DEFINITION
Business Succession Planning is the process of transferring the ownership and management of a business to another individual or group of individuals. This usually happens due to the retirement, death, or disability of the owner or as a result of other events.
WHY PLAN?
The breakdown of how businesses are currently being transitioned is as follows:
- 42% are passed on to family members
- 19% are sold to a third party
- 17% are sold to management/employees
- 10% are sold to a partner
- 9% have no idea who will take over the business
- 3% of businesses are closed
When transferring the business to family members, studies have shown that 70% of businesses will not survive the transition to the second generation. Even worse, 90% of those businesses will not survive the transition to the third generation. Therefore, the chances your grandchildren will take over your business are about 1 in 10.
There are two main reasons for this failure rate:
- There is no qualified successor.
- There is no formal business succession plan in place.
In fact, for Canadian businesses, only 18% of owners have a formal written Business Succession Plan. Studies across Canada and the United States have also shown that more than three-fourths of current family businesses will have to deal with leadership changes in the next 10 to 15 years.
As we can see, there is a huge wave of change coming, and a very small amount of planning has been done for most businesses. This could lead to a lot of money being left on the table by many business owners.
For more information on business succession planning, read our other article: Why you need a Business Succession Plan
Tom Zaks is a seasoned portfolio manager and wealth advisor, a former business TV commentator, an experienced university lecturer, and the author of three wealth management books tailored to Canadian business owners. The above is an excerpt from his most recent book, The Business Owner’s Guide to Tax and Succession Planning.