SUCCESSION

Going Out on Top
Six Ways to ensure that your Fortunes are set, your family is satisfied, and your company succeeds

1992, Henning Freybe became a fifth-generation owner of the family business when he took over from his father. The president and CEO of Langley, B.C.—based Freybe Gourmet Foods recalls being handed the reins in the old-fashioned manner—with little advance planning. "It was absolutely loose and ad hoc," says Freybe, whose company sold $75 million worth of sausages and deli meats last year. "I definitely knew that I would not want to do it that way."

So, six years ago, Freybe started developing a succession plan for his son Sven, who joined the 350-employee firm in 1995 and is now vice-president. To quarterback things, he retained Willy Fournier, principal of Montreal consultancy Ajawaan. Freybe, 64, says the original goal was simple: "It was to lay out a framework that not only prepared my son and management team for taking over responsibility for the company, but one where we would look back 10 years later and say, 'We did the right thing.'" Now that the plan is in place, 35-year-old Sven Freybe will succeed his father as president in 2009.

The Freybes may have begun with a simple objective, but succession is a complex process that can inflict financial and emotional wounds. Just ask the Bronfmans, the McCains and the Billeses, who fought among themselves for control of the family firm. Still, many small businesses fail to take succession planning seriously. In a 2006 survey by the Canadian Federation of Independent Business, 66% of the owners of small and medium-sized enterprises said they intended to relinquish ownership or transfer control of their businesses within 10 years. More than 50% of the 9,300-plus respondents, however, had yet to develop a succession plan; 38% had only an unwritten plan; and just 10% had a formal plan in place. If you're like most other SMEs, then here's some expert advice.

To get started on planning your succession, decide how you will exit the business. Do you want to pass it on to a son or daughter? Transfer ownership to employees through a management buyout? Sell to a third party? Whatever the goal is, don't expect to "tax-plan" your way to succession, says Ian Hull, co-founder of Toronto law firm Hull and Hull. Yes, the financial aspects are important, but compared to so-called soft issues like massaging bruised egos, they're fairly straightforward. "People who transition businesses spend almost 90% of their time worrying about tax, and that's the biggest mistake they can make," Hull says.

Barry LaValley, founder of the Nanaimo, B.C.-based Retirement Lifestyle Center Inc., compares a succession plan to an insurance policy. Before getting into the hard numbers, he has his clients do a "fire drill" in which they ask themselves what could go wrong with the company today and how they would react. "Where I find that small business owners go awry over not planning properly is with the emotional issues they didn't think about, both for them and the people who end up taking over the business," LaValley says.

Another important early step is to get an independent business valuation. Hull warns that using your own accountant can taint the result for the kids, who may perceive the estimate as biased in your favour. "In the transition, the biggest problem is almost always the valuation," he says. "Communicate with your family and be transparent about the process."

Tip: To manage taxes effectively, start planning for succession the day you open up shop. "From a business standpoint, you may decide on certain steps that don't make sense in 20 years, and so you may revisit them," says Ian Hull. "But the ship is very hard to turn 10 years away from the transition—especially from a tax standpoint."

Poor communication can poison a succession, and yet many family business owners still take a top-down approach to planning, says Hull. "They impose the estate plan and they transition, as opposed to sitting down with those who are going to enjoy the benefits and discussing it with them." To defuse bitterness and rivalry, strike a family council and hold regular meetings led by a facilitator. You may learn that your daughter has management aspirations, or that your son never wanted to work with his brother.

Sometimes diplomacy goes too far, though. Josephine Nadel, a partner with law firm Borden Ladner Gervais in Vancouver, cautions owners to think twice about vesting kids who show little interest in the company: "In some cases, the one child who's more active in the business should be left the business, and liquid assets should go to the other children."

Red Flag: Skimping on professional advice now could cost you big later if family discontent erupts into a long legal battle. An adviser's fee is a business write-off. Your bank may even offer free help—for them, the prize is wealth management at the other end.

The thought of moving on may cause you distress, but choosing a successor is a business decision. Create a profile of the new leader, focusing on the skills and experience he or she will need to have to tackle your job. Using these criteria, you may want to draw up a short list of candidates with potential to grow into the position, whether they're family members, employees or outsiders.

In the case of Freybe Gourmet Foods, Sven Freybe had always wanted to take over the business. As well as being highly motivated to step into his father's role, he brought considerable expertise to the table. Before joining the company, he'd earned a commerce degree, worked in advertising and apprenticed at six German sausage-making and meat-processing firms.

