Transitioning the family businesses to the next generation is a big deal. If done properly, it should take years of discussion and preparation, experts say.
Will the business be managed by younger family members or someone new? Or should it be sold?
The COVID-19 pandemic has highlighted the urgency of answering these questions, says Yannick Archambault, national family office leader with KPMG in Toronto.
His firm’s November survey of 500 entrepreneurs found that 37 per cent wished they could retire, transition or sell their businesses but said they hadn’t prepared for a transition.
“The founders are pausing, they are reflecting and they’re asking, ‘Do I want to continue, or is the next generation in a better position to continue?’” says Archambault.
Arthur Salzer, chief executive officer and chief investment officer of Northland Wealth Management based in Markham, Ont., says one of his clients experienced COVID-driven transition anxiety firsthand.
“The founder went offshore for vacation for three weeks, letting the next generation run the business. Then came lockdowns and stringent return-to-Canada qualifications.” The business owner was away for a total of five months, Salzer says, but the family’s next generation was able to run the operation.
Skilled advisors, such as those at family offices, can offer continuity and help guide families through transition discussions well before a crisis event, says Greg Moore, partner with Richter Family Office in Toronto.
“Advisors that come into the picture only during those life events typically aren’t as well equipped to understand the nuances of the family. They’re faced with potentially significant political headwinds because emotions are elevated,” Moore says.
Transition timing depends on where the family is in its life cycle and where the business is in the business cycle, he says. “Where’s the business? Is it peaking? Is it facing competitive pressures? Are there issues that need to be addressed with capital infusions?”
Do you think a business will keep a family together longer? No, it’s just the opposite.Neil Nisker, co-founder, CIO and executive chairman, Our Family Office
Also, family members need to agree on whatever strategy is decided upon.
He gives an example about a couple in their 60s who want to retire. “To them the business is basically their funding source. … It is going to fund their retirement, and the kids can come in and manage the golden goose.
“But the kids may say, ‘We’re at an inflection point whereby without capital infusion the business is going to decline, so instead of paying out mom and dad maybe we ought out to be putting money into R and D or capital equipment.’”
Ensuring that members of the next generation have the tools to take over the business and are prepared to take on new roles is also crucial.
KPMG offers a program in concert with Western University’s Ivy School of Management for next-generation family members to immerse themselves in financial and family basics.
The firm’s family office members meet with each client separately to work out ownership shares and leadership issues, says Archambault. The discussion about who wears which hat within the new organizational structure can take a year, he says.
“Having boundaries and roles and positions really goes a long way,” Salzer says. “When you don’t have that, it looks like tadpole hockey, where the puck gets shot into the corner and all the kids go into the corner at once and it’s a free-for-all.”
What if no members of the next generation want to be a manager? They can continue as board members or stockholders and bring in outside managers.
Founders need to consider whether their choice to have their kids take over – whether they are qualified or not – is a business or emotional decision, says Neil Nisker, co-founder, chief investing officer and executive chairman of Our Family Office.
“Do you think a business will keep a family together longer? No, it’s just the opposite,” says Nisker. Conflict can erupt among siblings if one is managing the firm and the others are sharing the wealth generated by it.
“It’s really important for the family to sit down with someone who understands the family dynamics and say, ‘Tell me why you want to bring the second generation or the third generation in.’”
Studies show that around 75 per cent of family businesses don’t survive through the second generation and at least 90 per cent don’t survive the third generation, says Nisker. Sometimes the subsequent generations don’t want to take over a business.
It’s very much like a Prince Charles syndrome. The founders think they’re going to live forever.Arthur Salzer, CEO and CIO, Northland Wealth Management
If the family decides a sale is the ultimate transition plan, disentangling from its enterprise is also a multiyear process, advisors say.
Moore says he asks clients where the money from the sale will go and how will it be managed. The family has to transition from being an operating company to an investing company.
“Is it going to be managed in a commingled structure with shareholders across the family, and if so, with what sort of governance?” he asks.
Managing a pool of capital, rather than a business, requires a different set of skills, Moore says. “Families sometimes falter by not providing themselves with appropriate support like investment portfolio management, reporting and tax planning.”
The emotional attachment of the first generation to a business can play a major role in the transition process. Founders are sometimes reluctant to step aside in a timely manner.
“I’ve seen cases where the next generation is in their mid- to late 60s and the founders are in their late 80s,” says Salzer. “It’s very much like a Prince Charles syndrome. The founders think they’re going to live forever.
“They like the power that they get being in that position. They have a social network, they get respected. Shows like Succession, although exaggerated, are probably a lot closer to the truth in many families than people understand.”
Salzer says one solution is for the elder to assume a chairman-emeritus role that allows him or her to stay on call or lend a hand but not call the shots any more.
“Transition only ends,” Nisker says, “when the founder dies or says ‘I want nothing to do with this business.’”