Alarming number of business owners don't plan enough for the inevitable, say experts

With a successful and growing business, Ottawa entrepreneur Irene Martin seems to be in an ideal spot.

Succession planning experts, however, say that she and business owners like her need to ensure they have a formal transition plan in place. And according to a recent survey, too few do.

Fourteen years ago, Ms. Martin, a former nurse, founded Retire-At-Home Services Inc., catering to the needs of seniors who want to postpone or avoid a move to a nursing home.

Now with almost 200 employees, a solid reputation for TLC and franchising ambitions, the "not-60-yet" Ms. Martin is looking to slow things down and pass most of the day-to-day administration to someone else.

Her son, executive director Jonathan Martin, is educated, experienced, and interested in carrying on. While Ms. Martin has made use of some succession planning seminars at industry associations, she's postponed seeing a financial planner to formalize plans.

That, say experts, is the problem.

A recent PricewaterhouseCoopers (PwC)survey showed that about 54 per cent of Canadian private companies did not have a formal succession plan in place.

Small- to medium-sized firms are particularly bad: once respondents with revenues of more than $10 million are removed from the equation, the number jumps to 70 per cent.

There's a certain irony in business owners spending years, often decades, building a business to a certain level, but not dedicating enough time or thought to the inevitable: his or her exit from the business.

"The primary shareholder becomes sick, has a scare health wise, is interested in retirement – that's when they tend to look at (succession plans)," said PwC's Lois McCarron-McGuire

While most respondents, like Ms. Martin, had plans to pass the business on to a family member or someone else, most had not visited with a planner. The problem is so acute, the Canadian Federation of Independent Business last year launched a nation-wide alert, urging its membership to sit down with planners.

It all comes down to owners and founders receiving the best return after a lifetime of work, said Ms. McCarron-McGuire.

"When you look at the number who don't have a succession plan in place, you wonder how they're going to do that," she said.

Without a plan, owners could be forced to sell at a discounted price to the competition, risking jobs and the original owner's good legacy, even if family members initially seemed willing to take it on.

"One consideration can be a financial risk," said PwC colleague Zoran Vranjkovic. "When you're selling to a third party, someone unrelated, he can pay the money up front, and have guarantees in place to make sure you get that amount. When you're selling to children, that's not the case."

It could take children years to pay back the parents, he said, making it even more vital that the progeny stay interested and keep the firm profitable.

"It's (the owner's) retirement fund" after all, said Ms. McCarron-McGuire.

With an aging population set to retire en masse over the coming decade, planning right is becoming even more vital. BMO predicts more than 50 per cent of today's business owners will retire over the next 10 years, and two thirds of the PwC survey's respondents stated the CEOs and owners of their companies were between 51 and 70 years of age.

Often, a business can take up to three years to get its ducks in a row towards a solid succession plan, Ms. McCarron-McGuire said.

Family-run business are even trickier, said Mr. Vranjkovic, as obligations and responsibilities get in the way.

"We had one client. She had a career in mind, her father had a business. He passed away, she felt obligated. She's still running that business, but she's not happy. It has provided her some wealth, but she's not really happy."

Ms. Martin said she is confident her son is more than mildly interested.

"He came out of university with a business degree, and even before that, he was dabbling in the business (which) started off in the home," she said. "He was always hands on with me, so it was a natural progression for him."

But, she added, there are other issues to consider, including her other kids.

"We know instinctively that it will be passed on. But when you have three children, it's not as easy. With succession planning, you have to be careful. Just because they're not interested right now, doesn't mean they won't be a few years on.

"You want to make sure it's equal."

The PwC planners advocate starting the succession planning well before owners think it's required.

"Depending on a number of factors, planning for your business to be bought out could take anywhere from six months to three years," Ms. McCarron-McGuire. "It's a renewal process, because as your customers change, the in-house requirements may change."

Owners should get a handle on a company's value drivers, she said, which are aspects that make a business attractive to buyers. In some cases, it's the relationship the particular business has with its clients. In others, it's a reputation for quality products.

"When a business owner sits back and says 'this is what's important,' then the business owner can put in the right sorts of things to make it attractive to a buyer," she said.

Ms. Martin has evaluated her value drivers, and said the company has sufficient customer and client goodwill to persevere without her at the rudder.

"We have about 170 employees and a lot of clients. We have a very small portion of the market (so) a lot of room for growth. And of course, the senior's market – it's just the tip of the iceberg.

"We've really cemented our mission and our philosophy. The people we have hired ensure that . . . I really believe it will go on, as long as you keep the people that will share the philosophy."