1. Succeeding at succession: structuring
your transition plan
January 2012
Matching your objectives appropriate succession structure, one that No matter what the precipitating
not only pays financial and emotional factor, the shift in attitude can have
with your exit strategy dividends, but also reduces the risk of unintended consequences. Without
business failure and minimizes taxes. adequate succession planning, growth
In the early years of a privately held can stagnate, management may become
business, it’s not uncommon for owners Have you reached a turning point in disillusioned and value erosion could
to follow Bob Dylan’s risk mitigation your business? follow at alarming speed. Recognizing
strategy: when you got nothing, you got While the need for an effective succession that shift is one thing. Taking the steps to
nothing to lose. Over time, those who plan is ongoing and best started early, it is consider the consequences and structure
successfully employ that strategy, as well often precipitated by a shift in the owner’s an appropriate succession plan is another
as more conventional ones, frequently find outlook toward business and life. In some matter altogether.
themselves with something—a profitable cases, owners who were willing to bet The first step is to reflect on what you
business—and much to lose: wealth, the house on a new or rapidly-growing want for yourself and for your business.
family harmony and more. business become more reluctant to gamble Few business owners allow themselves
Despite these achievements, many with both personal and company assets as this luxury, but it’s critical to establishing
business owners unwittingly risk losing time goes on. In other cases, the need for a a personal agenda and identifying catalysts
everything by failing to adopt the optimal new generation of managers or a transition for change. This self-evaluation requires
transition structure. Very frequently, to the next generation is the impetus for the owner to honestly answer questions
family-owned businesses fail following the the succession. such as:
death of the founder. Unexpected events External change, such as market • What are your personal ambitions?
aren’t the only source of business failure. dynamics, can also bring an owner to a How long, for example, would you like
Just 30% of family-owned businesses turning point. The business may need new to stay active in your business?
survive the second generation, 15% the strategic direction to maintain competitive • Are your personal aspirations aligned
third generation and 5% the fourth, advantage and maximize shareholder with the objectives of your business?
according to the Canadian Association of value. Or the new realities may put the • What is your appetite for risk and is it
Family Enterprise (CAFÉ). 78% of family owner at odds with younger managers or aligned with your company’s strategic
businesses face a transition of ownership family members seeking faster change or direction?
within the next 15 years, yet 70% have more aggressive tactics.
done no succession planning.
These numbers paint a bleak picture
for the future of privately held business,
at least at first sight. Yet many businesses
thrive and prosper after succession.
Why? Because the owners took time to
align their personal objectives with an
Succeeding at succession: structuring your transition plan 1

2. • What underlying challenges does your Selecting the best structure
business face? With a clear understanding of your
• Do they require capital? objectives, you have the elements you
• Is your management team capable of need to structure your succession
operating and growing the company? plan. Whether you intend to transfer
• Do you need any personal liquidity? or maintain ownership, the following
decision trees can assist you in evaluating
It’s important to keep an open mind your options. This process is especially
when undertaking this self-evaluation. useful in helping you decide whether to
Your answers may surprise you. Quite look internally or externally for the
often, an owner is thinking more about human and financial resources you’ll
aspirations for their business and need to reach your objectives.
less about outcomes from a personal Internal succession is the structure
perspective. In other cases, the owner may typically followed by family-owned
“When we meet with harbour nagging self-doubts about their businesses. Ownership and management
owners, we ask a series own abilities, believing their company are usually transferred to family members
will be substantially better off in the or to management through a management
of open-ended questions. hands of someone else. Then, through buyout or an Employee Share Ownership
Questions about the this introspective discovery process, they Plan (ESOP).
capability of the management realize that isn’t the case In either case, a governance committee,
after all. such as a board of directors or family
team, the owner’s need for Of course, any number of conclusions council, can smooth the transition from
liquidity or whether the is possible, including maintaining the an organization with a single owner to
owner cares what happens to status quo, at least for the time being. The one with either a professional or family
goal is to reaffirm what you’re seeking for management team. You do not necessarily
the employees when they’re require a legal structure when adopting a
yourself and to determine the implications
gone. We can’t answer of those choices from a business governance framework. In many cases, it
these questions, but when ownership and management perspective. is equally effective to simply interact with
new management on an informal basis and
the owner starts answering
provide oversight during the transition or
them the right strategy and for longer periods if needed.
structure soon become clear.”
Stephen McGee
Grant Thornton, United States
2 Succeeding at succession: structuring your transition plan

