Succession Planning: An Opportunity & a Challenge
The succession issue for small and family-owned businesses has grown due to the large number of small business owners nearing retirement. Studies in places as diverse as Australia and Quebec, have demonstrated that well over 50 per cent of small and medium sized businesses will face this challenge in the next ten to 15 years. At the same time, the overall percentage of employees working for small and medium-sized businesses has grown. There are currently 124,000 family businesses, each with sales of $1 million or more, in Canada. These companies employ about six million Canadians and generate as much as $1.3 trillion in gross annual sales. (Financial Post 2001) Successful successions are important not only to those immediately involved but to the economy at large. They are also important, not only to the owners and their families, but also to the many key stakeholders whose economic well-being is linked with these businesses. These stakeholders include: employees, managers, customers, local unions, suppliers, lenders and local communities that need the goods, services and the employment generated.
A cursory look at the information available on the topic of succession soon brings you face to face with the reality that only about one-third of all small businesses make a successful transition to the second generation in the family. Although there are no definitive reasons for this, there is no doubt that the complexity of developing and carrying out a successful succession is a major factor. “For retiring family owner-managers, the transition to retirement is even more complicated as personal issues are generally intertwined with issues of leadership succession and development, business continuity and viability, ownership and wealth transfer, organizational governance and family harmony.” (Journal of Financial Planning) Besides the complexity, another key factor is that a great number of business owners avoid succession planning until the last possible moment. This leads to a limited and inadequate approach for implementing an effective succession plan.
The experience of RoyNat Capital Inc., a Canadian merchant bank, should interest those considering succession options. “Our experience as a merchant bank, which is supported by U.S. studies, is that 70% of family businesses do not survive to the next generation. The odds are little better – just 50/50 – when the business is sold to an outside buyer.” (R. Reynolds, Financial Post). These statistics are sobering news for business owners who are planning for a family succession. The challenges are significant if they hope to see their children and enterprise succeed well into the future. On the positive side, there is
another succession option that has a significantly greater chance of success – the employee/management buyout. “Successions involving leveraged employee buyouts, supported by key managers, succeed in about 80% of the cases.” (Ibid.) This option has
the potential to serve the retiring owners and their families, as well as their existing employees. This paper will focus on this employee/management option from the vantage point of one particular form of employee/management ownership, a worker co-operative.
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