| How to pass the torch
without dropping it |
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| Entrepreneurs typically want their children or other close
relatives to carry on the family name through their business. |
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| But there are countless stories of families that have fumbled
the succession torch. It's clear that passing a business on to a second or
third generation is a very touchy process. |
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| Here are some things to consider: |
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| Start with a plan. All successful intergenerational
succession requires planning. As the principal owner of the business, begin by
determining what you and your spouse - if you have one - think is fair
distribution of the family assets. |
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| This will include a consideration of your RRSP's, your
investments, your company, and your real estate such as the cottage and main
residence. |
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| Once you have a general idea of how you want to divide the
assets, discuss it with each of your children - but not their spouses - to get
their views. Amend your plan as you see fit. Then bring in your accountant, who
can help with the proper structure to minimize tax and maximize benefits to
recipients. |
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| Your accountant will suggest bringing in a lawyer,
investment adviser or insurance agent at appropriate times in the process. Once
you have what you believe is a final plan, convene a meeting of the immediate
family to describe your decisions |
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| Your accountant and lawyer should be present to answer
questions. Be clear about your wishes and reasons. |
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| Identify major assumptions. Succession planning takes
time and it must be well thought out. One reason plans fail is they make
certain assumptions that are incorrect or turn out to be invalid. Clearly
identify all your major assumptions early on. |
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| These assumptions might include: · "I love all my
children equally." Most parents feel this way and they try to divide their
assets equally among their offspring. This is very difficult to do fairly. In
one family, the parents decided to leave their sons the two businesses and
their daughters the real estate. The allocations were roughly equal in value at
the time of succession. |
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| One of the sons used his business assets to expand into
other areas and he was quite successful. The other son went bankrupt. The real
estate received by the daughters did well initially, but in the roller coaster
of property values, the assets are now running at significant discount to the
succession value. |
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| This kind of situation raises the potential for bitter
animosity. · "I want to leave my significant other financially
independent." For many estates, there is enough money available to take care of
both a spouse and children. |
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| But even if you and your spouse agree to a plan, it could be
contested after your death. Let's say you agree to leave your spouse less than
50 per cent of your assets upon death. That allocation is contestable when you
pass away - whether or not your spouse has formerly agreed to it. |
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| Also, your accountant and lawyer can assist in structuring a
legal trust, which can help with the distribution of wealth, even after you're
gone. |
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| · "A family member would like to run the business she
is capable of running it, and she has earned the respect of customers,
suppliers, bankers and other team members." Most succession plans fail because
one or all of these assumptions prove false. Be realistic in assessing
successors. |
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| Recognize the emotional side. In putting a plan
together, it is important to realize there are two elements - the plan itself,
which deals with financial, tax, investment and insurance matters prepared with
the help of experts; and the emotional level of family members and their
spouses. |
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| Do the immediate family members - as well as their spouses -
view the plan as fair? This is often the most emotional part of putting a plan
in place. Children's spouses often cause the most anxiety. They want to protect
the rights of their partners (and themselves), and they often want their
opinions heard. |
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| Payments to parents. The assumption that parents can
continue to draw funds from a business is often mistaken. Once the ownership is
transferred, the monthly stipend usually stops. This income can often be
provided through a regular directors' fee, a dividend or interest on loans to
the business. But if the company does poorly, payments to parents can be a
source of contention. |
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| Protect your assets. A lot depends on the structure of
financial assets. Don't forget to buy insurance to protect them when you pass
on. While term insurance is expensive as you get older, it is still a great way
to make sure your family will not have to pay a lot of tax on your death. |
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| Change your will. Make sure it reflects your planning
decisions. Entrepreneurs gain piece of mind knowing that the fruits of their
labour will be distributed the way they want. |
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| Published May 18, 1998 |
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