Business owners need succession help

Small and medium-sized business owners can make great clients. Their net worth is usually higher than average and their complex needs allow the advisor to demonstrate their expertise in tax and estate planning.

If there is one area that needs special attention, however, it is succession planning. Nearly half of Canadian family business owners have yet to choose their successors, according to PwC’s latest Global Family Business Survey.

Among the half who have a succession plan, only 48% are opting to keep the business in the family, the study found—a massive shift from 90% in the 2007 survey.

Boomers were not just the largest demographic wave to hit the Canadian economy—they were also the largest wave of entrepreneurs. As they head into retirement, there will be a huge turnover of ownership among the companies they started.

Within the next five years, 27% of business owners expect a change in ownership.

“It’s possible that the global downturn led people to re-evaluate their plans. People are thinking harder about whether family members have the talent to take over the business,” says Tahir Ayub, Canadian leader of PwC’s private company services practice. “Another factor is that succession is happening much later. The natural successor may be in their fifties when the owner is ready to transition out of the business.”

Among those looking to sell the family firm, one third plan to sell to a private equity investor, up from 14% in 2007. Only 22% plan to sell to a management team.

Half of the companies the study looked at are owned by the founding generation, with 34% owned by the second generation and just 16% by the third or later generations.

“We’ve found that by the second and third generations, either the company doesn’t survive or family members are less interested in running the family business,” says Sharon Duguid, director, centre for family business and entrepreneurs, with PwC. “To set themselves up for success, owners should be planning well in advance to ease tension and create the right conditions for a successful transition down the road.”

Duguid says it is vital that families discuss business plans openly to ensure the survival of the company. The study found 36% of respondents experienced tension as a result of family members not consulting the wider family on key business issues, and 39% said the source of tension was the performance of family members who are actively involved in the business.

“Tension can be a good thing when it provokes necessary conversations, but when those discussions never happen, it can lead to the collapse of a family businesses,” says Duguid. “People tend to wait until they have a conflict [before] they start thinking about conflict resolution strategies and then wish they had a formal system already in place.”

PwC recommends the institution of a family council, which provides a framework within which tension can be resolved. Business owners may also want to consider creating an external advisory board that can provide insight without the baggage associated with being a family member. This option can prove especially helpful in determining the best successor for the firm.

Get the full report.