For business owners passing baton to their kids, stars don't often align

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A while back, Eric Gilboord was talking to an entrepreneur about succession planning. How long should he hold on to his business, the man asked? He also revealed that his wife was pushing him to keep it long enough to pass down to their sons.

“And I said, ‘Oh, that’s interesting. How old are they?’” asked Gilboord, founder and CEO of WarrenBDC, a management and business-selling consultancy in Toronto. “He goes, ‘Fourteen and 16.’”

Granted, it’s a good idea to plan for succession early – most advisors agree the process should begin about 10 years in advance – but after asking a few more questions, Gilboord discovered that the man’s children had never visited the office, not even on the weekends to help out. As far as they were concerned, the company was just their dad’s paycheque.

There was likely only one way this story would end if the parents insisted on the transition, and it wouldn’t be a happy ending. After all, he’d seen what happens when the business lands in the wrong kid’s hands. In one worst-case scenario, he watched a middle child drain a family enterprise’s funds in three short years after taking over.

“The fastest way to give your kid a $1-million business is to start with a $3-million business,” says Gilboord.

While many company founders have dreams of passing their business down to their offspring – and perhaps even hope future generations will grab the baton, too – building that legacy isn’t always easy. According to one PWC survey, 70 per cent of private company owners in Canada are planning to sell or pass down their business within the next few years. And while 48 per cent hope to transfer the company to the next generation, 47 per cent don’t have a succession plan and 27 per cent haven’t involved the family in planning for the baton toss.

“The reality is that many family businesses have huge challenges in transitioning to the next generation, and it just gets harder with every subsequent generation,” says Katrina Barclay, communications and liaison manager for the Family Enterprise Legacy Institute in Ottawa.

Barclay, who comes from a multi-generational entrepreneurial family herself, has worked closely with family businesses in Canada and around the world and says she has long been interested in why many never transfer to the kids. Usually it has nothing to do with finances or operational issues. Instead, most failures happen when families don’t communicate or talk about the future.

“The business is their baby,” says Barclay of the parent. “They started it, grew it, nurtured it. But it can be very hard to leave, especially if there isn’t a succession plan in place. The founder is worried that if they leave, the business will fall apart.”

Founders don’t want to let go

Others put off passing the business down – even if the adult children are interested – because they simply have difficulty giving up control.

“Entrepreneurs are a special breed,” Gilboord explains. “It’s kind of like you’ve spent three years refurbishing your car, a ’67 Mustang, and all of a sudden your 16-year-old wants to take it for a drive.”

The fastest way to give your kid a $1-million business is to start with a $3 million business.

Eric Gilboord, WarrenBDC

Others find it difficult to allow their children to lead the business because they want to protect them. Some days, running a business can be a thankless job that includes issues with employees, clients or supply chains. Watching their children struggle through all of that can be difficult.

“Most parents, if they have even one paternalistic cell, if they’re benevolent, they care about their children and their employees. The founder doesn’t let go, even when they want to retire, because they want to protect their kids,” says Jean Phaneuf, strategic advisor and organizational psychologist with Crysalia in Montreal.

Gilboord points to one parent who waited so long to retire that the child was in his 50s – and was ready to retire too. They sold the business instead.

Some kids feel resentment

Meanwhile, many adult children don’t want to run the business and even feel resentment toward it and how much stress it placed on the family over the years. Maybe the founding parents put in long hours during the start-up phase and weren’t around much. Or they were always exhausted at home.

“A lot of kids will complain later on in their 30s and 40s, ‘Well, dad was never there. Our arm was broken and he was working,’” Phaneuf explains. No wonder the new generation looks for other opportunities outside the family business.

But sometimes the transition just doesn’t make sense, even if both generations want it to happen. The kids are the wrong fit, and the parent doesn’t realize it.

Ask Gilboord how often he’s had to tell a company founder that his or her children aren’t suitable choices to become the next leader, and his response is immediate.

“Multiple times,” he says. “Sometimes you get paid for being a family counsellor. I mean, that’s really what it boils down to.”

The trick is to help owners come to the realization themselves. Gilboord says he always asks clients three questions: Are the kids interested? Are they qualified? Can they afford to buy the business? If the adult child can pony up some of their own money, they’ll have skin in the game and will be more interested in seeing it succeed, he explains.

There may be hope, however

Yet even if the child isn’t qualified, that’s not necessarily a reason to pass them over for a top position, at least not quite yet, says Barclay.

“Sure, they might be entitled, but if they want the job that badly, there is likely a passion and commitment there too. It may be a matter of trying to work with them through coaching, training and educational experiences to find the role in the company that’s the best fit,” she says.

But sometimes the adult child feels trepidation about taking over. Caroline Phaneuf, Crysalia’s co-founder and lead chief learning development officer, helps new generations take psychological ownership of the family business. Sometimes, it’s hard to get out of the parent’s shadow even after they’ve retired. She uses a hat analogy when talking to them. If they have to wear an owner’s hat eventually, how do they make it their own?

“How do you want to start knitting your hat? What shape do you want it to take? You have the ability and the power to start shaping it the way you want it to look. It’s about building on those elements of commonality across generations, but tweaking to make it relevant for them.”

Ultimately, helping families pass down the business means persuading them to communicate early and often – and ensuring emotions don’t run too high during difficult conversations.

“There are family business advisors who specialize in the financial side – investments and taxes – but succession requires someone trained and familiar with communication and interpersonal aspects,” says Barclay. “The goal here is to keep the family together.”

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• Six more Canadian family advisors and the books that inspired them
• Red flags that a family business succession plan is weak
• Paul Desmarais III: ‘Get training outside of your family business’

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