Values Driven Leadership • • • • Values ROE Accountability System Interaction Board of Directors Oversight • • • • • Long term investment -Patient capital Long term relationships Accountability Professionalism Management Implementation • • • • • Continuous improvement Diversification Employee empowerment Opportunities for growth Long term profitability Shareholder Group Values/Core Commitment
  41. 41. Family Enterprise Succession Passing on the Legacy Strategic Question # 3: Strategy “ Does the family understand its familiness advantage and constraints? “
  42. 42. Family Enterprise Succession Passing on the Legacy Defining Familiness “Familiness” is the unique bundle of resources a particular firm has because of the interaction of the family, its individual family members, and the business with one another. Source: Adapted from Habbershon, T.G.& Williams, M.L 1999A resource -based framework for assessing the strategic advantages of family firms. Family Business Review
  43. 43. Family Enterprise Succession Passing on the Legacy Managing Your Familiness - Competitive Disadvantage Competitive Advantage Constrictive Familiness Distinctive Familiness Where is the family on this advantage/constraint continuum? +
  44. 44. Family Enterprise Succession Passing on the Legacy Strategic Question # 4: Governance “ Does the family have the organizational structures in place to grow and change? “
  45. 45. Family Enterprise Succession Passing on the Legacy Thinking Like Shareholders Ownership Directorship Management 1. 2. 3. 4. 5. 6. Separate the functional categories Act within defined roles Empower a distinct ownership function Establish structures to manage interaction Mentor successors in the functional categories Plan transition within each of the categories
  46. 46. Family Enterprise Succession Passing on the Legacy Strategic Question # 5: Leadership “ Does the family have the leadership processes in place in order to build a family team for the future? “
  47. 47. Family Enterprise Succession Passing on the Legacy Systems Leader – System Management Actions Assets/Firm Outcomes Actions “Managing the Interactions of the Parts” Individual Members Family Unit Outcomes Actions Your “Familiness” Advantage Outcomes Source: Adapted from Habbershon, Williams & McMillian, 2003. A unified systems perspective of family firm performance. Journal of Business Venturing.
  48. 48. Family Enterprise Succession Passing on the Legacy Strategic Question # 6: Relationship “ Does the family have the relationship capital for long-term wealth creation? “
  49. 49. Family Enterprise Succession Passing on the Legacy Relationship Capital The relational reserve of trust, loyalty, positive attributions, benefit of the doubt, goodwill, forgiveness, commitment, and stewardship motives that allows for effective interpersonal interactions and long run family health.
  50. 50. Family Enterprise Succession Passing on the Legacy Creating the Action Plan – A Written Deliverable After having gone through and addressed the strategic questions and once the succession planning options are agreed upon, a formal written succession plan will need to be developed and incorporated into the overall strategic business plan
  51. 51. Family Enterprise Succession Passing on the Legacy Creating the Action Plan – A Written Deliverable  The succession plan should include:  The expected exit date for the founder/leader  A detailed description of the options and direction chosen and why they were chosen  Ensure completion of those elements needed to get the business ready for succession  Develop the action plan that includes timelines, milestones, and responsibilities for preparing the business and actually completing the succession process
  52. 52. Family Enterprise Succession Passing on the Legacy The Final Product: A Formal Succession Plan….  The final decision to implement should now be a highly satisfactory step forward for everyone  The final product is a written succession plan that clearly communicates everyone’s role going forward  It acts as a contract between stakeholders…. A promise to support the plan  Once the plan is implemented, it must be periodically re-examined to ensure it is on track and remains in the best interests of everyone involved
  53. 53. Family Enterprise Succession Passing on the Legacy Review of Key Points and Observations  Family enterprise concept  Family enterprising mindset to promote trans generational wealth and continuity planning  Three circle model (interaction of ownership, family and business)  Gaining an understanding of family dynamics – family genogram
  54. 54. Family Enterprise Succession Passing on the Legacy Review of Key Points and Observations  Assessing where the business is at today (SWOT analysis) and vision for it going forward for multiple generations  Six key strategic questions to be addressed:  Performance, Vision, Strategy, Governance, Leadership and Relationship  Importance of early succession planning; it is a process not a transaction  Giving the plan life and direction for the family and the business
  55. 55. Family Enterprise Succession Passing on the Legacy A Few Closing Quotes “If you don’t know where you are going …. Then any road will get you there.” - The Cheshire Cat
  56. 56. Family Enterprise Succession Passing on the Legacy A Few Closing Quotes “The plan is nothing, PLANNING is everything!” - Eisenhower
  57. 57. Family Enterprise Succession Passing on the Legacy Closing Comments Thank you for your time today. I hope this session has given you some insight and tools that will help you assist your clients in their family enterprise succession planning. Questions, comments and thoughts?
  58. 58. Family Enterprise Succession Passing on the Legacy Notes Page
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