Week 7

Question 1

When should a family business start their

succession plan?

Answer 1

As soon as next generation family members start working
full-time

Typically, the process doesn’t start until the older
generation is thinking about or planning its exit

This is WAY too late

The next generation has likely not been groomed properly

This will lead to a lot of conflict, especially if the next generation has
not learned how to make decisions together

The sooner you start, the better!

Question 2

Awareness

Step 1

Answer 2

u To inform the family (at least all the active family
members) of the overall
process and goal (what they
can expect).

Ideally, you include the entire
family (active & non-active)

 Can be used to gather all
pertinent information:
u Shareholders’ agreement
u Life insurance
u Wills
u Marriage contracts

Question 3

Individual
interviews
(Step 2)

Answer 3

One-on-one interviews with all family
members

Start with the owners followed by all active
family members

Followed by non-active family members

Including spouses, in-laws an children over the
age of 14 – 16 (children can be done in groups)

Can also interview some key non-family
managers

May need a 2nd interview with active family
members in order to clarify and confirm the
findings from initial interviews

Question 4

Succession report (Step 3)

Answer 4

Based on the interviews, a report, or essentially the
recommended succession strategy is developed

This report usually includes 4 main sections:
u Part 1: Current situation as we understand it
u Part 2: Draft set of guiding principles & their application (Chapter5)
u Part 3: Draft set of family business rules (Chapter 6)
u Part 4: Listing of shareholder agreement issues that need to be
considered (Chapter 8)

Question 5

Guiding principles

Answer 5

Need the family to endorse
principles in order to move
forward Helps make decision-making related to family members objective

Applying these guiding principles facilitates the discussion pertaining to the specifics/details of the succession plan

Perceived success

A strong and well-managed family can take a weak or
mediocre business to prominence and prestige but a weak or dysfunctional family will eventually dismantle the strongest and greatest of businesses

Professionalizing the family business
• Often needed once the 2nd generation has entered the
business
• Harder for any next generation to lead without formal
processes and procedures
• Can’t do it all like the founding generation
Professionalizing the family business

Restricted ownership
• Keep the ownership in the family (direct descendants
only)
• Meaning no spouses or in-laws (requires pre-nuptial or
marriage contracts

Family business ownership

• This is a key principle for success
• Only active family members in senior management can become
owners
• No non-active shareholders meaning all the owners work and
understand the business

Opportunity versus entitlement (managing expectations)

• Important to reduce conflict and increase the chances of
keeping the business alive
• The family business should be considered an opportunity NOT an inheritance

Compensation for active family members
• Should be based on FMV (not equal or based on
need)
• Need to be clear what benefits are included
• Compensation philosophy should be shared with
entire family so that expectations are clear

Exit Strategies
• Death, incapacity, termination, voluntary exit
• The terms and conditions to each of these need
to be outlined in the shareholders’ agreement
• Typically involves an estate freeze (as outline in
class 5)
Exit Strategies

Governance

For the family and the business (Chapter 7)
• Family council meetings (entire family)
• Family business meetings (active family members)
• Management table (next gen, if required)
• Management meetings
• Board of directors
• Board of advisors

The door is never closed

• It’s never too late to join the family business
• Don’t want to force family members to make this decision before they are ready

Question 6

Application of the guiding principles

Answer 6

This is where the actual issues in the
business are solved using the endorsed
guiding principles

During the interviews I ask the family members about most of these principles

Sometimes the client doesn’t like the recommended course of action, but since it is linked to a guiding principle
that they endorsed they usually come around to realizing it’s the best
solution

Don’t want to give shares only to active siblings, but they endorsed
Opportunity vs. Entitlement

Question 7

Professionalizing the family

business:

Answer 7

u Assessing family managers
u Performance reviews
u Employment contracts
u Service contracts
u Organizational chart (appropriate chain of command)
u Job Descriptions
u Annual compensation reviews
u Corporate culture (dress code, mission, vision,
values)

Question 8

Restricted ownership

Answer 8

Who can own shares of the family business?

Only direct descendants of the founders
(XXX)
u Potential pool of owners can now be clearly identified

Can name all the potential owners (meaning it becomes clear to spouses and in-laws that they will not be considered for ownership)

A key recommendation or application:

Need for all potential owners to get a marriage contract – much easier to mandate before the potential owner is
married

The next generation should be made aware of this early on

Question 9

Family business ownership

Answer 9

Only family members in senior management for a
number of years (at least 5 in management with
10 years in the business) can become owners

You can now name any next generation family members that have qualified or that will qualify in near future

All potential owners need grooming plans to become competent owners

Can also explain an estate freeze and how the
next generation will obtain shares and how the
older generation will be paid

This is often a key missing piece for the whole family (important to explain)

Question 10

The door is never closed

Answer 10

In other words, the door is always open meaning as long as a family member meets the employment criteria and there is a
position available, family members can join any time

Family members will only be hired if they have a skill that is required
by the family business

No need to force family members to make decisions about their future in the family business right away.

Family council meetings – with the entire family is a great place to discuss employment opportunities so all family members can
consider their options (irrespective of age)