• Planning for the Future -- Succession Planning Considerations for Small and Medium Sized Businesses
  • April 30, 2010 | Author: Barbara E. Smith
  • Law Firm: Stewart McKelvey - Charlottetown Office
  • Small and medium sized businesses are tremendously important to the economy of Atlantic Canada. Small businesses, defined by Statistics Canada as those having fewer than 100 employees, account for over 20% of Gross Domestic Product in Atlantic Canada. Moreover, over 98% of businesses found in Atlantic Canada are considered small businesses. Many of these businesses are family owned and operated. Unfortunately, many family businesses do not survive to the second generation, and fewer still survive to the third generation. There are many reasons why this is the case, but not least among them is a failure to properly plan for the future.

    A proper succession plan:

    Draws on the expertise and advice of a host of advisors -- including lawyers, accountants, insurance brokers, and bankers -- in the development and renewal of the plan.

    Answers the fundamental question of what are the short and long-term objectives of the family. Oftentimes, the largest asset of the family is the family business. How the present generation can access that asset to fund retirement needs while the next generation takes control is an important consideration.

    Addresses the appropriate governance structure. Recent research indicates that family businesses with strong corporate governance tend to outperform their peer group over time. A governance structure may evolve over time as family members’ roles change. Some plans also involve the use of a family committee to deal with certain issues.

    Deals with the question of management, specifically, when and in what capacity family members can become part of management. Oftentimes, members of the next generation are unwilling or do not have the proper skills to become managers. When this is the case, professional non-members should be hired. Family businesses may encounter a handicap in hiring managers as potential recruits may perceive a limitation on advancement opportunities for non-family members. A proper succession plan can help to alleviate or address some of these concerns or, at a minimum, clarify the extent to which such limitations exist.

    Considers the tax aspects. There are many tools available to minimize taxes arising from inter-generational transfers. Many of these tools are not available if proper planning is not done. One of the more common tools is an estate freeze where the value of the company is frozen for the current generation and future growth in the company is attributed to the next generation. The availability and use of the Enhanced Capital Gains Exemption is an important consideration. The Income Tax Act allows an exemption of up to $750,000 on the sale of shares in a “Qualified Small Business Corporation”.

    Accounts for the possibility of selling to a third-party. The next generation may not aspire to take over the family business. If that is the case, two options remain: selling to a third-party or liquidation. Selling to a third party is almost always going to be to the best way to preserve the wealth created in the business. Proper planning would include identifying potential buyers and having an up-to-date appraisal of the business to aid in potential negotiations.

    Appreciates the role of a shareholders agreement. Family members might disagree over key decisions that face the company, such as who to hire as a manager. A proper succession plan includes the use of a shareholders agreement that addresses ¿ among other things ¿ dispute resolution, buy-sell arrangements, and what happens to shares upon death or disability. A properly drafted shareholders agreement can reduce stress and anxiety for all family members and minimize conflict.

    No one has a crystal ball. As such, it is not possible to address every single circumstance that may arise. That said, turning your attention to the issues that you might face, and working to address them in a thoughtful manner before you “have to”, can clearly facilitate transition, be it from one generation to the next, or to a third party. Receiving legal and tax advice when working on your transition plan is strongly recommended.