The succession planning dilemma:  selling versus leaving your business to your family

Across Canada, our industry today is characterized by hundreds (if not thousands) of family-owned businesses. They’ve endured and have become an integral part of their local communities. They’ve served with pride, dignity and a genuine desire to go above and beyond when it comes to service – not only to protect their family name, but also their unique brand. For these businesses, intelligent succession planning can sustain their company and keep it profitable in the future. But few family business owners are doing a good job preparing to turn their shops over to their sons and daughters. No matter how accomplished the children, there may be questions about whether they can run the business as effectively as their parents.

Most family print shop owners find themselves so involved in day-to-day operations, that they’re not giving succession planning a second thought. Without it, the business impact could be disastrous and family members can end up having heated disagreements and even legal issues that could ultimately tear them apart. If you’re a shop owner, the earlier you can start planning for a family transition, the better. Experts tell us that you need at least 10 years (yes, a decade) to properly plan for succession. Why?

Well, there are several reasons – not the least of which include estate planning, taxes, liability, ownership, voting rights, management training and much more. Many of the pitfalls are unforeseeable. Then there are family dynamics issues. Which child will be chosen to take over and will there be sibling rivalries or jealousy? Does he or she have the necessary experience, expertise, work ethic, business acumen – and above all, desire? According to a PwC (PricewaterhouseCoopers) 2016 survey of family businesses, of those expecting to change ownership in the next five years, only 52% plan to keep the business in the family, down from 74% in its 2014 survey – and the lowest number since 2010. Of the family businesses expecting to change ownership more than five years into the future, just 69% plan to keep their companies in the family, compared with 79% in the previous survey.

Get an objective family business advisor

Across the board (assuming that your children are interested in owning and running your family business in the first place), you should seek out an objective family business adviser to help make the succession both smooth and successful. He or she can objectively point out the advantages and disadvantages, and be especially helpful in drafting the necessary succession documents. Or, partner with a firm experienced in the intricacies of succession planning. According to PwC, just 23% of family firms have a “robust, documented plan.” Here’s another issue quite common in our industry that’s dominated by middle-aged and older males. Once you do hand over the company to your children, please, please, please let them run the day-to-day operations – not you! Sure, you can be on the sidelines ready and willing to give advice, but your children actually need to make some mistakes, learn from them, and ultimately figure out how to do things their own way.

Finally, the best family succession scenarios have come when every family member involved in running the business participates. Never fall victim to “picking favourites.” As family business consultant, coach and author David Bork said in his helpful book The Little Red Book of Family Business: “Succession is about continuity of the business as a viable economic unit, not who sits in the corner office. But he also added, “It is possible that a non-family professional is the best person to sit there.” This brings us to our next – and currently more popular – option.

Selling your business to a non-family third party 

Large, medium and small companies dominate Canada’s commercial printing industry. But what happens when aging owners want to retire and wish to hand off their businesses to their children? The surprising reality is that the majority will sell their business to a third party rather than pass along the assets to their children. Brian Trainor is Vice President of Geneva Merger & Acquisition Services of Canada, headquartered in Toronto. Over his 16-plus years with Geneva, he’s seen some key trends emerge within privately-held Canadian businesses. Most revealing has been business owners selling to a third party, rather than passing the business on to family members. In fact, the CFIB (Canadian Federation of Independent Business) found that the majority of business owners (51%) considering an exit strategy plan to sell to a third party – while about 30% plan to sell or transfer to family members.

“Based on our experiences, I’d say that the actual results are skewed even more towards selling to a third party,” said Trainor. “For nearly all privately-held businesses, these two options are the only choices an owner has – the exception being a sale to other partners or to an employee group. But these situations are exceptions and not available to most owners.” Trainor sees four major reasons why owners today favour selling to a third party, rather than a sale or transfer to family members.

  1. It’s all about life balance. Generally speaking, today’s younger generation had a much more balanced lifestyle than their parents. They’re prepared to work very hard, but don’t intend to make the extreme sacrifices or take on more risks than their parents did when building the family company. Their lives revolve around work, family, health and social activities – rather than the grinding workload so prevalent today. So, in many cases, it’s the children that actually reject succession and prefer instead to carve out their own careers. “We’ve had several clients who’ve had children in senior roles in a business, obviously being groomed for succession,” Trainor added. “But when the time came to declare their intentions, they told their parents that it would be a better option to sell to a third party, rather than risk the future of the business and their parent’s retirement on them.”
  2. Managing parents’ needs and expectations. For most owners, the business itself is their most valuable asset, and should fund their retirement while providing a comfortable lifestyle. They have no appetite for risks and the resulting stress during retirement. When you put these factors together, family succession may not be a viable option. Most inter-generational sales require some commitment of seller support (i.e. parents/sellers holding notes to finance the purchase) and repayment of these notes is usually dependent on performance of the business being maintained by children after parents retire. While selling to a third party can also involve vendor notes, these transactions are typically done in cash at closing, which is less risky for the seller. As a result, quite often both conclude that it’s not worth risking their personal relationship by putting the responsibilities of retirement funding on the heads of the children.
  3. A highly competitive environment. In today’s printing industry, cutthroat competition and thinner margins are still prevalent. Parents know this first-hand. Even with the most capable of children running their operation, they may be extremely nervous if their retirement funding is dependent on the future cash flow of the business under their children’s management.
  4. Expanded base of buyers. In today’s M&A world, a thorough buyer search is needed to ensure that the best deal is available to a print shop owner. The good news is that the buyer base has expanded significantly in the past 10 years. A growing number of Private Equity Groups (PEGs) now number more than 3,000 in North America alone. We’ve also seen several examples of these buyouts involving major vendors in the printing industry over the past few years – the most recent being the sale of Kodak’s Flexographic Packaging Division to European-based Montagu Private Equity. The knowledge that there’s now an expanding base of well-financed buyers can be a compelling reason to sell to a third party versus selling to family members.

The bottom line

If you’re looking to leave your business to family members down the road, the time to start planning for the transfer is now, as experts suggest that you allow an average of 10 years to get everything in order. Seek out an objective family business advisor or a well-established firm that deals with succession planning. Then talk to their former clients. Remember, according to PwC, only 23% of family firms have a “robust, documented plan.”

Alternatively, if you’re looking to sell your shop rather than pass assets along to your family members, partner with a company that has experience and success in this specific area. Brian Trainor can be reached at brian.trainor@gencan.inc. Or, for more information please visit www.gencaninc.com.

 

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Tony Curcio is the editor of Graphic Arts Magazine.