Experts talk succession planning in a labour shortage

A high proportion of Atlantic Canadian businesses have fewer than 50 employees, but together they represent 90 per cent of all private sector employment in the region. The long-term survival of these companies is obviously paramount to local economic health. However, some surveys suggest just nine per cent of business owners have a written succession plan.

What’s even more disturbing? With Atlantic Canada’s aging population, the near future shows an imminent wave of business owners looking to retire. Meanwhile, in the here and now, companies are already struggling to find staff—further amplifying the crunch for those seeking people to take over the reins. Challenging as the situation is, Atlantic Business Magazine spoke with three professionals who say there are ways to manage the transition.

OPTION 1: Encourage Inhouse Ownership

CM: Two to five years would be a reasonable window. Two years is a target because a lot of tax planning has to happen, and in some cases, things have to be in place for two years to get the tax benefits. And then it just takes time to get through the various steps, to think about what’s right, and what fits the individual owners. Because there’s no one size fits all solution, the owners have to think about what they want to achieve out of it. And obviously, life changes, industries change, economies change, and that can be updated. But really just to have goals in place, and in the back of someone’s mind, is probably going to be of benefit.

CM: Labour issues—every industry is experiencing that now. Some of the advice that we’re giving to our clients, if it makes sense, [is] to consider something like an ESOP, which is an executive stock option plan. It doesn’t always make sense, but when it does, it can be very powerful, in that it basically gives management an opportunity to either have actual shares or to be compensated as though they have shares in something called phantom equity plans. [ESOPs] can be very powerful for retaining and recruiting a high-level management team. We’re seeing more of that, and it’s becoming quite a powerful tool for both owners and key employees.

CM: An ESOP is often a first step in a succession plan. Let’s say you have an ESOP in place… you have a management team in place, and they have been treated like owners for a number of years. Sometimes the management team will just buy out the rest of the shares from the majority owners. Banks typically like that, because [management] has been running the business, they know the business intimately. Another way, which does happen as well, when management has an interest in the business—minority interest, typically—a lot of times other companies, or a private equity group, will be much more interested in that business, because it typically has a strong management team in place with a vested interest in that company. So that usually reduces risk, increases value, it makes it easier to sell or transition.

OPTION 2: It’s time for a family meeting

KA: You always should begin with the end in mind: where do I want to go with this? If this is going to be passed on to my children, or my family, then you have to plan for that. But they say that only 10 per cent of family businesses have a written succession plan. And I’ve been in meetings [of professionals] with over 50 of them in a room, and I said, ‘everyone put up their hand that has seen a written succession plan.’ About six people put their hand up. And then I said, ‘how many have seen two’, and everyone puts their hands back down—[so] 10 per cent is way overshooting.

KA: They say that only 30 per cent of families successfully succeed from one generation to the next, and only 10 per cent make it to the third. There’s lots of professionals out there doing their best, and yet there’s this high degree of failure. And the reason is the soft issues. Fifteen per cent fail because of financials….

Twenty-five per cent is nepotism and the next generation’s lack of preparedness, their lack of education and mentorship. Sixty per cent is lack of communication—no one wants to talk about [succession planning]. It’s the elephant in the room. But if you want to succeed, you really have to plan for it. So if I could get any message out there, it would be that people have to talk about [planning], and they need professional help.

KA: I share models, concepts, ideas about where you start, and, what you need to do. There are processes to be put in place. The simplest thing to do is create a family council, and you create it as a place where they can talk about everything, and they’ve got to be able to do that, or they’re not going to be successful. I educate the family on what needs to be done, and then we bring professionals in to work with them in that area. When it comes together, it’s absolutely beautiful, and I really enjoy working with the other professionals— it can be very collaborative, and it has to be.

Another big area in succession planning is governance. If you have a one-man, one-woman, show, they make all the decisions, [their] kids work for them. How is that going to play in the future, if everyone’s waiting for them to make the decision? When do you start transitioning that? And then let’s say it’s a complicated industry, or you’re very successful because of certain things you do, you’ve got to pass that on, and who’s the advisor to the kids? What happens if mum and dad disappear? So you set up advisory boards and boards of directors. It’s a huge area and why you need to really have a team. And it is long term, it’s not overnight. That’s why the sooner you get started, the better.

OPTION 3: It takes a community

CC: Back in 2015, my wife and I purchased a business in our hometown. It was a pub and restaurant; we were owners and operators for the better part of four years. When we were exiting the business, we were exiting the business because our family was growing. That’s a lot different from what you see as the norm for why a lot of small business owners in Newfoundland and Labrador decide to retire or move on. Still, we struggled to sell our business. I saw a lot of the challenges directly through those experiences as a small business owner, and how difficult it is to have a proper succession plan in place.

CC: When somebody is selling their business, particularly in this province, and very similar nationally, protection of the current employees is fundamentally important. The other piece is yes, small business owners do want to get the highest price that they possibly can. But on equal footing, in Newfoundland and Labrador, there’s more loyalty to the community, so they want to ensure that the business stays in the community.

CC: There’s four ways that this can work. The first one is a bit of a cooperative model. So if the owners of the gas station wanted to ensure they protect the employees, one of the ways to continue the gas station and continue the business in that community is to adopt an employee cooperative model, where the employees work in a cooperative way to run the gas station and share in what that means. It could also be several non-profit organizations or small charities in that region coming together in that shared risk and shared service delivery model.