Succeeding at succession: structuringyour transition planJanuary 2012Matching your objectives                       approp...
•	 What underlying challenges does your        Selecting the best structure                                               ...
Transferring ownership options                                                                Transfer ownership to family...
On the flip side, external succession           There are a plethora of techniques and                                    ...
Scenario planning can also highlight        Getting real about value and riskpitfalls. For instance, in the transition    ...
The responsibility is on owners to          planning perspective, it may not be                                           ...
•	 Do you have adequate health and life      Making the most informed choice   insurance?                                S...
About Grant Thornton in CanadaGrant Thornton LLP is a leading Canadian accounting and advisory firm providing audit, tax a...
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GT Succeeding at Succession: Structuring your transition plan Canada

  1. 1. Succeeding at succession: structuringyour transition planJanuary 2012Matching your objectives appropriate succession structure, one that No matter what the precipitating not only pays financial and emotional factor, the shift in attitude can havewith your exit strategy dividends, but also reduces the risk of unintended consequences. Without business failure and minimizes taxes. adequate succession planning, growthIn the early years of a privately held can stagnate, management may becomebusiness, it’s not uncommon for owners Have you reached a turning point in disillusioned and value erosion couldto follow Bob Dylan’s risk mitigation your business? follow at alarming speed. Recognizingstrategy: when you got nothing, you got While the need for an effective succession that shift is one thing. Taking the steps tonothing to lose. Over time, those who plan is ongoing and best started early, it is consider the consequences and structuresuccessfully employ that strategy, as well often precipitated by a shift in the owner’s an appropriate succession plan is anotheras more conventional ones, frequently find outlook toward business and life. In some matter altogether.themselves with something—a profitable cases, owners who were willing to bet The first step is to reflect on what youbusiness—and much to lose: wealth, the house on a new or rapidly-growing want for yourself and for your harmony and more. business become more reluctant to gamble Few business owners allow themselves Despite these achievements, many with both personal and company assets as this luxury, but it’s critical to establishingbusiness owners unwittingly risk losing time goes on. In other cases, the need for a a personal agenda and identifying catalystseverything by failing to adopt the optimal new generation of managers or a transition for change. This self-evaluation requirestransition structure. Very frequently, to the next generation is the impetus for the owner to honestly answer questionsfamily-owned businesses fail following the the succession. such as:death of the founder. Unexpected events External change, such as market • What are your personal ambitions?aren’t the only source of business failure. dynamics, can also bring an owner to a How long, for example, would you likeJust 30% of family-owned businesses turning point. The business may need new to stay active in your business?survive the second generation, 15% the strategic direction to maintain competitive • Are your personal aspirations alignedthird generation and 5% the fourth, advantage and maximize shareholder with the objectives of your business?according to the Canadian Association of value. Or the new realities may put the • What is your appetite for risk and is itFamily Enterprise (CAFÉ). 78% of family owner at odds with younger managers or aligned with your company’s strategicbusinesses face a transition of ownership family members seeking faster change or direction?within the next 15 years, yet 70% have more aggressive tactics.done no succession planning. These numbers paint a bleak picturefor the future of privately held business,at least at first sight. Yet many businessesthrive and prosper after succession.Why? Because the owners took time toalign their personal objectives with an Succeeding at succession: structuring your transition plan 1