3. Transferring ownership options
Transfer ownership to family over time
No need/desire for liquidity
Transfer ownership to employees over
time
Transfer ownership
Transfer ownership to family or employees
through recapitalisation
Transfer ownership to family or employees
Need/desire for liquidity
through ESOP
Transfer ownership to third party through
sale of the company
Maintain status quo
Stay active in the business
Transfer management to family successor
Maintain ownership
Transfer management to internal
non-family successor
Step away from the business
Hire professional management
Source: Grant Thornton US
Succeeding at succession: structuring your transition plan 3

4. On the flip side, external succession There are a plethora of techniques and
may be a better option if your family structures that can work independently or
members aren’t interested in the business together. The key is to match these to your
or there’s a lack of confidence in the ability company’s cash flow, growth plans and
of family members or the management your need to take money off the table.
team. Financing and liquidity requirements
are also a determining factor. The most Keeping your options open
viable route for these situations is a triple- Establishing a structure for your
track process that simultaneously explores succession plan is essential, but it’s only
structures for a strategic sale, financial a good first step. Because in business, as
sponsor-led recapitalization or Initial in life, things rarely go according to plan.
Public Offering (IPO). So the structure must be flexible enough
For those seeking to maximize short- to adjust to changing circumstances.
term liquidity, sale to a strategic acquirer Determining the degree of flexibility
“The transition strategy may be the best option. If you’ve decided requires consideration of two groups
you adopt is largely to retain ownership but step away from of factors: controllable factors, such
day-to-day management, then an IPO as company policies, family creed and
governed by your answers could be considered. While many owners business values; and uncontrollable factors,
to an introspective discovery still view IPOs as a time-consuming, including economic trends, ownership
process. You can’t structure expensive proposition, access to equity continuity and growth plans.
markets has eased, making IPOs an All of these internal and external
the transition effectively attractive option in many cases. factors, controllable and uncontrollable,
until you articulate your Private equity-led recapitalizations form the basis for testing various
core objectives.” are usually best for owners seeking succession structures. This testing, also
employee continuity or capital to finance known as scenario planning, provides
Scott Griffin a transition. Although many business answers to key questions, including:
Grant Thornton, Australia owners worry about their ability to attract • How does the transition match growth
financing from private equity investors like and expansion plans?
strategic purchasers, these firms are also • How does the owner get liquidity—
interested in a company’s fundamentals, either immediately or over time?
even though they may approach valuation • What is the role of existing
differently. Private equity firms generally management?
invest in businesses that are unable to • Will external managers be required?
maximize market opportunities because of
lack of capital, limited management depth
or an aversion to risk.
4 Succeeding at succession: structuring your transition plan

5. Scenario planning can also highlight Getting real about value and risk
pitfalls. For instance, in the transition Structuring and negotiating a
of a small- to mid-sized privately held succession plan can be an emotionally
business, many owners unwittingly charged process for all parties. For the
negotiate against themselves by agreeing owner, it’s a once in a lifetime event
to a financially supported transition that involving a significant hurdle—letting go.
requires them to maintain a management After years of blood, sweat and
role. If the deal is linked to future tears, there’s an understandably strong
performance, the owner remains largely personal attachment to the business and
responsible for that performance and to the ownership, which is nearly always
committed to years of extra work, which jealously protected in a family business.
may not have been part of the bargain at Even if the owner sells an ownership
the outset. interest and stays involved, tension can
For their part, large private businesses develop between the owner and a bunch
can use scenario planning to ensure of “know-it-all” management experts. “The structure must be
the smoothest transition possible. By Willingness to sell is another issue flexible enough to deal
considering different scenarios, these that leads to difficulties in reaching an
companies can develop response plans in agreement. Despite seeking a purchaser,
with future changes and
advance to deal with the potential lack the owner may not be fully committed to unexpected occurrences.
of appropriate management skills or the selling unless there’s a real need or desire However, there is a limit to
challenges that may arise if different family for liquidity.
groups conflict. When it comes to valuation, private
scenario planning because
Many owners fail to perform equity and venture capital buyers are you can’t envision every
realistic scenario planning because unequivocally attached to the financial side possibility. So you must
they lack a clear vision for themselves of a purchase. Owners, on the other hand,
often focus on the factors which they
be prepared to deal with
and for their business. Others conduct
rudimentary scenario planning that leads consider make their business “special” or changes in a practical way.”
to the adoption of a single or inflexible the possibility for strong growth. These
Frank Walsh
succession structure. The objective is to differences can lead to a valuation gap
Grant Thornton, Ireland
establish a primary succession plan and or even the realization that the business
a plan B that match the expected long- is worth more to the owner than the
term performance of your business while purchaser.
allowing for the unexpected.
Succeeding at succession: structuring your transition plan 5

