rick gendemann, cpa, ca - family enterprise succession planning - november 7th, 2013

FAMILY ENTERPRISE SUCCESSION PLANNING

- PASSING ON THE LEGACY -

Presented by Rick Gendemann, CA

Partner

November 7, 2013

Family Enterprise SuccessionPassing on the Legacy

Outline for Today’s Session

Introduction and Background

Goals and Objectives of Family Enterprise Succession

Understand Differences Between Family Business and

Family Enterprise

The Process of Transition in a Family Enterprise Context


Outline for Today’s Session

How to Plan and Execute the Business Transition – What you need to Consider and Address

Review and Summary of Key Points and Observations

Question and Discussion Period


Introduction and Background

Family businesses in Canada employ over 6 million Canadians; an average family business employs over 18 people

Canada’s family businesses employ 4.7 million full-time and

1.3 million part-time workers

Total annual sales of Canadian family businesses: $1.3 trillion

Source: BDO Dunwoody/ Compass Report on Canadian Family Business


Over 40% of family businesses will experience ownership change

in the next five years…. Less than 5% of those have a formal succession plan in place Is your client’s business or the business you work in part of the other 95%?

% of FB's w/Change in Ownership over next 5

yrs

% w/a Succession Plan in Place

0

10

20

30

40


Challenges Facing Business Family Succession

According to a PricewaterhouseCoopers Family Business Survey of 1606 family businesses operating in 35 countries

Lack of Family Strategic Plan:62% of surveyed firms lack of strategic plan

Lack of Common interests:44% of surveyed firms report family members have disparate interests

Source: PricewaterhouseCoopers Family Business Survey 2010/11



Lack of common vision between interested parties

Lack of a communication framework for all parties involved

Difficulty dealing with conflicts

Source: Canadian Financial Executive Research Foundation, 2011



John L. Ward’s 6 Biggest Challenges

1) Maturing business life cycles and increasing competition

2) Limited capital to fund both family needs and business growth needs

3) Weak next-generation business leadership

4) Entrepreneurial leadership’s inflexibility and resistance to change

5) Conflicts among sibling successors

6) Disparate family goals, values and needs

Source: Growing the family business; special challenges and best practices, John L. Ward, Family Business Review. (1997)



Peter Leach’s Four Challenges

1) Lack of communication (conflict)

2) Family members’ employment in the business (Merits VS Entitlement)

3) Business transition to next generation (Succession)

4) Manage change in both the family and the business (changes)

Source: Family Business Rulebook, 2008, Peter Leach


• Changes in leadership of the business may be expected or unexpected when they occur, but they will occur

• Neglecting to include a formal succession plan as part of the overall business strategy introduces uncertainty that could threaten the survival of the business

• Given that 65% of family businesses do not survive past the 1st generation of ownership, largely due to poor succession planning, it makes sense to plan as early as possible

% Not Surviving past 1st Generation% Surviving past 2nd Generation% Surviving past 3rd Generation% Surviving past 4th Generation


How will planning for succession help?

• A succession plan should be an integral part of the overall business plan document

• It will clearly map out what must happen for current leadership to exit the business – how and when this occurs

• Putting a formal succession plan in place will help the family business

– Survive changes in ownership and continue as a successful entity– Identify and address family issues before they become disagreements– Maximize return and wealth preservation and minimize tax liabilities– Ensure an orderly transfer of control and competencies– Prepare the business and future leadership for transition


Goals and Objectives of Family Enterprise Succession

Create long term “ family enterprising” that promotes trans-generational wealth and continuity planning

Creating a culture of “trans generational entrepreneurship”

Develop a process focused on preserving families and preserving family wealth for multiple generations

This level of thinking is much more holistic and focused on linking the overall family vision with the enterprise vision


Differences Between Family Business and Family Enterprise

Family business is generally viewed as a situation where one or more

family members collectively own operating business assets

Operation and direction of the family business may or may not be taking into account the family goals and objectives

Family business typically operates with business interests at the forefront of decision making and future direction


Differences Between Family Business and Family Enterprise

Family enterprise concept is addressed at a higher level

Family Enterprise

Operating Business Assets

(Family Business)Financial Assets Real Estate

AssetsFamily Heirloom

AssetsPhilanthropic

Assets


Family Enterprise Characteristics

Healthy Family Enterprises Unhealthy Family Enterprises

Communications are open and clear Poor communication

Family has the ability to resolve conflicts Family is unable to resolve conflicts

Goals and values of the family are clear Goals and values of the family are unclear

High trust between family members Low trust between family members

Boundaries between family and business Boundaries between family and business

are clear are unclear

Succession is planned early Little thought to succession planning

Functioning independent board of No functioning board of directors

directors


Family Enterprise Paradox:

The Three-Circle Model

Source: Tagiuri, R. and Davis, J.A. (1982) Bivalent attributes of the family firm. Working Paper, Harvard Business School, Cambridge, MA.

