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The surprising complexity of business succession

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For business owners, one of the keys to achieving long-term financial wellness is to develop a plan that allows them to eventually leave their business behind and retire—or transition to the next phase of their always-busy lives. Because entrepreneurs typically lack any kind of formal pension, their corporation and personal assets are their golden-year nest egg. So for the majority, tapping that equity to fund their retirement will involve an eventual exit from their business through a sale, or by passing it along to the next generation through a well-orchestrated family business succession strategy that could involve a sale or transfer of corporate shares to family members.

But succession is about securing more than their financial future. In fact, it’s rarely just about the payout.

While many founders dream of growing their business and achieving organizational and financial success, a sizeable portion also hope to leave a lasting entrepreneurial legacy that extends well beyond their time running the company. For some, there is a certain pride in not only creating jobs, but also seeing their kids take the reins and (hopefully) take the business to the next level. Others take joy in knowing the corporate brand they’ve built will carry on without them under the guidance of a non-family management team, delivering products or services and keeping their people employed for years to come.

The succession process is poised to play out more as the COVID-19 crisis pushes a surging number of burnt-out CEOs (including business owners) to the exit doors. A 2021 survey by HR consultancy Lifeworks found that 82 per cent of senior leaders in Canada reported being mentally and physically exhausted by their pandemic-era workload, and 51 per cent are considering departing their organizations through a resignation or retirement. For others—including many aging Baby Boomers—it may simply be time to call it a career.

But if the satisfaction of implementing a coherent succession strategy is undeniable, so are the challenges in making it happen.

The psychology of succession

What eludes many business owners is the sheer complexity of the people side of succession: competing internal ambitions among leaders within their company, kids’ ambivalence to the family business, industry indifference to a potential acquisition. They assume that a son or daughter will choose to take over the company as they wind down their involvement. But what happens when the kids aren’t interested? Others might groom a non-family successor within the business that leaves before their time comes to assume a leadership role, or simply doesn’t pan out as a future CEO. Many picture a lucrative sale that never happens, or is much less than the substantial windfall they’d imagined. In fact, in many cases, continued ownership of the business generates more revenue (and makes more sense) than a cash sale.

Others struggle with the transition to something different. The psychology of succession presents more challenges than many expect because a great part of their personal identity is tied to the business. That’s especially true in family ownership situations. After building their business over years or decades, it’s hard to leave their ‘baby’ behind.

Not only do many CEOs struggle with filling their time and figuring out what do next, they want to ensure they maintain a sense of purpose. Creating jobs and giving back to their community not only feels good, it becomes just as important to them as bottom-line performance. When that disappears, a personal gap emerges that becomes difficult to bridge.

Another major hurdle is the fact that so few have time to formally draft a succession strategy. According to a 2021 PwC survey of business owners, only 34 per cent have a “robust, documented and communicated succession plan in place.”

Another survey conducted by the Canadian Federation of Independent Business in 2018 captured business owners’ succession concerns.

While it found that 48 per cent plan to sell to a buyer outside of their family (25 per cent say they hope to sell to family and 21 per cent intend to transfer the business to family through inheritance), 56 per cent said that finding a buyer was their biggest succession worry. Putting a value to the business was a key issue for 48 per cent of business-owning respondents, while 40 per cent worried that the degree of their day-to-day involvement could impair the sale of the company. In that latter case, owners considered themselves so intrinsically tied to the business that it can’t function without them.

Most notably, about a third said they didn’t even know how to start building a succession plan. And that’s why it’s crucial that entrepreneurs prioritize putting together a strategy to one day exit their business. Our next blog explains how.

The Bridgewell Team

Contact a member of the Bridgewell team now to discuss your business succession and personal financial planning needs.

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