To sell or forge on – What’s best for family-run businesses?

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For founders and owners of family businesses, it’s one of the biggest decisions they will ever make: Should they transition their company to the next generation or sell it to the highest bidder? It is a complex question, and there is no one-size-fits-all solution. But according to PwC Canada’s Trevor Toombs, partner, private company services tax, and Christine Pouliot, M&A advisory partner and deals private company leader, there are best practices.

Toombs and Pouliot work extensively with business owners who are selling or transitioning their companies, and they emphasize the importance of communication, planning and flexibility in making the right decision – for the owner, the family and the business.

Here are a few things Toombs and Pouliot say owners trying to decide whether to sell or transition the business should think about:

1. What do you want?

It sounds obvious, but the decision to sell or transition is made much easier if the business owner has a clear and well-articulated goal in exiting the family company. Often, Pouliot says, that decision crystallizes around the issue of legacy. “What is it that you want to leave to the next generation?” she asks. “Is it capital for them to build their own business, or do you want them to take over?” It doesn’t have to be an either/or proposition. Children could, for instance, maintain an ownership position, but with professional management. Whatever your vision, Pouliot says, “the legacy component is something the entrepreneur should be thinking very deeply about.”

2. Build flexibility into your plans.

If you’re unsure whether to transition or sell – or perhaps even if you are – it’s important to remember that goals and circumstances can change. That’s why Toombs recommends considering steps to build flexibility into the business structure well before a sale or transition. The idea is to allow for multiple exit paths, recognizing that you and your family’s choices may change over time. For some (but not all) businesses, an estate freeze and family trust structure might be an appropriate way to achieve this, since it can allow for selling or transitioning more tax efficiently and equitably. “Setting up multiple paths and flexibility can be really helpful when it comes time to make a decision,” Toombs says. “You might have thought a family member would step up and be active in the business, but that doesn’t always turn out to be the case. You have to be able to accommodate that.”

3. Talk to your kids.

One of the big mistakes an owner can make is to just assume that their children will be interested in taking over the business. “Very often, an entrepreneur will think that their children will be happy to take over the family business,” Pouliot says, “but when it’s actually time to exit, the children will say, ‘I’m not interested,’ and the entrepreneur is in shock.” To prevent that, it’s important to talk to children – when they are old enough to think about and articulate their goals – about how and if the future of the family business and their own goals align. “And just don’t make it a quick conversation,” says Pouliot. “Ask them if they are interested in taking over, and realize that they might not be prepared to answer right away. Give them time to reflect.”

Also, be ready to talk about your own goals, for them and for the company. And if they do express an interest in taking over, be as objective as possible about whether they are up to the task. If they are not, it’s not necessarily a deal-breaker. Some owners make employment and training within the company – or even at a competitor – a condition of transition, while others may bring in professional management or coaches to get the next generation ready and assess their abilities.

4. Consider putting structure around family decisions.

Family dynamics are complicated enough, but they can get even more so as families and/or businesses get larger. “Deciding to sell or transition is a holistic decision, and you need to take into account multiple points of view,” notes Pouliot. Depending on the size and complexity of the business, one helpful approach may be to establish a family council, which functions something like a board of directors for key family decision-making. Often, says Pouliot, the council will comprise family members as well as one or two outside advisors who “have a more objective view, fewer emotions, and some experience with family businesses so they can help moderate the discussions and find solutions.” Toombs adds that some families adopt a constitution or playbook that sets out their intentions and guides future decision-making.

5. Start early.

Communication and planning can be much more effective – and help preserve family harmony – when they are practised over the long term. “There’s a big element of trust that needs to be embedded into all of this, especially in the context of the family business because there are all sorts of dynamics in play,” Toombs says. “So the earlier you can start, the better.” Advance planning and open communication also help to mitigate the risk that unforeseen events will derail the owner’s plans. “I’ve seen situations where an owner has kept the second generation in the dark for too long and they don’t really understand the business,” he adds. “Then an unexpected death forces a transition, and that can get really ugly.”

6. Get advice.

If you are weighing whether to sell or transition to the next generation, do not be afraid to solicit outside advice. “A lot of entrepreneurs will reflect on the question a lot but keep it to themselves,” says Pouliot. “But they might make better decisions if they involve team members or even a trusted external advisor to help them think through goals and options.” Remember that selling or transitioning a business is not simply a business transaction: it will also have legal and tax implications, as well as impacting wealth management and estate planning. “Those all need to be aligned,” says Toombs.

Of course, every business is different, and every family is, too. “There really isn’t one simple answer to the question of selling or transitioning,” Toombs explains. “But the over-arching message is to starting thinking about it early and make sure you give yourself flexibility to accommodate a number of different paths.”

This story was created by Content Works, Postmedia’s commercial content division, on behalf of PwC Canada, which is a member and content provider of this publication.