Ownership

BusinessFamily


Three Circle Model

Different family members may stand in

different circles of the three-circle model

Family members in different circles may

have different perspectives towards the

same issue

Management of different

perspectives is essential !

Ownership

BusinessFamily


Family Enterprise: Three Dimensional Development Model

Maturity

Expansion

S

Ownership Axis

Business Axis

Family Axis

Maturity

Expansion/Formalization

Start-Up

Controlling Owner

SiblingPartnership

Cousin Consortium

YoungBusinessFamily

Entering the

Business

WorkingTogether

Passing the

Baton

Source: Kelin E. Gensick et al., Generation to Generation: Life Cycles of the Family Business. Harvard Business School Press, 1997


Key Elements of the Family Enterprise

Understanding of the unique family dynamics of family owned businesses

Understanding the family enterprise as an interactive system between the family, business and ownership systems

Understanding the life cycles of the individual, the family, the business, and how different life cycle phases affect the family enterprise model



Recognize the differences between family enterprise strategy and non-family enterprise strategy

Development of family vision and family enterprise strategies that match and support this vision

Assessing the resources of the family enterprise, financial performance and capital, competencies of family members, leadership skills, entrepreneurial skills all in the context of the “family, business and ownership systems”



Using family genograms as a key tool in understanding family relationships and history in a family enterprise

Jack (Dad)Age 68

Betty (Mom)Age 66

John (son)Age 44

Sally(wife)Age 43

Mary (dtr)Age 41

Don (husband)Age 40

Bob (son)Age 37

Cathy (dtr)Age 17

Phil (son)Age 23

Liz (dtr)Age 24

Sales mgrFamily bus.

ControllerFamily bus.

EmployedEngineer

RestaurantOwner

Teacher

ProductionFamily bus.

UniversityMed School

HighSchool

President Office Mgr.


Process of Transition for the Family Enterprise

Need to reinforce with the family that this is a “process” and not simply a transactional based system of various advisory services

Need to create an understanding for the business owner(s) to have a long-term view to promote trans generational wealth and continuity planning for the family enterprise

Clear strategy is essential for multigenerational transition

Early and sufficient succession planning is essential to the success of the family business



Strategic planning (formalized and documented) is needed to balance the Family Business Dilemma for successful transition

Business requirements

and opportunities

Business Goal

Family Goal

Familyneeds and

wants

ControlCareersCapitalConflictCulture



Best Practices: Successful Family Businesses

Three Foundations

Board of Directors Family Constitution Family Meetings



Board of Directors

Active Independent Brings different perspective



Family Constitution

Articulates and sets out the family’s: Purpose Values Policies Vision



Family Meetings

Regularly scheduled family meetings

Improve communication among family members

Build collective decision-making

Members can understand each others concerns and expectations

Build trust in each other

Build conflict management skills to reduce conflict among family members

Define shared values, shared dreams


More Thoughts on Best Practices

Strategic planning Encourage changes Open information sharing Create and conserve capital Prepare successors for leadership Exploit the strategic advantages of family businesses

(e.g. quick decision-making, invest on R&D to seek the reward of patient capital)


How to Plan and Execute the Business Transition

Let’s look at the factors that need to be considered:

What is the current state of the business

What is the family vision for succession

What are the strategic questions to be addressed

Creating the action plan


What is the Current State of the Business

Need to perform a SWOT analysis based around the critical areas of the business (review of strengths, weaknesses, threats, opportunities)

Vision Strategy Structure Culture

Products and Services

Marketing & Sales

People

Systems & Processes

Finance


SWOT Analysis will then:

Identify the current position of the business in each key area

Identify those areas that need development before succession


What is the Family Vision for Succession

5- Star Planning Model

STRUCTUREProject Structure

Organizational Roles

PROCESSWorkflow

Management Systems

STRATEGYVision

Mission/Direction

PEOPLE PRACTICESStaffing & selection

Performance feedbackLearning & Development

MEASUREMENTMetrics/ KPI’s

Rewards

“Family Vision”


What is the Family Vision for Succession

1) How does the strong entrepreneur(founder) see transmitting leadership to a successor generation?

2) What does the business organization chart look like when the founding entrepreneur leads it?

3) How will the structure change when successors join the company?


What are the Strategic Questions to be Addressed

Summary of Six Key Areas

Performance Vision Strategy Governance Leadership Relationship


Strategic Question # 1: Performance

“ Do you want to be an

enterprising family ….. or not? “


Defining the Concept of Enterprising

“ The spirit of enterprising is one that favours growth and leads organizations to investigate opportunity when

expansion is neither pressing nor particularly obvious.”

