Who Gets Your Business?
March 13, 2024The nature of succession is changing. Across the globe, the old practices of succession are declining. Practices like primogeniture (passing the business exclusively to ones offspring) now make up only 12% of succession plans. In fact, about half of family business owners value a successor’s interest in their business over their family’s interest[1]. This trend is so prevalent, that only about one-third of businesses plan on keeping it within their family. That number is a global low of 31% in Canada[2].
Changing habits and demographics are some of the reasons to blame for this shift in behavior. With the average Canadian life expectancy rising over time, from 73 to 83 years old over the last five decades[3], paired with the growing trend of people retiring younger, the transfer of ownership from one generation to the next is more frequently involving two living parties rather than one deceased and one living.
This means its more important than ever to adjust to the changing variables of succession planning. Does the future owner of your business know how they’re going to take equity? Do they know how long you intend to stay in your business? Do they know what you expect in return? These are very basic questions that nearly two thirds of North American family businesses don’t have an answer for, and only 18% of them have written down in documentation[4]. This doesn’t include the more nuanced must-knows such as ‘Does the owner and shareholders have a clear, attractive, and controlled way to exit the business?’ or ‘Will the transfer minimize taxes and other financial hits related to the transfer?’.
An unprepared or unmotivated successor could turn a thriving business into an irrelevant one, or worse, an insolvent one, in the snap of a finger. Worse yet, in the case of your inevitable passing, when assets and liabilities are suddenly redistributed at the whim of the law or arbitration, long term family conflict often erupts.
With business owners’ needs becoming more complicated over time and the increasing barriers of succession planning making the transfer of assets prohibitive and consequential if not done properly, the importance of having a written succession plan with proper execution is the most valuable asset you can have come time of succession. Look for advisors with a “TEP (Trust and Estate Professional)” or “FEA (Family Enterprise Advisor)” designation for starters. Also, incorporating life insurance into your succession planning strategy provides financial protection, liquidity, and peace of mind for your heirs while facilitating the smooth transition of assets and responsibilities after your passing.
Times are changing, behavioral trends are changing, and what you want, and need will change over time too. It’s best time you start planning for it.
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Sources:
- Calabrò and Valentino. STEP 2019 Global Family Business Survey. KPMG. p. 14. https://assets.kpmg/content/dam/kpmg/sa/pdf/2020/step-2019-global-family-business-survey-report.pdf
- BDC. “Succession planning: 3 exit strategies for entrepreneurs.” https://www.bdc.ca/en/arti cles-tools/change-ownership/plan-succession/3-common-exit-strategies
- Canada Life Expectancy 1950-2024. Retrieved 2024-03-10: https://www.macrotrends.net/countries/CAN/canada/life-expectancy
- Barr, Alan. “Navigating the Future of Family Business.” KPMG. https://home.kpmg/xx/en/blogs/ home/posts/2020/09/navigating-the-future-of-family-business.html