Private company succession plannning: Where do you stand? An FEI Canada Survey

Private company succession plannning: Where do you stand? An FEI Canada Survey

By Canadian Financial Executives Research Foundation / FEI Canada | January 19, 2014

The Canadian Financial Executives Research Foundation (CFERF) is the research institute of Financial Executives International Canada (FEI Canada), the all industry professional membership association for senior financial executives. FEI Canada provides professional development, thought leadership and advocacy services to its 1,800 members through its 11 chapters across Canada. In July 2011, CFERF conducted a survey of more than 100 Canadian financial executives across Canada on the issue of private company succession, and summarized their findings in a research paper entitled Private company succession: Where do you stand? This research study was sponsored by Grant Thornton LLP and can be read in its entirety by viewing FEI Canada’s website

The following are excerpts of this insightful survey reprinted here with the kind permission of FEI Canada.

Canada is preparing for a significant shift as baby boomers retire and a new generation takes the reins of private company ownership. But according to financial executives participating in a CFERF study, the process is unlikely to be smooth sailing. The research findings indicate that succession plans at most companies are murky at best: only 40% of Canadian private companies have a clear business ownership succession plan in place.

The lack of widespread succession planning may be partly due to a lack of overall business planning: 30% of financial executive respondents said business owners did not have a five year vision for their business, while 20% did not have a clear overall strategy at all.

As company owners age along with the rest of the population, many entrepreneurs are finding they are ill prepared for the inevitable ownership transition that lies on the horizon. The risks of this lack of foresight are enormous: by not having a plan in place, owners may fail to realize the full value of their business during the exit process or may take a significant tax hit – or both.

With regards to estate planning, fewer than half of the respondents said the owners of the company were satisfied that their succession planning objectives would be achieved through their estate plan. Only half said their company owners had an up-to-date will in place and had adequate pension or retirement arrangements. Less than half of the owners knew how much personal income tax would be triggered upon his or her death.

Succession is just like any other change: Many find it difficult to accept.

Some of the greatest challenges are human or emotional issues, areas which the financial executive may not be trained or equipped to deal with.

Some of the issues on the “softer side” of succession include:
• Lack of common vision between the interested parties,
• Lack of a communication framework for all parties involved,
• Difficulty dealing with conflict, particularly around sensitive issues,
• Unwillingness for all involved to support the succession planning process, including owners ambivalent about planning for transition and / or reluctant successors, and
• Managing the business profitably through change.

These issues, although not directly financial in nature, can have a very real impact on the numbers side of the business if left unresolved. This can create a ripple effect throughout the organization, and ultimately boomerangs to the CFO and the finance team.

There may be problems with decision making and other conflicts. This could lead to a loss of focus by owners and management, ultimately leading to inefficiencies and profit loss. Similarly, the lack of a communication framework can leave everyone involved confused and perhaps without cleat direction, including employees, clients, suppliers and other stakeholders -  generating even more inefficiencies that will hit the bottom line sooner or later.

Private company succession planning: Where do you stand? clearly demonstrates that private businesses face an uphill battle regarding ownership transition, even though many have either started the process or are considering it. But time is running out quickly as a whole generation of baby boomer entrepreneurs has reached or is quickly approaching retirement age. That translates into a larger number of businesses that may be negatively impacted by an unplanned change in ownership. Some of this potential for turmoil might be avoided or at least minimized through a well thought out succession plan involving the entire organization. There are many steps to take on this route, but perhaps the first is for current ownership to work with its management team to create a long term vision for the company.

Best Practices:

• Don’t delay or simply wait until there is a “trigger” event such as illness, divorce or death. Succession planning should be an ongoing process that is started early and revisited regularly.
• When it comes to planning the transfer of responsibilities, draft a clear list of the key responsibilities and tasks required to run the company. Are there internal candidates with appropriate characteristics, traits and skills? Write job descriptions which can be matched against prospective successors.
• When dealing with family businesses, ensure there is transparency and clarity regarding the roles and responsibilities of active and inactive family members, as well as agreement between all parties on the succession plan and direction of the business.
• Offer opportunities to train and develop internal candidates now. Look for gaps in skills and seek ways to address these. Examples include job shadowing, rotations and lateral transfers.
• Ensure there are appropriate successors lower down to move up to fill the vacancies left when senior managers move up. If remaining staff are not able to handle more responsibility, find other duties for them, or make arrangements for training and education so they will be.
• Prepare for issues post-succession. If there are finance executives staying on after an ownership transition, it’s best that they’re familiar with all aspects of the business beyond the numbers.

Since transfer of ownership comes with many challenges – some of which may not have been considered in a traditional “succession plan” – the study indicated that sometimes outside help is useful. One financial executive involved in a successful succession planning exercise reported that the presence of an independent facilitator was helpful in keeping the process on track and quarterbacking the overall planning, while balancing both financial and emotional concerns.

However, when professional advice is sought, it was felt that tax experts alone where not best suited to driving the process. Rather, a holistic approach which takes all concerns into account should be the key consideration when planning a succession. Advisors can include accountants, tax and estate experts, business valuators and other consultants, bankers, lawyers, mediators and a board of directors.

CFERF’s primary objective is to study emerging financial management issues with the aim of increasing competitive capabilities of Canadian financial leaders and their organizations which are both public and private companies.

The MBO Group’s Ross Campbell is past Chair of FEI Canada’s Private Company Finance Sub Committee.

In Their Words

The MBO Group seems to have a unique ability to uncover interesting and worthwhile opportunities in the Canadian private company market. I have had the benefit of working with them in a variety of situations. They have always been able to capture the essence of what makes a project assignment or deal work in a very strategic way that others can embrace. With a rare ability to communicate clarity they are able to efficiently bring individuals as well as groups to understand what it takes to achieve success.


Laurie Tugman

FCA, Former CEO & President, Marsulex Inc.

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