To leave the business in capable hands, bank

on spending half a decade grooming your successor. One way to build leadership is by giving the next-in-line a subsidiary to run. Five years ago, Sven Freybe became president of Freybe Gourmet Chef, a 30-employee offshoot of the parent company. Sven's division finished in the red for 2006—but Henning Freybe says there's a silver lining. "You learn an awful lot more when you lose money than when you always make money."

Tip: Owners and successors often find they have different management styles, but this is a healthy dynamic that marks the changing of the guard, says Willy Fournier, Freybe's succession adviser. He observes that the best new leaders push their own vision for the company while building on the old boss's strengths. "If you get a young, passionate leader who has a vision and can bring people into it, that helps."

MAINTAIN LAW AND ORDER

In any succession plan, the key legal document is the agreement approved by the shareholders, partners or co-owners. This agreement governs a company's conduct, board membership and decision making. Josephine Nadel explains that it also includes buy-sell remedies. In a closely held corporation, the shareholders will get along better if they're free to liquidate their investments.

As a last-resort provision, legal advisers can build in a shotgun clause, which allows one party to buy out the others at a set price. This encourages fair pricing, because anyone who triggers the clause could end up as buyer or seller. "Often just having a mechanism like that forces the parties to try and resolve their differences and maybe negotiate a buyout," Nadel says.

It's also vital to address the legal ownership of various assets. Hull recalls dealing with a warehousing firm that was passing the business on to the son and had a building in the owner's name. "I said, 'Well, that's going to create lots of problems. It's not even in the holding company.'"

Red flag: As a living document, the shareholders' agreement needs regular updating. Ian Hull says he sometimes gets presented with a fossilized specimen that hasn't been touched in decades. "It doesn't accommodate the children's issues, and then all you've done is jam the deal down the kids' throats if you're going to bring them in as shareholders."

BUILD A NEW TEAM

According to Freybe adviser Willy Fournier, business owners must get past the idea of developing a single heir and instead must reinvent the entire management team. This is a tough step because it means letting the new gang make big decisions—and possibly big mistakes. "The whole idea is that if something does happen to the successor candidate, you're not stuck," Fournier says. "And if nothing happens to the successor candidate, you've got a team that can work together."

Fournier asks disinterested members of the leadership group—those unlikely to vie for the top job—what they think the business will look like the day the current owner leaves. He then drafts job descriptions and profiles for the ideal succession team. After making a list of promising employees, Fournier assesses each one against the benchmarks he has set. Those who pass muster embark on development plans, while the other positions are filled by strategic hires.

For Henning Freybe, assembling a team with the right mix of skills to support the transition meant replacing several of his senior managers. "Some were just moved aside and are still with us today," he says. "But others had to be made available to the competition."

Tip: Ian Hull says many of his clients reduce their financial risk by taking out life insurance on the successor and other key managers. "You're giving yourself a buyout, essentially, should something happen to that person."

Because they put so much of themselves and their time into the company they build, small business owners often evade retirement until their hand is forced by failing health or an insistent spouse. And when they do decide to go, they have trouble abandoning old ways. "Too many people tend to plan for retirement like they're planning for a 30-year long weekend," says Barry LaValley. But there is such a thing as too much golf. To cushion the blow of the handover, LaValley recommends a gradual departure. Consider acting as a consultant to the business you just relinquished—as Henning Freybe will do—or to other companies in the same industry.

Chances are, the business will fund your retirement, so be zealous about tax planning. As an owner, you may qualify for the $500,000 lifetime capital-gains exemption. Another common succession tool is an estate freeze, which minimizes death-tax liability by trading your shares for a fixed amount and issuing new ones to the next generation, either directly or through a family trust. "If you're selling everything to a third party," says BLG's Josephine Nadel, "you might look at an asset shelter such as a share sale."

Tip: Your ability to secure a loan to finance the succession depends on the company's health. "If you've got a solid business and it's profitable and well managed, in my experience you can usually find financing," Josephine Nadel says. Those same qualities attract private-equity firms, which scour the marketplace for sound family businesses —without heirs apparent—that are looking to sell. -    2007 September 26   GLOBE & MAIL   

The Trust Fund Whisperer
She's an heir's worst nightmare: Lee Hausner coaches wealthy families on how not to bequeath their riches

Three months ago, Lee Hausner flew to Toronto from her California home so she could attend the annual meeting of a wealthy Canadian family.

She is not related to the well-heeled brood, or employed by them as a lawyer or a financial guru.

Dr. Hausner is a psychologist, one who is paid to tell families how to avoid screwing up their children with cash.

Call her the Trust Fund Whisperer, a woman whose tough-love approach to handling families with wealth has made her an in-demand consultant across Canada and the United States.

