In recent years, numerous media stories – both in the news and in popular television series – have proven the importance of succession planning for businesses. Succession planning is important for any business, providing continuity, sustained productivity and even tax benefits. However, it is possibly even more important for family businesses, where personal relationship dynamics are more likely to cause disruptions and conflict when business leaders decide to step down and allow other family members to step into their positions.

Why Succession Management is Important for Business Continuity

Succession planning helps to ensure the smooth transfer of leadership and information from outgoing leaders to new ones. It helps to reduce disruptions and risks, ensures that the organizational culture is upheld, and helps to retain crucial talent. A business needs to continue running, unimpeded and without disruptions, regardless of who holds the senior leadership positions, and this is what makes succession management so important. 

Steps in Developing a Family Business Succession Plan

What goes into developing a success plan for a family business? Firstly, it is important to ensure that the subject of succession planning does not suddenly emerge out of nowhere when the current leader is just about to retire. It should be discussed frequently, both among the family members who form a part of the board and management, and non-family members in positions of power. Both before and after a succession plan is put in place, discussions should continue, bringing the possible problems and solutions out into the open.

When devising a succession plan, keep the following essential rules in mind:

  • Keep shareholder and management succession plans separate. Operational succession and ownership succession should not be conflated, nor should the one be favoured over the other. If one receives more attention than the other, this can lead to problems down the line. For example, if ownership is transferred from a family-led majority to external shareholders, but the same family members continue to hold the operational reins, this constitutes a failure of proper succession planning.
  • Consider the financial and legal implications before making any decisions. When leadership positions and controlling shares change hands, a number of legal and financial implications can be triggered. Think about questions such as anticipated succession, compulsory portions, pensions, tax-free allowances and possible adjustments to the articles of association.
  • Try to keep the focus on the business. One of the drawbacks of family businesses is that personal relationships can sometimes be conflated with, and complicate the running of the business. When drawing up a succession plan, everyone involved needs to be reminded to prioritize the interests of the business, and try to keep family dynamics out of the offices and boardroom. 

Addressing Challenges in Succession Planning and Family Dynamics

Perhaps the most important thing to secure for the business before creating and implementing a succession plan is an expert, objective advisor who is completely removed from the family dynamics. Financial advisors, lawyers, consultants and business coaches can all help to ensure a smooth transition, while family members deal with the changes, which can sometimes be overwhelming. A business financial planner can help decision-makers override the sentiment and possible resentments involved with the transition, by drawing attention to the simple practicalities of the succession. A coach could chair and mediate regular meetings in which the details of the succession are discussed and finalized.

Tax Considerations in Business Succession Planning

As far as tax law is concerned, transfers of ownership are mainly addressed in the provisions of Bill C-208. These provisions were intended to facilitate the genuine intergenerational business transfers while also preventing tax evasion and keeping tax laws as fair as possible. Before Bill C-208, tax laws favoured arm’s-length share sales and were biased against the transfer of shares between family members. This inequity has now been addressed. Previously the sale of shares to family members would have been regarded as dividends and capital gains tax would have been levied. This is no longer the case.

That being said, the tax implications of business succession can be complex and will require the help of an experienced tax professional, who can help formulate strategies to reduce the tax burden associated with the transfers of ownership.

Momentum Financial Services Inc. is a boutique financial planning firm based in Halton Hills, ON. Contact us to begin working with one of our expert financial planners, who can help you with your business’s succession planning.