VELA Blog

VELA Wealth is pleased to work with a network of established experts who help deliver outstanding outcomes for clients. This month, we’ve partnered with Lorraine McGregor of Spirit West Management to talk about the realities of business succession planning.

What No One Tells You About Business Succession

Is your company ready for succession even if it’s years away? The Globe & Mail is warning business owners to pay attention now, not wait until you want to retire or sell.

To know if a business sale or transfer is possible, you need to come to terms with your circumstances, like these owners did.

Family or Key Employee Really Ready to Take Over?

Dave always promised to give his business to his sons. Last year, it was time. Then three events almost cratered his business:

1. Dave learned that gifting, rather than selling to family, is a main reason second-generation family businesses often shrivel.
2. Dave suggested his sons and key employees buy into the business, learn how to run it and continue in their functional roles.
3. One son quit, not appreciating Dave’s plan. The other declined to buy-in. He didn’t want the personal financial risk required on the buy-out loan, never mind running the company.

Now Dave is now missing a key manager, his dream is dying, and he still has to run operations, even though he wants to step back.

His next step?

Dave needs clarity on what he really needs and wants from this transition. Out of disappointment, he feels like selling now. But the company is not transferrable: how he earns 12% profit margin is in his head, not embedded in a team and systems.

Dave has to face his disappointment to find the energy to commit to a decision: should he close the doors on 150 employees because his sons aren’t cooperating? Or revise his vision so they all have a better future?

Seven Owners + Seven Views on Succession = Angry Stalemate

Like Dave, Ian had told his employees they would be offered ownership in the business. They had helped grow it.

The previous owner had sold his shares to seven key employees who were now the shareholders of a much larger firm. But those shareholders wanted out now. What were their shares worth?

The valuation was a shock: The shareholders demanded to know why, under Ian’s leadership, the company wasn’t worth more.

The basis of the low valuation boiled down to:

1. Too reliant on one customer;
2. Inconsistent profits despite rising revenues;
3. No management team ready to take over from those wanting to leave.

To come to terms with their predicament, the shareholders had to reveal all their interests, and prioritize them, or face no ability to exit any shareholder.

They weighed their priorities against how companies get acquired, how management buyouts work, and why company needs have to come first.

If getting a higher return, faster, was their top priority then that promise to employees couldn’t be fulfilled.

Not easy discussions. They practiced how to listen to each other without judging or fearing that another’s interests were going to trump their own. Was a harmonized solution possible?

Making a commitment to find one was their first joint decision.

Your Next Step

A transition of ownership is not something you lead on your own, or when you’re up against volatile, emotional, or complex circumstances, or involve others. Ask yourself:

1. Do you want a return on investment from your business beyond salary and dividends?
2. Do you want employees and family to have the same sense of future security and peace of mind that you do?
3. Is reducing your risk and increasing your chances for success important?
4. Are you willing to work with professionals to uncover all the pieces of your puzzle to assemble them in a way that works for all?

Dave and Ian came to terms with their circumstances, recognized there was no easy fix and got expert support. By cooperating, Ian and his shareholders found their ideal solution and pursued it to completion.

Dave is still hoping his son returns. In the meantime, he’s committed to making his company transferrable and saleable, just in case.