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Never too early to put succession plan in place

Special to The Globe and Mail

00:00 EDT Thursday, May 22, 2003

W hen Robert and Joan Shatilla started to craft a succession strategy for their family business back in 1989, they figured they would simply hand it off to their son, David, and daughter, Kim.

But by the time they put the real plan in place nine years later, their son was designated to take the helm of Oakville, Ont.-based KD Displays, later bringing a non-family partner aboard, while their daughter and her husband, Jon Dunski, would purchase and head a division of the company, which they subsequently spun off as a separate entity.

"If we had solidified our plan in 1989, it would have been wrong for the personalities involved," says Joan Shatilla, whose husband founded the company, which designs and builds point-of-sales displays for merchandisers, in 1984.

"But by starting early, when nothing actually had to be implemented, we had the advantage of being able to explore various options."

The Shatillas practiced what business experts always preach: It's never too early to plan for the succession of a family business.

But whether because of a fear of upsetting family members or facing up to their own mortality, too many owners of family enterprises fail to establish a succession plan until it is too late -- if they do it at all.

In fact, according to a 1999 study, even though approximately three-quarters of leaders of Canadian family-owned businesses planned to retire within 15 years, fully two-thirds had not even initiated a succession-planning process. The study was conducted by the Deloitte & Touche Centre for Tax Education and Research at the University of Waterloo.

That's often cited as a major reason for the widely touted statistic that only about 30 per cent of family businesses survive into the second generation.

This failure to act could have enormous impact.

"The big fear," says Terri Heggum-Allen, national executive director of the Canadian Association of Family Enterprise (CAFE) in Mississauga, Ont., "is that, in the next 15 years, we're going to have something like $1-trillion worth of assets change hands and if it's not done in a careful way, that could have a huge impact on jobs and everything else."

To increase their chances of enjoying a smooth transition, experts stress that a family-owned business needs to get a succession plan going early, then review it regularly.

There are many benefits to doing that, including the opportunity to plan a financial strategy that will maximize the retirement income of its founders "without saddling the business with too much debt or putting the second generation on a tight string," says Don Zinyk, an Edmonton-based partner with the KPMG Enterprise Group.

Conversely, not planning ahead can mean being forced to sell a business on short notice and at a firesale price, if the owner suddenly dies or becomes disabled.

Or there's the chance that uninterested or inactive family members could suddenly be forced into a position of authority, perhaps sparking resentment within the family, says certified financial planner Laurie Sylvester, a Money Concepts franchise president in Penticton, B.C.

Having a succession plan in place early will also provide the founders with the time to establish a mentoring process to properly train the successor generation.

It can also be the difference between making the right -- or wrong -- move for the company's future. When the Shatillas, for instance, figured both their children would take over, "my husband and I were dealing with the best of intentions and the wisest of motives," says Ms. Shatilla, who retired as executive vice-president of KD Displays in 1998, but still sits on its advisory council. Her husband still works three or four days a week in the business but plans to completely retire next January.

"But we found out that you can make wrong assumptions as to what you think your children want."

Besides enacting an early succession plan, there are other steps a family-owned business can take to help ease the transition process.

One is to establish an outside board consisting of non-family members whom family can meet with regularly and be accountable to about succession planning and other issues.

This board can help families undertake difficult decisions associated with the succession-planning process and facilitate discussions in which everybody expresses open, honest opinions about how they feel the succession should take place, says Ms. Sylvester.

By acting as mediators, they provide a family business with "that unemotional, impartial body" needed at critical times when the company's future is at stake, adds Terry Jackson, a certified general accountant based in Coquitlam, B.C.

KD Displays, for instance, has a seven-person advisory council, including four non-family members, which has helped provide "distance and objectivity," Mrs. Shatilla says.

Experts also say insurance has an important role to play in easing the financial considerations of a smooth succession.

For instance, a life insurance policy on the founder could be used to cover deemed disposition taxes payable on his or her estate.

"I've met a number of members within CAFE who didn't even realize there is [potentially] a large capital gains tax when you dispose of a company. If dad passes away, and he owned 100 per cent of the company shares, with no planning having been done, sometimes the only way to pay that tax is to sell the business," Ms. Heggum-Allen says.

The proceeds from a partnership or shareholder policy can provide the surviving partners with a tax-efficient mechanism to purchase the shares of a deceased or disabled partner, says Stephen Smith, president of Yorkminster Insurance Brokers Ltd. in Port Hope, Ont.

An estate freeze is another tax-effective strategy for family-owned businesses to consider before the business is handed down.

Under an estate freeze, redeemable preferred shares, frozen at the company's present value, are issued to the senior generation; new common shares whose growth will be determined by future company growth are then issued to the succeeding generation, says David Mason, a partner with Deloitte & Touche in Ottawa.

Once an estate freeze has taken place, "the kids can start taking on more responsibility in the business, hopefully helping it grow and then being able to really benefit from that future growth."




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