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Passing the Family Business to the Next Generation? Or NOT?


Passing the Family Business to the Next Generation?  Or NOT?

The marketplace for private & family business in Toronto

We enter a time in Canada, where many established business owners face a pressing question.  Should we be passing on the family business to the next generation?  At first this may sound like a rhetorical question, most definitely yes, let’s keep the business in the family.  However when considering  the next generation or the “millennials” , finding the right fit is just as important if not more than all the hard work you put into the business from day one 20 years ago.

Coming up with a succession plan is critical, this may include several outcomes, many of which do not include passing down the business to a family member.  There are many factors to consider when the next generation is to take over and run a successful business.  Some of the indicators whether a family member is a good candidate to “carry the torch” include: 

·     1)  Did the family member grow up in the business and work closely with all areas of the company, from operations, sales, finance, and strategic management?

·     2) Does the family member have professional training for running a business?  Many lawyers, accountants, or business school graduates are positioned well to jump into an owner/manager role because their training from school, large professional firms, or banks has prepared them to handle the pressure, work smart, stay dedicated and deliver results day in day out.

·      3)  Is there a strong team that the successor can leverage to make the transition seamless?

·      4) Does your family member have a passion for the business?

·      5)Does the successor have a long term plan for running the business?

If you answered NO to many of these questions, your children, or other family members may not be ready, or have the right fit for continuing your company’s legacy.  This may be difficult to process, but there are many different options available.

Sometimes Family members or Children are Entrepreneurial but Want their Own Story

Often times the next generation want to have their own business in sectors that are of interest to them and not the family business.  This makes perfect sense because they have been brought up in a entrepreneurial family and they have watched the hard work that their parents have put into something they are proud of today.  There is a sense of ownership for the next generation, it’s easy way out to just take the family business and continue on, however working towards something that is new for them creates a true sense of ownership.

Why Toronto is a Buyers’ Market Right Now?

We often come across, hedge fund managers, brokers, wealth managers, and other professionals that advise client’s on their wealth management requirements comment that Toronto’s private business market is a “Buyer’s market” right now.  This means there is an under supply of businesses for sale, and a lot of buyers looking for new business opportunities.  This is largely due to the fact that many of the “baby boomers” are not quite ready to retire.  It is our opinion that demographics play’s a lot to do with this as aging business owner’s want to keep the business in the family but had a vision that their children would one day step into the business full time and progress as the successor.  As their children are not likely the best fit, or on to other passion business ventures of their own, this has created a lot of business owners holding onto their business and running the day to day operations longer than anticipated.

What will happen to Businesses When Owners Retire?

As the baby boomers reach retirement age a large number companies will be changing hands in the next coming years (and increasing rapidly in the next 10 years).  According to recent survey from a schedule A Canadian bank, only 25% of business owners have a succession plan in place as they plan on winding down for retirement.  Further details under covered some interesting stats for the current market conditions when owners were asked, 38% mentioned that they will be looking to sell their business to a 3rd party, 30% expected to transfer the business to a family member, 18% said they would sell to partner or a plan for a management buyout, this means the remaining 14% either didn’t know what to do or would wind down the business.

M&A Opportunities in the next several years

There will a lot of M&A opportunities as the next several years play out and the owners of small to mid-market businesses look for succession plans, because clearly this is an issue. With Toronto being “buyer’s market” it is likely the buyers in the market are getting higher in age as well, so they will have will have the problem a few years out anyways.  If you have baby boomers selling to other baby boomers, or investors approaching retirement, what’s next?

How are Business Owners to Prepare for Succession Planning?

The following steps are critical for succession planning:

1)      Ensuring you have a team of advisors that can support and assist you

2)      Assessing your exist options

3)      How much is your business worth?  Have a valuation prepared.

4)      Ensuring that you take the steps necessary in the last years to maximize the value of your business.

5)      How to best finance the Business transition

6)      Dealing with the tax and legal implications

7)      Plan & Prepare for your retirement

What are the exist options for Business Owners?

Having performing some research for the different types of strategies, we have identified the following succession planning strategies below:


Business Succession Strategies

Breakdown(1) by Company Size

Total

Revenue less than $1 Million

Revenue $1 to $5 Million

Revenue more than $5 Million

Pass business to family members

30%

28%

42%

29%

Sell to 3rd party

38%

40%

19%

34%

Sell to management/employees

12%

12%

17%

15%

Sell to partner

6%

6%

10%

11%

Don’t know

5%

5%

8%

11%

Wind down business

9%

10%

3%

1%

 

 

 

 

 

1)    Quantitative Study of the Business Succession Market in Canada (March 2007)

If you would like to speak with an MP Group Advisor regarding your succession plan please contact one of our partners below:

Raffael Mazze, CPA, CA, LPA
Consulting & Business Advisory for Sucession Planning
O: 416-214-0527
E: rmazze@mpgroupcpa.com
W: www.mpgroupcpa.com

Kunal Parshotam, CPA, CA, LPA
Tax Consulting for Sucession Planning

O: 416-214-0527
E: kparshotam@mpgroupcpa.com
W: www.mpgroupcpa.com 

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