The Succession Fund: private equity financing for succession transactions, management buyouts, and shareholders looking for partial liquidity or wanting to “take chips off the table

Bowing out: Succession planning no simple matter

Bowing out: Succession planning no simple matter

This article originally appeared on the website on September 28, 2007, as written by Denise Deveau.

Robert, a 49-year-old business owner, says bowing out of his thriving marketing consulting business was more complex than pulling out of a failing marriage. "There's no way on God's green Earth it would have been seamless or easy. It's more complicated than a divorce, by far."

That's despite the fact that when the decision was made and it came time to plan his exit, Robert did everything by the book — which is not the norm.

The business world is seeing a glut of baby boom generation owner-operators like Robert starting to plan their exit strategies. The problem is the vast majority are ill-prepared to make the transition successfully, and if they don't manage things properly, they may lose out on equity when it comes to cashing in.

More than 40 per cent of business owners surveyed by the Canadian Federation of Independent Business plan to leave their businesses in the next five years, and more than 70 per cent within the next 10 years. At the same time, 71 per cent of family businesses and 61 per cent of non-family businesses surveyed did not have a formal exit strategy.

Of those who are exiting their businesses, 82 per cent plan to retire, while another 11 per cent are moving on to other business ventures. And 60 per cent of the respondents without exit plans felt it was "too early to plan for succession."

Those counting on their kids to take over the business might want to examine that a bit more closely. A joint report issued by RBC Financial Group, the Canadian Manufacturers & Exporters Association and Queen's School of Business said that only 30 per cent of Canadian family-owned businesses pass the company on to a second generation, and one in 10 is handed down within the family to a third generation.

Laying the groundwork
Why are many savvy business folk so bent on postponing the inevitable? According to industry advisors, it's often just too emotional a process for many entrepreneurial types — especially visionary ones whose personal talents were a driving force behind a business's success over the years.

"I find that most independent business owners have the most difficulty engaging in [succession planning]. They just can't seem themselves actually retiring," said Susan Smith of S.B. Smith Consulting Group in Toronto. Robert did take the time to find the right like-minded successor. He also stayed on as CEO to ease the transition with clients, and paid special attention to communicating his long-term plans to all involved. "I was laying the pipes for this long before we made the announcement," he said.

But even with all his carefully laid plans, he ran into some hurdles.

"The clients were great, but the team was a little more lost than I expected," he said. "I was surprised to find out that problems that were once under your control can erupt when you step aside."

Smith herself was able to orchestrate a relatively seamless exit six years ago when she sold her half of an accounting firm partnership to become an independent consultant. "It worked well. People stayed with the purchaser for a good length of time and all the clients stayed with the new firm."

Smith may be an example of a best-case scenario for succession planning, but for that large majority without a plan, the risks can be significant.

"Succession planning should be a process, not an event," said Larry Klar, managing partner of the Succession Fund, a provider of private-equity financing for succession transactions. "You never want to be in a position where you are forced to accelerate the process because of illness, a death in the family or divorce." Building value

Michael Epstein, president and managing partner at Fuller Landau LLP, a chartered accountancy and business consulting firm in Toronto, said there is a "staggering amount of capital" available from private equity investors to finance succession planning. The caveat is that the business has to be investment-worthy in the eyes of the beholder, he said.


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