Succession Planning – Are You Setting Up Your Family for Success or Failure?

Are you among the 12 million Canadians that have no will and testament? Worse yet, do you operate a marina or dealership and have no clear succession plan in place? If so, you certainly aren’t alone, but you should be worried.

If you’re plan consists of handing over ownership of your company to the next generation – statistically speaking – you might be setting up your family for financial hardship, which is certainly the last thing any loving parent has in mind when providing their offspring an inheritance.

Thomas William Deans, a public speaker and author of Every Family’s Business and Willing Wisdom (which made the New York Times 10 Books Business Owners Should Read list), has been preaching succession planning for years. He believes what he calls ‘the traditional method’ of handing the business to the kids after retiring is not shrewd and is an antiquated approach to succession planning.

“Often the business owner will semi-retire, not really working for the business every day but continue to draw a salary from the company until they pass away,” says Deans. “After that, the marina’s shares would transfer to a surviving spouse. Statistically, they often pass away a few years later, leaving the shares to the estate, which is often divided equally among the kids, putting them in business together as equal partners. This strategy simply doesn’t work anymore.”

A Changing Landscape
Canadian families have changed over the years. A drop in our national fertility rates following the baby boom, combined with an increase in lone-parent families, has resulted in a lower average of kids per family. According to Stats Canada, the average number of children per household has decreased from 2.7 in 1961 to 1.9 in 2011. Although smaller in size, those fewer children tend to be increasingly educated. Additionally, the average lifespan has increased, meaning many business owners are living well into their eighties and even nineties.

Deans says this can lead to multiple generations standing in line to receive an inheritance. “This makes the situation more complex,” he explains. “Three or four generations can be working together within the same business, causing more potential conflict and confusion between family members about the future of a business. The younger generations will often become frustrated and leave the business ‘high and dry’, which can drain it of management depth.”

Deans’ name might be familiar to some in our industry who were present for one of his eye-opening presentations at the Boating Ontario Conference and Expo in 2009 or at the Marine Dealer Conference and Expo in Orlando, Florida in 2014. In the recreational marine space, most of Deans’ audiences consist of family-owned marinas.

Deans often asks his listeners to envision an all too typical scenario. “Fast forward to mom and dad being in their sixties, seventies or eighties,” he says. “The kids are in their thirties, forties or fifties trying to figure out how the family business should transition. Not all of the kids are in the business but a number of them have an interest. Figuring out how to divide the inheritance isn’t easy, although the parents often want it to be equal. Starting the conversation isn’t easy and the chance of damaging relationships is definitely a risk.”

In addition to advocating the creation of a succession plan, Deans’ books also admonish owners to avoid gifting their business to their children. “Don’t gift it at a discount and certainly not for free,” he stresses. “If the children want the business, they need to do what the founder did and risk their capital.”

Deans suggests the next generation should instead buy the business from their parents. If their parents pass away, they would take over the operation of the business and retire any outstanding debt they owe against the purchase. “The risk of their own capital authenticates that the next generation has a passion for the business. If they’re not willing to ‘put skin in the game’, they probably don’t really want to buy it.”

Generally speaking, Deans says about 30 percent of family businesses in North America transition to the second generation. “Of that 30 percent, only 10 percent make it to a third generation,” he explains. “They simply liquidate or go under.”

Deans says the typical transition of a business usually proceeds as follows: the founder passes away, leaving the business to the spouse. The spouse passes away, passing the business down to the children. “This is when capital gains taxes are triggered,” says Deans. “In many cases the capital appreciation on real estate, especially for a marina, is huge.
“Let’s say a marina’s property was bought in 1965 on prime real estate, not even factoring in the growth of the business. It could potentially leave a huge tax liability for the next generation. So what do the kids do when they get their tax bill from the Canadian Revenue Agency within weeks of the parent passing away? Often they try to reach within the company for the funds to pay their tax bill, and unfortunately, many of those marinas don’t have the free cash flow to cover the expense. As a result, the business fails within the hands of the kids and everyone rushes to judgment saying, ‘there’s another example of lazy spendthrift children with no respect for the parent’s business.’”

Deans believes the true blame falls squarely on the shoulders of the business’ founder or owner who failed to plan for such an eventuality. In a lot of cases, he says owners ignore their succession planning until a major health episode and then scramble to create one. “Sadly, they run out of time.”

Although Deans advocates the arranging of a payment plan that enables children to purchase the business from their parents over many years, he believes there are alternatives. “I’m indifferent as to whether a business is sold to family members, key employees or outsiders,” he explains. “My central message simply is: you can’t take your business with you, you sure as heck can’t operate it from the grave, so sell the business while you’re still healthy so your family isn’t burdened with it.”

If a business has no in-house buyer, owners need to get out and begin searching for a strategic buyer such as another marina/dealer or a private equity firm.

A lack of succession planning is a global issue that transcends the marine industry. “At the end of the day, every business owner needs to consider, who will buy my business when I get older? And if they do nothing and pass away, what will happen to my family?”

If your marine business has no succession strategy, make an appointment with a financial advisor. After all, when it comes to planning, time can either be your best friend or your worst enemy.