  2. 2. • What underlying challenges does your Selecting the best structure business face? With a clear understanding of your • Do they require capital? objectives, you have the elements you • Is your management team capable of need to structure your succession operating and growing the company? plan. Whether you intend to transfer • Do you need any personal liquidity? or maintain ownership, the following decision trees can assist you in evaluating It’s important to keep an open mind your options. This process is especially when undertaking this self-evaluation. useful in helping you decide whether to Your answers may surprise you. Quite look internally or externally for the often, an owner is thinking more about human and financial resources you’ll aspirations for their business and need to reach your objectives. less about outcomes from a personal Internal succession is the structure perspective. In other cases, the owner may typically followed by family-owned“When we meet with harbour nagging self-doubts about their businesses. Ownership and managementowners, we ask a series own abilities, believing their company are usually transferred to family members will be substantially better off in the or to management through a managementof open-ended questions. hands of someone else. Then, through buyout or an Employee Share OwnershipQuestions about the this introspective discovery process, they Plan (ESOP).capability of the management realize that isn’t the case In either case, a governance committee, after all. such as a board of directors or familyteam, the owner’s need for Of course, any number of conclusions council, can smooth the transition fromliquidity or whether the is possible, including maintaining the an organization with a single owner toowner cares what happens to status quo, at least for the time being. The one with either a professional or family goal is to reaffirm what you’re seeking for management team. You do not necessarilythe employees when they’re require a legal structure when adopting a yourself and to determine the implicationsgone. We can’t answer of those choices from a business governance framework. In many cases, itthese questions, but when ownership and management perspective. is equally effective to simply interact with new management on an informal basis andthe owner starts answering provide oversight during the transition orthem the right strategy and for longer periods if needed.structure soon become clear.”Stephen McGeeGrant Thornton, United States2 Succeeding at succession: structuring your transition plan
  3. 3. Transferring ownership options Transfer ownership to family over time No need/desire for liquidity Transfer ownership to employees over time Transfer ownership Transfer ownership to family or employees through recapitalisation Transfer ownership to family or employees Need/desire for liquidity through ESOP Transfer ownership to third party through sale of the company Maintain status quo Stay active in the business Transfer management to family successor Maintain ownership Transfer management to internal non-family successor Step away from the business Hire professional managementSource: Grant Thornton US Succeeding at succession: structuring your transition plan 3
  4. 4. On the flip side, external succession There are a plethora of techniques and may be a better option if your family structures that can work independently or members aren’t interested in the business together. The key is to match these to your or there’s a lack of confidence in the ability company’s cash flow, growth plans and of family members or the management your need to take money off the table. team. Financing and liquidity requirements are also a determining factor. The most Keeping your options open viable route for these situations is a triple- Establishing a structure for your track process that simultaneously explores succession plan is essential, but it’s only structures for a strategic sale, financial a good first step. Because in business, as sponsor-led recapitalization or Initial in life, things rarely go according to plan. Public Offering (IPO). So the structure must be flexible enough For those seeking to maximize short- to adjust to changing circumstances. term liquidity, sale to a strategic acquirer Determining the degree of flexibility“The transition strategy may be the best option. If you’ve decided requires consideration of two groupsyou adopt is largely to retain ownership but step away from of factors: controllable factors, such day-to-day management, then an IPO as company policies, family creed andgoverned by your answers could be considered. While many owners business values; and uncontrollable factors,to an introspective discovery still view IPOs as a time-consuming, including economic trends, ownershipprocess. You can’t structure expensive proposition, access to equity continuity and growth plans. markets has eased, making IPOs an All of these internal and externalthe transition effectively attractive option in many cases. factors, controllable and uncontrollable,until you articulate your Private equity-led recapitalizations form the basis for testing variouscore objectives.” are usually best for owners seeking succession structures. This testing, also employee continuity or capital to finance known as scenario planning, providesScott Griffin a transition. Although many business answers to key questions, including:Grant Thornton, Australia owners worry about their ability to attract • How does the transition match growth financing from private equity investors like and expansion plans? strategic purchasers, these firms are also • How does the owner get liquidity— interested in a company’s fundamentals, either immediately or over time? even though they may approach valuation • What is the role of existing differently. Private equity firms generally management? invest in businesses that are unable to • Will external managers be required? maximize market opportunities because of lack of capital, limited management depth or an aversion to risk.4 Succeeding at succession: structuring your transition plan
