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FROM: JAN-FEB 2009 ISSUE | BY J. LYNN FRASER
As Deborah Graystone, CGA, discusses the importance of ensuring that a business passes successfully from hand to capable hand, she recalls the potential turmoil facing a family-based business whose owner was too busy to plan ahead.
The owner, a Graystone client in his late fifties, had been in a construction-related business for 30 years, building a stable, profitable company that had earned a solid reputation in the community and grown to 60 long-term employees. This effective, strategic-thinking businessman was typical of many of Graystone’s clients who talked for years about succession plans for their businesses without actually designing and implementing one.
“He was too busy running the day-to-day operations and administration of his business to deal with his own affairs. He had difficulty delegating responsibility to his sons, and the sons’ business abilities had never really been tested. Other key people were more technically inclined and again, they did not have the full picture of the business. “Then,” she adds, “he had a mild heart attack.” The next day, he was in Graystone’s office. A succession plan was drafted, finalized, and enacted.
“My client controlled everything before his health scare and it was really difficult for him to give up control. In the end, the succession to the sons was successful, but it was a long process,” recalls Graystone, the Tax Practice Leader for MacKay LLP. Without the succession plan in place, Graystone believes chaos would have resulted and the business sold at fire-sale prices.
An Ounce of Prevention
Succession planning – whether it is for an owner selling his business or a public company seeking a new CEO or senior executive – is a key strategy for any organization.
Succession planning has become even more critical in the last 10 years, as decision makers realize that their human talent is a business’s most critical asset, observes Shawn Cooper, MBA, managing director and country manager (Canada) for Russell Reynolds Associates, a global leadership search firm. The retirement of baby boomer executives and owners, the imperative to attract top leaders, talent retention and motivation, and higher turnover than ever at the top levels of the executive suite all add incentive to undertake succession planning.
And at a time when certain high-profile, charismatic CEOs drive all aspects of a business, the need for proper planning becomes even more imperative. “If something happens to the CEO, the shareholders’ stock value plummets,” notes Graystone. “For this reason, public companies have had to build solid risk management policies, including internal succession plans.”
The consequences of not having a strategic succession plan can be dire. They include:
- lost consumer, employee, stakeholder, and industry confidence
- lost shareholder value
- top talent departures
- potential exposure to hostile, low-value takeover bids
- a requirement for outside talent, which costs the company search and training fees, reflects poorly on the company’s ability to develop talent, and gobbles up resources that should be used for competing priorities
- outside talent avoids work opportunities with the firm unfavourable credit and financing terms
- lost key partner and customer relationships
Even so, most companies still do not have succession plans for their top executives in place. Graystone notes that entrepreneurs and large public company CEOs alike postpone succession planning for years due to financial and time commitments, a reluctance to let go of a business they built, and a deep aversion to acknowledging their mortality and that of their executives.
Research reveals that companies big and small run into numerous obstacles to implementing a succession plan. They include:
- a lack of career development and personnel assessment tools
- a lack of funding for leadership development
- an inability to identify future talent needs in the organization
- a lack of input from senior executives
Addressing the Fear Factor
In addition, the succession planning process itself can be daunting, as it’s an intense, difficult, costly, and time-consuming experience. A successful succession plan also requires keen awareness of both the psychological and financial repercussions of a succession for all involved.
Such a plan is a wide-ranging document. It must consider a company’s immediate and future needs such as: products, processes, and services to be developed; expansion into local or global markets; acquisitions; stock offerings; hiring or firing of key staff; and marketing plans.
A succession plan must also ensure that the marketplace’s perception of a company during the transition period remains positive. It must address the key audiences of employees and clients and ensure they remain loyal. It must calm shareholders and ensure they remain on board and confident of the company’s prospects.
David Weiner, MBA, a senior partner at NATIONAL Public Relations who advises companies on executive changes, advises a three-prong succession strategy. One, there must be a committee in place to respond in the event of a planned or unplanned succession. Two, an individual, such as a senior executive or someone with experience in the business, must be able to step in during the interim if needed. Three, the succession plan must be a team effort.
