The following article was recently featured in Business In Vancouver‘s October 2015 special feature on Succession Planning.
Vancouver is a city known for its multi-generational businesses, especially in the agriculture and real estate industries. Developing a succession plan for your family-owned and operated business can be one of the most complex exercises a family has to deal with.
This process is often costly, time consuming, and an emotional minefield. Worst case scenario is that the family can’t find and agree on a suitable candidate within the next generation to take over the business and thus, the family transition plan falls apart.
In such instances, there are generally three different options available:
1. An employee buy-out
If there is a) no clear family successor and b) no need for the family’s name and goodwill to operate the business, then perhaps the business can identify key employees and develop them into a position of leadership and ownership. This involves trusting in those employees, and hopefully locking them down with tight employment agreements containing incentives like bonuses or gradual equity participation.
2. An arm’s-length sale
This would be an option when you cannot find an employee to buy the business and your business can operate independently of your contributions. In looking for an arm’s length purchaser, you want to ensure that all inactive business assets like investments and vehicles that may have been purchased by the company, but used personally, are stripped out of the company. You should also ensure that all active business assets are properly contracted for and secured. This could entail renegotiating a long term lease, various intellectual property licenses, or important contractor and client agreements.
3. Business wind-up
Finally, if you cannot find an employee to buy the company, or a third party arms-length purchaser, then unfortunately sometimes the only option left available is winding up the business. This option is generally a last resort. In this instance it is important to speak with your legal and financial advisors about your available capital gains exemption before going down this road.
Not having a family successor to transition your business to is not the end of the world but it definitely requires planning and a comprehensive succession plan. It’s never too soon to kick off the conversation and sit down with your family, lawyers, accountants, and financial advisors. The sooner you start discussing it, the more time you’ll have to explore all the options and find a solution that makes the most sense for your business, and your family.
If you have questions or are in need of succession planning expertise, please contact Luca Citton.
The material contained in this article is for your general information and should not be taken as legal advice.
Tags: Luca Citton, Business Law, Succession Plan, Article