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.
CONDUCT A FIRE DRILL
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
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."
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."
GET THE FAMILY TALKING
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
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.
START REPLACING YOURSELF
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
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."
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."
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.'"
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."
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
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
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."
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
TAKE RETIREMENT SLOWLY
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."
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
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
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
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
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
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
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
"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
Sharing the wealth
Lee Hausner's tips for psychological wealth
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.
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
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."
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