  5. 5. Scenario planning can also highlight Getting real about value and riskpitfalls. For instance, in the transition Structuring and negotiating aof a small- to mid-sized privately held succession plan can be an emotionallybusiness, many owners unwittingly charged process for all parties. For thenegotiate against themselves by agreeing owner, it’s a once in a lifetime eventto a financially supported transition that involving a significant hurdle—letting go.requires them to maintain a management After years of blood, sweat androle. If the deal is linked to future tears, there’s an understandably strongperformance, the owner remains largely personal attachment to the business andresponsible for that performance and to the ownership, which is nearly alwayscommitted to years of extra work, which jealously protected in a family business.may not have been part of the bargain at Even if the owner sells an ownershipthe outset. interest and stays involved, tension can For their part, large private businesses develop between the owner and a bunchcan use scenario planning to ensure of “know-it-all” management experts. “The structure must bethe smoothest transition possible. By Willingness to sell is another issue flexible enough to dealconsidering different scenarios, these that leads to difficulties in reaching ancompanies can develop response plans in agreement. Despite seeking a purchaser, with future changes andadvance to deal with the potential lack the owner may not be fully committed to unexpected occurrences.of appropriate management skills or the selling unless there’s a real need or desire However, there is a limit tochallenges that may arise if different family for liquidity.groups conflict. When it comes to valuation, private scenario planning because Many owners fail to perform equity and venture capital buyers are you can’t envision everyrealistic scenario planning because unequivocally attached to the financial side possibility. So you mustthey lack a clear vision for themselves of a purchase. Owners, on the other hand, often focus on the factors which they be prepared to deal withand for their business. Others conductrudimentary scenario planning that leads consider make their business “special” or changes in a practical way.”to the adoption of a single or inflexible the possibility for strong growth. These Frank Walshsuccession structure. The objective is to differences can lead to a valuation gap Grant Thornton, Irelandestablish a primary succession plan and or even the realization that the businessa plan B that match the expected long- is worth more to the owner than theterm performance of your business while purchaser.allowing for the unexpected. Succeeding at succession: structuring your transition plan 5
  6. 6. The responsibility is on owners to planning perspective, it may not be protect themselves and be realistic about appropriate from a personal or corporate value and risk. Understanding the true tax perspective. Care must also be taken value of your business also lessens the to avoid double taxation when a company likelihood that you’ll leave money on the operates in more than one tax jurisdiction. table or allow the purchaser to extract all Yet despite the importance of tax of the upside. An independent advisory planning, owners must understand that group can be particularly helpful in the most critical number associated with removing emotion from the transaction any transition is the net amount they and ensuring that valuation is both realistic take away. While tax planning can help and fair. owners arrive at that net amount, tax considerations alone should not drive the Dealing with tax issues transition’s structure. Instead, financial Scenario planning is also an effective means considerations must remain paramount,“Owners need to determine of dealing with the tax implications arising while conducting tax planning to avoidthe long-term forecast of from the sale or transfer of shares, which any unanticipated outcomes. can be substantial. Where the owner is ablethe business. Any structure to claim the capital gains exemption on the Ask the right questionsyou put in place, especially sale of qualified small business corporation Experience tells us that the best approachif a buyout will occur over shares, this will have a significant impact to succession planning is to start early. on the tax that has to be paid. Other That helps to avoid surprises and gives youtime and be paid out of the provisions are available that may allow time to gain confidence in and comfortcash flow of the business, the owner to defer paying tax on any gain. with your decisions. You can preparemust match the expected Regardless of the personal or corporate for structuring your succession plans by tax reduction or deferral methods that are answering the following questions.future performance of the available, you can’t leave the tax planningbusiness.” until late in the game. It’s important to Retirement and estate planning: seek tax advice early and to structure your • Is there a shareholders’ agreementKevin Fraser company appropriately before a change in regarding the disposal and valuation ofGrant Thornton LLP, Canada management or ownership. This can help shares? ensure that your succession plan provides • Is your will up-to-date? every opportunity to maximize your • Do you know how much income tax wealth. will be payable on your death? All tax aspects of the transfer must be • Have you made arrangements to reduce considered, especially the timing. Even the potential liability of this tax? if a transaction is eligible for favourable treatment from a transfer tax or estate6 Succeeding at succession: structuring your transition plan