Enterprising is: The proactive and continuous search for opportunistic growth


Long-term Wealth

Creation ….. Requires a New Mindset

Family Ownership Group:A unified family group with a vision for using their joint economic assets to create wealth across multiple generations

Business Entity:A temporary collection of humanand physical assets that are a vehiclefor creating wealth at a given point in time

• Relationship Capital• Compelling Vision• Unified Risk Profile• Entrepreneurial Skills• Execution Capabilities• Professionalization• Strategies and Structures


Enterprising Families Domain

Source: Enterprising families domain, Family Business Review, 2002

Strategic InvestorThinking

Operational BusinessThinking

ManagerialOrientation

Enterprising Families Domain

EntrepreneurialOrientation

Preservation

Acceleration

Generational

Trans GenerationalOwnership Orientation

Strategic Orientation


Strategic Question # 2: Vision

“ Does the family have a compelling vision

that encourages family unity and ensures

long-term wealth creation? “


Values Driven Leadership

Shareholder GroupValues/Core Commitment

Board of DirectorsOversight

ManagementImplementation

• Values• ROE• Accountability• System Interaction

• Long term investment• -Patient capital• Long term relationships• Accountability• Professionalism

• Continuous improvement• Diversification• Employee empowerment• Opportunities for growth• Long term profitability


Strategic Question # 3: Strategy

“ Does the family understand its familiness advantage and constraints? “


Defining Familiness

“Familiness” is the unique bundle of resources

a particular firm has because of the

interaction of the family, its individual

family members, and the

business with one another.

Source: Adapted from Habbershon, T.G.& Williams, M.L 1999A resource -based framework for assessing

the strategic advantages of family firms. Family Business Review


Managing Your Familiness

- +Competitive Disadvantage

Competitive Advantage

Constrictive Familiness

Distinctive Familiness

Where is the family on thisadvantage/constraint continuum?


Strategic Question # 4: Governance

“ Does the family have the organizational structures in place to grow

and change? “


Thinking Like Shareholders

1. Separate the functional categories

2. Act within defined roles

3. Empower a distinct ownership function

4. Establish structures to manage interaction

5. Mentor successors in the functional categories

6. Plan transition within each of the categories

Ownership

Directorship

Management


Strategic Question # 5: Leadership

“ Does the family have the leadership

processes in place in order to

build a family team

for the future? “


Systems Leader – System Management

Source: Adapted from Habbershon, Williams & McMillian, 2003. A unified systems perspective of family firm performance. Journal of Business Venturing.

Assets/Firm

Individual MembersFamily Unit

“Managing the Interactionsof the Parts”

Outcomes Outcomes

Outcomes

Actions Actions

Actions

Your “Familiness”Advantage


Strategic Question # 6: Relationship

“ Does the family have the relationship

capital for long-term wealth

creation? “


Relationship Capital

The relational reserve of trust, loyalty, positive attributions, benefit of the doubt, goodwill, forgiveness, commitment, and stewardship

motives that allows for effective interpersonal interactions and long run family health.


Creating the Action Plan – A Written Deliverable

After having gone through and addressed the strategic questions

and once the succession planning options are agreed upon,

a formal written succession plan will need to be

developed and incorporated into the

overall strategic business plan


Creating the Action Plan – A Written Deliverable

The succession plan should include:

The expected exit date for the founder/leader

A detailed description of the options and direction chosen and why they were chosen

Ensure completion of those elements needed to get the business ready for succession

Develop the action plan that includes timelines, milestones, and responsibilities for preparing the business and actually completing the succession process


The Final Product: A Formal Succession Plan….

The final decision to implement should now be a highly satisfactory step forward for everyone

The final product is a written succession plan that clearly communicates everyone’s role going forward

It acts as a contract between stakeholders…. A promise to support the plan

Once the plan is implemented, it must be periodically re-examined to ensure it is on track and remains in the best interests of everyone involved


Review of Key Points and Observations

Family enterprise concept

Family enterprising mindset to promote trans generational wealth and continuity planning

Three circle model (interaction of ownership, family and business)

Gaining an understanding of family dynamics – family genogram


Review of Key Points and Observations

Assessing where the business is at today (SWOT analysis) and vision for it going forward for multiple generations

Six key strategic questions to be addressed:

Performance, Vision, Strategy, Governance, Leadership and Relationship

Importance of early succession planning; it is a process not a transaction

Giving the plan life and direction for the family and the business


A Few Closing Quotes

“If you don’t know where you

are going …. Then any road

will get you there.”

- The Cheshire Cat


A Few Closing Quotes

“The plan is nothing,

PLANNING is everything!”

- Eisenhower


Closing Comments

Thank you for your time today. I hope this session has given you some insight and tools that will help you assist your clients in their family enterprise succession planning.

Questions, comments and thoughts?


Notes Page

rick gendemann, cpa, ca - family enterprise succession planning - november 7th, 2013

Business

family business review

family business rulebook

family wealth

family needs

family enterprise context

background family businesses

overall family vision

address family issues