In this blog I’d like to remind readers that the idea of “keeping it in the family” is still the most common response business owners provide when asked what they would like to see happen to their business after they have passed away. In fact, many business owners initially think that they will pass the business onto the next generation, usually their children. Having been involved in this discussion often, ensuring that this statement translates into reality is fraught with many challenges along the way.
Notwithstanding that intergenerational transfers account for roughly 60% of all succession strategies and is usually the first choice, statistically a majority of those successions do not survive. In fact, statistics suggest that 90% of these transitions do not survive. The phenomena is consistent across cultures and geographic locations, bearing proverbial names such as shirtsleeves to shirtsleeves in three generations, rice paddies to rice paddies in three generations, and from clogs to clogs in three generations. The consistency of the theme suggests that regardless of the differing legal structures of family businesses across jurisdictions, its ability to successfully transition has its own unique frailties that must follow from the only common feature among all family businesses – human relationships.
Recently the ability to successfully transition a private business to one’s children has been hurled another challenge. This challenge takes the form of the recently released proposed changes to the Income Tax Act which were introduced on July 18, 2017 and have received much negative public attention (the “Private Company Tax Changes”). For more information see my blog from July 21, 2017.
Much has been written about the potential negative impact the Private Company Tax Changes will have on the ability of family businesses to transition to family members in a cost-effective and efficient manner. It is not the goal of this blog to add to this dialogue. Rather, the purpose of this blog is to remind those readers who do have a private enterprise within their asset structure to take time to develop a formalized succession plan.
Part of any formalized succession plan ought to focus on understanding the distinct interests and needs of each of the three systems that are at play in a family business – the family system, the business system and the ownership system. Within those overlapping systems is the challenge presented by lack of open communication. The lack of open communication is perhaps the single biggest challenge that arises in the ability to successfully transition a private business to the next generation. For more information on the Three-Circle Model click here.
Opening the lines of communication within the family and ensuring regular communication among family members, is perhaps the single, most-important step a business owner can take to keeping family relationships and the business healthy. Healthy family relationships is the key to ensure the ongoing success of their business. Some actions to consider taking in opening the lines of communication are:
- Establishing a family council;
- Working with a family facilitator;
- Developing a family participation plan.
Ultimately it will require open-minds and the ability to compromise on the parts of all family members. In the long run, however, the effort will be worth the investment.
 A saying that is often attributed to Scottish born, American industrialist and philanthropist Andrew Carnegie, who himself was perhaps the wealthiest individual ever given the sale of his steel empire to JP Morgan realized US$401Million in 1901. See https://www.carnegie.org/interactives/foundersstory/#!/
 The Three-Circle Model was first published in the Family Business Review in 1982 in Taguiri and Davis’ classic article Bivalent Attributes of the Family Firm.