"One of the reasons we have a generation that goes broke is that no one teaches them about wealth," she said during a recent address at Toronto's National Club. "It's like throwing the keys to the Ferrari to an eight-year-old and saying, 'Go drive.' "

Dr. Hausner is one of a growing chorus of people who believe the younger generation should not get the Ferrari, the mansion or any substantial monetary reward whatsoever.

"They are very poor people living in rich people's homes," she said.

"And they need that made very clear."

As the baby boom generation ages, North America is about to experience an unprecedented transfer of wealth, and the need to prepare young people to handle their wealth responsibly has spawned its own small industry in the United States.

In California, young heirs attend sessions such as the Financial and Life Skills Retreat presented by the consulting firm IFF Advisors, and many banks in New York run investment courses for those who stand to inherit a bundle. Next month in Miami, a group of high-net-worth families from North and South America are gathering for the Pilot Family Office Summit.

Dr. Hausner is on the speed dial of many a Forbes family, thanks to her book Children of Paradise: Successful Parenting for Prosperous Families, one of a number of self-help guides for the desperately rich.

Having started her career as a psychologist at the Beverly Hills, Calif., school board, Dr. Hausner has seen young people of the Paris Hilton ilk be overindulged, and raised to believe they are part of the "lucky sperm club" and entitled to anything and everything their family has earned.

"You have to work very hard to disavow this generation of that notion," she said.

Handling a family's financial windfall is not just a challenge for the American rich and famous. According to Forbes magazine, there are 23 Canadian billionaires, "legacy families" that are likely to pass on their wealth for generations to come.

Investment advisers who attended Dr. Hausner's seminar in Toronto said they are often approached by families who don't know how much to give their kids, and who worry their heirs will "blow it all sailing."

To address that concern, more family advisers are urging young trust-funders to roll their windfalls back into their family estates, said Toronto family legacy coach Jennifer East, who advises clients in Canada and abroad worth at least $5-million on how to manage massive inheritances and business succession.

Ms. East encourages well-off parents to prepare their children by encouraging them to make choices. Instead of giving them whatever they want, she says, the message should be that "if you want a car and a trip to Africa and a third thing when you hit 18, you need to pick."

That way, "it's about teaching the next generation that there are choices to make."

Other advisers urge the creation of a "family office," a concept that dates back to the early 1900s with families such as the Rockefellers who amassed great wealth and hired in-house managers for both their money and their affairs, including philanthropy.

Dr. Hausner said Canadians should consider two models when they decide if and how to dole out the cash. One is the Pritzker family, owners of the Hyatt hotel chain, which saw its $15-billion (U.S.) empire broken up after two twentysomething heirs sued their parents for $900-million, saying their trust funds had been robbed during their childhood.

On the other end of the spectrum is Warren Buffett, one of the world's richest men, who has said his kids will not receive a substantial portion of his billions (opting instead to divide his fortune among charitable foundations).

Dr. Hausner believes families should embrace the latter option, and that kids raised to expect a windfall will have little impetus to work. "This is not about money," she said. "This is about being productive."

Ms. East, who will attend the Miami conference as a moderator and a workshop leader, recently advised one family after the boomer parents sold the family business. They wanted to know how they should best juggle teen children and millions of dollars.

Ms. East asked the parents about their business values for a clue about how to map out the future.

"I tried to help them become the managers essentially of their family and their money, their estate and their legacy," she says. "It's like a whole new business they've never really dealt with before."

The most important thing older generations can do, Dr. Hausner said in presentations in Toronto and Montreal, is to set an example.

"If you want to play golf all day, that's fine," she said. "But get an office, hang your golf clothes there, get up and put on a suit every day and just head over there like it's a job."

Sharing the wealth

Lee Hausner's tips for psychological wealth management.

Set an example

How children feel about money has a lot to do with how they see their parents spend it. Stay productive, be charitable and invest wisely, and your kids will too.

Encourage philanthropy

Put young children on charitable committees to learn how to collaborate and make a difference.

Do the math

Add up everything you want your children to have - money for education, a house,

retirement and even yearly

vacations. Then decide where you want the rest of your money to go. Stick to the plan.

Avoid cash paralysis

Don't transfer any substantial amount of wealth before or

during a child's career-building years. Pay for education, housing and other expenses, but large sums of cash will just "grind their productivity to a halt."

Encourage passions

If your child wants to be a

teacher, but worries about the standard of living associated with the profession, offer to match their salary.

The rule of thirds

When transferring money, break it into three payments over a

prolonged period - in case they blow it the first time. And the second.

Decide who's in and out

Don't alienate spouses or in-laws - it will only lead to trouble.    - 2007 October  16   GLOBE & MAIL  

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