Passing along a business is among the most multifaceted of wealth transfer challenges, balancing finances and family dynamics.GETTY IMAGES
The family business may be a driver of wealth for many Canadians. Too often, their plans for future growth have a blind spot: succession.
Simply put, many families neglect business transition planning. A 2023 study from the Canadian Federation of Independent Business found that only one in 10 business owners has a formal succession plan in place. That’s problematic given that business succession, especially ones involving passing ownership and leadership from one generation to the next, don’t happen overnight.
“A lot of conversations need to happen about many different issues, often over many years,” says Patrick O’Connor, chief executive officer of Blackwood Family Enterprise Services in Winnipeg.
Any wealth transfer can have complexities, but business owners face particular challenges. Yet, many aging business owners delay even getting started. It’s often incumbent on wealth advisors to nudge this planning to the forefront.
One reason for reticence is the sheer number of factors to consider. The technical strategies alone require bringing together many financial professionals, from tax to estate planners to legal. Then, business owners must decide how to structure the business and its assets.
Among those choices are whether to employ an estate freeze whereby parents lock in the current value of their ownership stake. Mr. O’Connor explains that the process typically involves issuing a new class of shares at nominal values to the adult children, who benefit from future growth of the business in their ownership stakes.
Technical matters aside, the family dynamics at play can add to the challenge and stress. Chief among the considerations is determining whether adult children want to own, let alone lead the business.
“It’s much more emotionally charged and complex than passing on traditional wealth assets,” says Nader Hamid, wealth advisor and portfolio manager with TWM Group at iA Private Wealth Inc. in Pointe-Claire, Que.
He adds that succession for a business generally isn’t a simple transaction because it isn’t a liquid asset.
“It’s like a living entity with employees, clients, a legacy and brand. And it can be very difficult to split three ways among the kids and be done with it.”
Many aging business owners aren’t at the point of discussing succession with their children because they have yet to contemplate their retirement, says David Baker, a wealth advisor at Nicola Wealth Management Ltd. in Vancouver.
“Inevitably, a decision must be made, whether that’s selling to a third-party or passing it to the next generation. You don’t want to find out that they have no interest at the last minute,” he cautions.
Particularly with respect to leadership, a successful transition often requires years of planning, involving adult children working in the business, receiving relevant post-secondary education and then taking over gradually.
“The challenge for a good advisor is to identify the needs much earlier than the owner,” Mr. Baker says.
As discussions touch on many facets of wealth planning and require a multi-disciplinary team, the wealth advisor’s role often involves making sure that the various professionals working with the business owner communicate. The goal is to have every part of a plan working toward a common vision. “There’s a lot of co-ordination,” Mr. Hamid says.
Communication between generations is most critical, ensuring that the business owner’s vision of the business aligns with their adult children’s plans for their future. While those discussions can be uncomfortable, they should be framed as an opportunity to strengthen family unity and grow the business and family’s wealth for generations to come, Mr. O’Connor says.
As a cautionary tale, he references television programs such as Succession, which revel in sibling in-fighting over the family business.
“Dysfunctional family businesses may make for great TV, but it shouldn’t be the reality,” he says. “There are all kinds of true success stories that better serve to guide clients’ succession plans.”