January 1, 2016

Documents, planning and communication for successful succession


Part 1 of this story appeared in the June 2015 issue of Landscape Trades

Eventually every business owner will have to hand over the reins. It’s inevitable. However, the odds of a successful transition increase substantially with advance planning and ensuring key documents are in place.

“An ounce of prevention is truly worth a pound of cure,” says New Hamburg, Ont. lawyer Randy Thomson. By putting good documents in place at the outset, a lot of expense and grief can be avoided down the road. Not only will this save the business money, it can also prevent families being torn apart by conflict.

Almost everyone can think of one family that is no longer on speaking terms following the death of a parent, or the sale of a family business. That doesn’t have to be the case. Several professionals weigh in with their advice to help ensure a successful succession for your business.

Get documents in order

Although a will and power of attorney are personal documents, Saskatoon lawyer Al Haubrich says they ensure legal operation of a business if the owner dies suddenly, or becomes incapacitated. These documents enable someone to sign cheques for the owner. For corporations, the assigned individual can vote for the shareholder of an incorporated company. “Otherwise it’s like a ship at sea, with no captain,” he says.

The will should be specific and thorough, especially regarding joint property, continues Haubrich. He recommends reviewing your will every five years to see if it still reflects your intentions. Are the executors and beneficiaries you named still the right ones?

If you are one of the many people without a will, don’t run out to the stationery store to pick up a standard kit. “Kits don’t cover everything and things can go terribly wrong,” says Haubrich. “No two wills are the same,” agrees Thomson. They should reflect each individual’s circumstances, he continues.

Haubrich recounts the tale of one client who had worked hard his whole life to build up a business, but was too cheap to spend money on estate planning. “He left a mess,” says Haubrich. It was difficult to get a property guardian appointed and bonded, and his beneficiaries were not set out in the will with certainty.  “A good-quality will is a gift to your loved ones,” says Haubrich.

Spell out agreements

Wills and powers of attorney aren’t the only business documents that are important. “Shareholder and partnership agreements set out the rules of doing business and provide for the Three Ds: death, disability and disagreement,” says Thomson. “It’s much cheaper and more cordial to decide ahead of time over coffee,” he says. It’s much more expensive to go to court and have the judges decide, he adds.

Thomson had one client who died young and his wife inherited his shares. The other shareholders were able to buy her out using the pay-out from a shareholders’ life insurance policy. Thomson says it all went smoothly because everything was put in place ahead of time.

It is estimated that 70 per cent of businesses are operating without an agreement between the owners. This can lead to many complications. What happens if a partner becomes disabled, dies or wants out? Agreements can prevent conflict by answering questions such as, Can a child take over the parent’s share? Or, If one partner dies, how long does the surviving partner have to pay off the partner’s spouse?

Even, or maybe especially, family members should have agreements in place to describe their business relationship. This includes siblings, parents and children, even spouses. Haubrich knows of one sad case where two men were in business together and each carried life insurance on the other. Unfortunately there was no legal agreement in place among the owners, and without a buy-sell agreement, the survivor kept the life insurance money and purchased the deceased owner’s interest for a much lower amount.

Transfers: All in the details

Once you’ve agreed upon the terms of the sale, a legal document is necessary to set out the conditions of the sale and the transfer of control from the owner to the successor, says Thomson. Most transitions involve gradually transferring responsibilities and ownership.

Michael Henry is the managing partner of the law firm Houser, Henry and Syron LLP in Toronto. Henry specializes in working with entrepreneurial and family businesses and has been a director of the Toronto chapter of the Canadian Association of Family Enterprise (CAFE), a national organization that aims to promote the success of family business. Even when the right documents are in place, Henry says a successor will have a limited chance of success unless the right mix of people, products and procedures is also in place. “There’s a lot of work on the business side that should be done ahead of time to set the business up for future success,” he says.

According to the Canadian Federation of Independent Business, only half of businesses have a succession plan. Fewer than 10 per cent have a written plan. Henry recommends business owners consider their five-year plan during their annual review of financial statements. He urges clients to map out a plan with a timetable. He sees the steps as, “Have a vision, make a plan, get advice, carry out the plan, and review.” If it’s not working, update the plan.

Doing nothing is still a choice but it can be costly, says Henry. “It leaves the business, employees and clients adrift if something happens.”

Too often business owners procrastinate on creating a succession plan. Sometimes this happens because the owner thinks he or she is too busy to plan, does not want to let go or has difficulty choosing a successor. Unfortunately, the issue will eventually be forced by a health crisis or death, says Henry.

If an owner has trouble imagining life after work, Henry likes to include the owner’s spouse in discussions. “This can often help owners have a vision of what else they could be doing; it gives a fresh light to future planning.”

Personality plays a role

Also essential for continued success of the business is choosing the right successor. This person needs to have the right skills and drive. If more than one person is taking over, can they get along?

Henry reflects that fights within a family are expensive and take an emotional toll. “We try to keep our clients out of the courts. Litigation is a blunt and expensive mechanism for achieving goals.”

Lawyers and accountants can ensure the right documents and tax structures are in place, but communication throughout the process is also critical, says Henry. “Unexpressed, unvoiced expectations are a minefield.”

Andrew Pigott, founder of The Succession Bridge in Oakville, Ont., and a board member of the Canadian Association of Family Enterprise, helps businesses navigate the succession process. He helps business families engage in an exploration of some of the tricky subjects such as ownership, how decisions are made at the family and business level, and facilitates understanding on the key issues that get captured in wills, estate planning and shareholder agreements.

“It’s essential to get the issues out on the table,” he says. He encourages parents to have dialogue with their kids that will inform them about what the future looks like, and to start the succession process years in advance.

A frequent problem for small and mid-size businesses is the absence of an effective board of directors or even an advisory panel. “When good corporate governance is missing, succession planning suffers,” remarks Henry. “If the owner is the president and the dominant director on the board, it’s like an echo chamber. There is no constructive outside perspective, and these owners don’t have the resources to tackle steep challenges like succession.”
Pigott agrees. “Surround yourself with experienced people who bring an independent perspective and talk to people who have gone through it,” he says.

While you may think you don’t have the time or financial resources to seek out professional advice on managing succession, investing the time and money upfront could save you much more down the road, both financially and in heartache.    
Helen Lammers-Helps is a freelance writer based in Ontario. She reports on topics related to business, agriculture, horticulture, the environment and parenting.