Being fair to your heirs

Handing off your company to the next generation can be a fulfilling experience but it’s not without its pitfalls.

It’s estimated about one-third of family businesses don’t survive the transition from the first to second generation. Too often the end result is a failed enterprise, and a fractured family.

“The number one reason why business succession plans fail is poor communication among family members,” says Brian Wilson, an estate mediator with Wilson Vukelich LLP. “The kids need to feel a part of the process, and understand clearly what the parents’ intentions are.”

Playing favourites

While you may have long-held visions of passing the crown to your kids, they may not be interested—or prepared—to receive it. The best way to find out is to ask. “Don’t go in with any preconceived idea of how this is going to work out,” says Ron Prehogan, president of Equitas Consultants, an Ottawa-based business transition specialist. One or more children may want to assume the leadership role, or none may want to be even remotely involved.

The latter case sets up an easy decision. Time to sell.

Things get tricky when you have a mix of interested and uninterested offspring.

Unless there’s an obvious family successor, it may be difficult to objectively assess your children’s skills. Ask a reliable mentor who’s well acquainted with both your company and family, but isn’t directly connected to the business, for a second opinion. Or, contact a family business advisor or an executive headhunter to help guide your decision.

Once you’ve determined a successor, devise a fair succession plan, so that will go unchallenged.

Dividing business assets

An equal share may not be fair. If you’ve chosen one child to be your successor, but divided the business assets equally, you’re putting a heavy load on the new business leader. He or she will be the one responsible for siblings’ ongoing financial success—and bear the burden of any failure.

“A fundamental question you have to ask: Will it hinder the operating sibling to have the non-working sibling involved in the business?” recommends Jeff Halpern, business succession advisor for TD Bank Group in Toronto. If the answer is yes, he says, then ideally you’ll want to “get the non-working siblings out of the business.”

Option 1: Single-wing butterfly

There are a few different options for doing this. One is called a single-wing (or partial) butterfly. In this approach, you carve off various non-core business assets—like real estate holdings and unrelated subsidiaries—into a separate company, with no tax implications for doing so.

Often, these non-core assets aren’t equal in value to the primary business. To keep things balanced, you could sell off a portion to a third party.

And then there’s life insurance. Halpern recalls one man who handed over the reins of his multi-national company to his “natural successor,” and offered non-business assets and a term life insurance plan—with a substantial $70-million payout—to his other child, leaving all parties “very pleased.”

Option 2: Voting and non-voting shares

You can also create a share structure that divides the company into voting and non-voting shares. Give each child—and perhaps yourself—equal numbers of shares, entitling all to a portion of the annual dividends.

Ownership of voting shares, by contrast, would be restricted to family members who are actually involved in the day-to-day operations

Another possibility is to break a multi-faceted business into autonomous parts. This can be done geographically; for example, Kid A takes over the North American operation, Kid B heads up the European division. Or you can do it by market or product lines.

Option 3: Family trust

Finally, you can set up a family trust to run the company. This is probably the most flexible choice: the company remains whole so you can revisit the plan and adjust it as family dynamics change.

Revisit and revise

Once you’ve finalized the details, keep in mind nothing is truly finished until you leave the picture.

A child who was keenly interested in taking over at one point, may decide that time with a growing family is more important. Others who have ventured off into different fields—and failed—may find they now covet the security of the family business.

So you need to revisit and revise the plan as necessary.

When you finally hand over the keys, resist the urge to meddle. But let the kids know you’re still around for both some parental and business advice.

Allan Britnell is a freelancer writer and editor whose work has appeared in Profit and The Globe and Mail.