  7. 7. • Do you have adequate health and life Making the most informed choice insurance? Succession planning is a highly personal• Will your spouse be financially process. With many options or independent if you were to become combinations of options available, it can disabled or die? be daunting for even the most experienced entrepreneur. Being a once in a lifetimeWealth preservation: experience doesn’t make the task any• Do you know how much the business easier. That’s why outside advisers with is worth? succession planning expertise can be• What proportion of your wealth is tied valuable. up in the business? Following time-tested methodologies• Is there scope for extracting non- that are adapted to each client engagement, essential assets from the business? the practitioners at Grant Thornton LLP• Do you hold business assets personally? will collaborate with you—the owner of a• Do you have a diversified portfolio of privately held business—to help you make “Some vendors are investments that are not dependent on the most informed decisions. From estate unsophisticated and may the fortunes of the business? and tax planning to transaction advisory• Do you actively manage your personal and wealth management, we can help you leave it to a strategic buyer to wealth? build an effective transition strategy. With resolve the valuation issues.Owners of small private businesses our global reach, proven track record, Those vendors are likely to integrated suite of services and in-depthmay also want to ask themselves these knowledge of privately held businesses, leave an enormous amountadditional questions: our practitioners truly act as your trusted of value on the table by• Do you have a set retirement age? guides to help you navigate the succession allowing the buyer to extract• Do you have adequate pension planning process. arrangements? To find out how our professional all of the upside.”• Could you afford to retire without advisers can help you effectively structure Alysoun Stewart selling your shares in the business? your succession plan, contact your Grant Grant Thornton, United Kingdom• Do you have adequate wealth outside Thornton succession and estate planning the business to facilitate retirement? specialist. Succeeding at succession: structuring your transition plan 7
  8. 8. About Grant Thornton in CanadaGrant Thornton LLP is a leading Canadian accounting and advisory firm providing audit, tax and advisory services to private andpublic organizations. Together with the Quebec firm Raymond Chabot Grant Thornton LLP, Grant Thornton in Canada has morethan 4,000 people in offices across Canada. Grant Thornton LLP is a Canadian member of Grant Thornton International Ltd, whosemember and correspondent firms operate in over 100 countries worldwide. This list represents the countries and territories where Argentina Finland Lebanon Serbia Grant Thornton International member firms currently Armenia France Luxembourg Singapore have operations. August 2010. Australia Georgia Macedonia Slovak Republic Austria Germany Malaysia Slovenia Bahamas Gibraltar Malta South Africa Bahrain Greece Mauritius Spain Belgium Guatemala Mexico Sweden Bolivia Guinea Moldova Switzerland Botswana Honduras Morocco Taiwan Brazil Hong Kong Mozambique Thailand Bulgaria Hungary Namibia Tunisia Cambodia Iceland Netherlands Turkey Canada India New Zealand Uganda Cayman Islands Indonesia Nicaragua Ukraine Channel Islands Ireland Norway United Arab Emirates Chile Isle of Man Oman United Kingdom Mainland China Israel Pakistan United States Colombia Italy Panama Uruguay Costa Rica Jamaica Philippines Venezuela Croatia Japan Poland Vietnam Cyprus Jordan Portugal Yemen Czech Republic Kenya Puerto Rico Zambia Denmark Korea Qatar Dominican Republic Kosovo Russia Egypt Kuwait Saudi ArabiaFind out how our professional advisers can help you establish, improve, preserve and transfer your business’s value. To contact alocal Grant Thornton adviser near you, please visit our Web site at© 2011 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved.The information contained herein is prepared by Grant Thornton LLP for information only and is not intended to be eithera complete description of any tax issue or the opinion of our firm. Changes in tax laws or other factors could affect, on aprospective or retroactive basis, the information contained herein. You should consult your Grant Thornton LLP adviser toobtain additional details and to discuss whether the information in this article applies to your specific situation.A listing of Grant Thornton offices and contact information can be found on our Web site at