6. The responsibility is on owners to planning perspective, it may not be
protect themselves and be realistic about appropriate from a personal or corporate
value and risk. Understanding the true tax perspective. Care must also be taken
value of your business also lessens the to avoid double taxation when a company
likelihood that you’ll leave money on the operates in more than one tax jurisdiction.
table or allow the purchaser to extract all Yet despite the importance of tax
of the upside. An independent advisory planning, owners must understand that
group can be particularly helpful in the most critical number associated with
removing emotion from the transaction any transition is the net amount they
and ensuring that valuation is both realistic take away. While tax planning can help
and fair. owners arrive at that net amount, tax
considerations alone should not drive the
Dealing with tax issues transition’s structure. Instead, financial
Scenario planning is also an effective means considerations must remain paramount,
“Owners need to determine of dealing with the tax implications arising while conducting tax planning to avoid
the long-term forecast of from the sale or transfer of shares, which any unanticipated outcomes.
can be substantial. Where the owner is able
the business. Any structure to claim the capital gains exemption on the Ask the right questions
you put in place, especially sale of qualified small business corporation Experience tells us that the best approach
if a buyout will occur over shares, this will have a significant impact to succession planning is to start early.
on the tax that has to be paid. Other That helps to avoid surprises and gives you
time and be paid out of the provisions are available that may allow time to gain confidence in and comfort
cash flow of the business, the owner to defer paying tax on any gain. with your decisions. You can prepare
must match the expected Regardless of the personal or corporate for structuring your succession plans by
tax reduction or deferral methods that are answering the following questions.
future performance of the
available, you can’t leave the tax planning
business.” until late in the game. It’s important to Retirement and estate planning:
seek tax advice early and to structure your • Is there a shareholders’ agreement
Kevin Fraser
company appropriately before a change in regarding the disposal and valuation of
Grant Thornton LLP, Canada
management or ownership. This can help shares?
ensure that your succession plan provides • Is your will up-to-date?
every opportunity to maximize your • Do you know how much income tax
wealth. will be payable on your death?
All tax aspects of the transfer must be • Have you made arrangements to reduce
considered, especially the timing. Even the potential liability of this tax?
if a transaction is eligible for favourable
treatment from a transfer tax or estate
6 Succeeding at succession: structuring your transition plan

7. • Do you have adequate health and life Making the most informed choice
insurance? Succession planning is a highly personal
• Will your spouse be financially process. With many options or
independent if you were to become combinations of options available, it can
disabled or die? be daunting for even the most experienced
entrepreneur. Being a once in a lifetime
Wealth preservation: experience doesn’t make the task any
• Do you know how much the business easier. That’s why outside advisers with
is worth? succession planning expertise can be
• What proportion of your wealth is tied valuable.
up in the business? Following time-tested methodologies
• Is there scope for extracting non- that are adapted to each client engagement,
essential assets from the business? the practitioners at Grant Thornton LLP
• Do you hold business assets personally? will collaborate with you—the owner of a
• Do you have a diversified portfolio of privately held business—to help you make “Some vendors are
investments that are not dependent on the most informed decisions. From estate unsophisticated and may
the fortunes of the business? and tax planning to transaction advisory
• Do you actively manage your personal and wealth management, we can help you
leave it to a strategic buyer to
wealth? build an effective transition strategy. With resolve the valuation issues.
Owners of small private businesses
our global reach, proven track record, Those vendors are likely to
integrated suite of services and in-depth
may also want to ask themselves these knowledge of privately held businesses,
leave an enormous amount
additional questions: our practitioners truly act as your trusted of value on the table by
• Do you have a set retirement age? guides to help you navigate the succession allowing the buyer to extract
• Do you have adequate pension planning process.
arrangements? To find out how our professional
all of the upside.”
• Could you afford to retire without advisers can help you effectively structure
Alysoun Stewart
selling your shares in the business? your succession plan, contact your Grant Grant Thornton, United Kingdom
• Do you have adequate wealth outside Thornton succession and estate planning
the business to facilitate retirement? specialist.
Succeeding at succession: structuring your transition plan 7

8. About Grant Thornton in Canada
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