68 | AUGUST 2016 www.canadianmetalworking.com
BY ALMA JOHNS
As a career banker, my
succession planning has been
For next-generation family business
owners, however, it can be an emotional transition.
When it’s time to pass the baton
to Junior, some founding business
owners do what’s intuitive: hand over
the business with little or no monetary exchange. After all, Junior has
worked in the business for the past 20
years. His sister has a career of her
own, she’s not interested, and she has
not spent a day of her life building the
business. She might have worked in
it for a summer or two, but they don’t
count. Junior’s deliberation only confirms his sense of entitlement. This
scenario has been proven to destroy
Upon retirement at 65, Dad would
have done well, but still is far from
being filthy rich. If the business valuation was done by a third party, Dad
could retire comfortably, allowing him
to pursue life-fulfilling passions he
has deprived himself of for decades.
But the valuation—and whatever
amount Junior intends to pay—has
been validated by the firm’s accountant of over 30 years.
This story, although fictional, happens in many next-generation succession plans. Lack of communication
and clarity, sense of entitlement, and
mismanagement of expectations are
among the worst culprits.
In his best-selling family business
book Every Family’s Business, Tom
Deans emphasizes the importance of
having a “family blueprint” several
years before the sale of the business.
He highlights 12 questions aimed at
building consensus. One of them is a
straightforward question from parent
to child: Are you interested in buying
stock and acquiring control?
While not everyone may buy into
Deans’ idea that pursuing family business longevity destroys value, I share
his opinion when it comes to having
parents and children pull in the same
economic direction. Thus, an honest
discussion between both parties must
take place to determine and achieve
goals that will have equitable monetary benefit for both the founder and
the next generation.
Business owners should ask several
questions when contemplating a succession plan. They are:
1. How much do I need to retire?
Understanding your financial needs
and what exactly you want to do after
running a business will help you
design a succession plan. It will also
set the framework for how you will
create value in the business while still
actively managing it.
2. What family dynamics do I need
to deal with prior to and during
Passing a business to the next generation is easier if only one person is
standing in line. Having two or more
children involved in the process complicates the situation, especially if the
children are pulling in opposite directions. Family dynamics have caused
founders so much agony, defeating the
purpose of preserving wealth for the
3. Is my child willing to take over?
Most founders have the “grit” that
made them successful in running the
business. If your child is somewhat
interested but his or her passion is not
in it, it’s time to look for an alternative
4. Is my child capable of taking
over the business?
They may be passionate about the
business but lack business acumen
and leadership skills. Your instinct
should be to hand control to a capable
party or have your child take minority
ownership and remain in the business.
There’s nothing worse than handing
over a business to someone you suspect will take what you worked hard
for to the ground.
5. Do I have an objective business
Has there been an offer to buy from a
third party? The only way to decipher
the real value of your business is to
get a third-party valuation. Better yet,
test the market for potential buyers.
Understand industry multiples that
similar businesses have been sold for.
6. Assuming a third-party valua-
tion was done, can my child afford
to acquire some shares or 100 per
cent of the company’s shares?
I always caution business owners that gifting your business away
destroys value very quickly. If a child
can’t afford the full amount, he or she
can secure financing by leveraging the
business. If the next-generation owners don’t have real skin in the game,
it’s much easier for them to walk away
during difficult times. No business
has ever been free from challenges.
Alma Johns is president, Bench
Capital Advisory, 416-238-2204,
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