Kathleen Grace, MA, is a partner in ConsultVesta, a firm that advises companies on succession planning. She adds that a clear, measurable process for succession around leadership identification and retention must be prepared and adopted. Indeed, best-in-class companies create a “performance culture” and “development mindset” around succession planning.
To develop talent within their organizations to help ensure successful succession, leading companies offer external leadership development programs, executive coaching, and mentoring programs.
Internal or External?
What about bringing in a new leader, one with new ideas to inspire the rank and file, impose new and more effective processes and reinvigorate the company? Research and expert opinion reveals the jury is still out on whether an outside candidate is better than an internal candidate.
Studies of leadership succession show that choosing an “outsider” leads to declining share prices while an inside promotion increases share value. The Hay Group, a U.S. research and management solutions firm, surveyed 150 boards and found that 77 per cent preferred an internal candidate.
That said, Cooper contends that the open, external process is the way of the future. He notes there is merit in maximizing internal talent and an argument for “cultural fit.” But he stresses that it is necessary to bring talent on board that fits the company’s future needs. “External DNA can be transformative for a company,” he notes.
Either way, Weiner advises that all top choices should be anticipated by the company’s key audiences – shareholders, clients, business partners, and employees. The payoff for proper succession planning? Almost priceless. Benefits include:
- the ongoing confidence of customers, employees, shareholders, and other stakeholders
- continuous evaluation and development of management staff to ensure key positions can be filled
- loyalty and emotional investment among staff
- share price stability
First impressions are critical for new leaders and their companies. “The perception that lasts is formed in the first 100 days,” notes Weiner. With that kind of pressure on organizations today, companies must have the best leaders in place at a moment’s notice, and the optimum way to achieve that objective is through thorough preparation and extensive succession planning.
Family Values
Succession planning for family-owned businesses can add additional layers of complexity.
Whether the successor is a family member or a third party is key to tax planning. And if the former owner stays on in some form, there are also tax implications that must be taken into account.
“There is a huge difference in tax planning when the business is taken over by family versus existing management versus a sale to third party,” notes Lori Mathison LL.B., CGA, and a partner in Fraser Milner Casgrain LLP’s tax law group.
For example, if owners sell the business to their children, an estate freeze may well be the best option. This strategy can help defer any taxable gain if the children are in a situation where they don’t need money right away, adds Mathison.
Various tax planning tools can be used to minimize the resulting tax consequences of selling to a third party, outside of the family. For example, providing the seller with a retiring allowance can help augment an RSP. If the former owner of the business remains involved, perhaps in a consulting capacity, that also creates RSP eligibility.
“If you use the lifetime capital gains exemption the business will have to meet rigorous tests and will require planning before the sale to ensure the company will qualify for the tax exemption,” Mathison points out.
She adds that if the $750,000 lifetime capital gains exemption has been exhausted, the new small business share rollover may be a viable alternative. |
Your Worth is at Risk
The number of CGA firms for sale in Canada has increased in the past few years, and expanding supply has driven down values and selling prices, notes Tina Peters, BA, CGA, and director, public practice services and public practice advisor for CGA-BC.
Prices vary by location and client base. However, a firm with billings of $500,000 two years ago sold for $450,000 to $500,000 and now they sell for $300,000 to $350,000, says Peters. The lesson? In addition to their work with clients, accountants must enact their own succession plans.
So how best should busy CGAs tackle succession planning? Peters suggests the following steps:
Evaluate your practice - Step back and take an objective overview of your practice. Put yourself in the shoes of potential buyers. Objectively assess the client base, individual engagements, billings, and collections. If you struggle with doing this yourself, seek advice.
Train your successor - How can potential candidates take over a business if they do not have the required training and experience? In addition to technical skills, they need strength in strategic decision-making, planning, communications, capital investment decisions, credit management, cost-control, marketing, and employee relations.
Train yourself - During the transition to retirement, you must find a balance between being available to assist your successor and questioning their business decisions. If you want a smooth transition, the continued loyalty of your clients and the harmony of your employees are paramount. |
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