Building Value Through Succession Planning in Canada

1. Canadian Association of Movers December 2007 Building Value for Succession • Luanna McGowan • Succession Planning Specialist

2. What is a succession plan? Why plan for succession? When to plan? How to plan? Succession Planning Overview of today’s presentation

3. Succession PlanningWHAT is it? • Planning for transfer of ownership and management responsibilities • Deals with such issues as: • Who will take over the business? • Within what timeframe will the transition take place? • How will the transition be structured? • What are evolving roles and responsibilities?

4. Succession PlanningWHAT is it? • A succession plan is different from, but closely tied to, an ESTATE PLAN • An estate plan provides for a tax effective disposition of all of one’s assets at death (including shares of a business) • Dovetail with succession plan • Successor may inherit shares/lifetime planning • “Equalization” for heirs not involved

5. Why have a Succession Plan? • Over the next few years, Canada’s entrepreneurs will retire in significant numbers: • 39% within the next 5 years • 67% within the next 10 years Source: PwC Pulse Survey, 2007

6. PwC Business Insights Pulse Survey on Succession F i g u r e 1 . T h e c u r r e n t o w n e r / C E O h a s a F i g u r e 2 . A g e o f t h e o w n e r / C E O s u c c e s s i o n p l a n i n p l a c e . 5 % O v e r 7 1 y e a r s 6 % U n d e r 4 0 y e a r s 2 4 % 6 1 – 7 0 y e a r s 4 6 % 5 4 % Y e s N o 2 6 % 4 1 – 5 0 y e a r s 3 9 % 5 1 – 6 0 y e a r s

7. F i g u r e 3 . W h e n t h e c u r r e n t o w n e r / C E O r e t i r e s , t h e b u s i n e s s w i l l b e : 1 4 % O t h e r 1 3 % 3 5 % I d o n ’ t k n o w P a s s e d t o n e x t 1 % g e n e r a t i o n P r e p a r e d f o r f l o a t a t i o n ( I P O ) 1 2 % S o l d t o s o m e o r a l l o f m a n a g e m e n t t e a m ( M B O ) 2 5 % S o l d t o a n o u t s i d e p a r t y PwC Business Insights Pulse Survey on Succession

8. Business Insights Pulse Survey on Succession F i g u r e 4 . T h e t i m e l i n e f o r t h i s i s : 6 % D o n ’ t 9 % 1 1 % k n o w N o t y e t 0 – 2 y e a r s d e c i d e d 1 8 % 2 8 % 1 0 + y e a r s 2 – 5 y e a r s 2 8 % 5 – 1 0 y e a r s

9. Succession Planning – WHY plan?Statistics • 80 – 90% of Canadian businesses are family owned and managed and account for nearly half of Canada’s gross national product • Only 30% will continue as a family operation into the second generation • Only 10% will remain a family-owned and managed enterprise into the third generation • Only 1% will make it to the fourth generation

10. Reasons for Failure • Entrepreneurs fail to plan (topics of death and retirement too hard to address) • Plans are devised by entrepreneur according to own perspective and desires • Tax driven planning • Unresolved issues in family and/or business

11. Reasons for FailureSuccession • The founder did not have an adequate succession plan in place • Chosen successor was not properly prepared for taking over the business • A clear successor to the founder was never identified • Chosen successor did not want to manage the business

12. Reasons for FailureFinancial Planning • Founder did not have an adequate estate plan in place • Founder did not adequately prepare for transfer of the business • Needed to raise funds to pay estate taxes • Financial advisors performed inadequately • Insufficient capital to run business effectively

13. Reasons for FailureOther • Conflicts with family members both within and out of the business (e.g. active/inactive siblings) • Conflicts with non-family employees in the business (e.g. career path, uncertainty) • One or more key employees left the company • Management mistakes after business was inherited

14. The Answer? Proper Planning Effective Communication

15. Succession PlanningWHEN to plan… • Retirement • Commencement or restructuring of the business • Death (of spouse, beneficiary, key employee, potential successor) • Birth of children or grandchildren • Marriage or divorce Entrepreneurs should be planning for succession in contemplation of, and after, any of the following events:

16. Succession PlanningWHEN to plan… • Major change in circumstances (e.g. illness or disability) • Tax or other relevant legislative changes • Sale of all or portion of the business • Employment of family members in the business • Buying buy-sell insurance; insurance to fund purchase • Changes to existing wills, estate and succession plans Entrepreneurs should be planning for succession in contemplation of, and after, any of the following events:

17. Succession PlanningWHEN to plan… Planning for the succession of a business is not an event – it is a process. Many entrepreneurs assume that they do not need to start planning for succession until their later years. However, this is not the case. As the owner advances through the various business, ownership and family stages, their goals and circumstances change and it is necessary to revise plans.

18. Succession PlanningHow to Plan…

19. Succession Plan Contingency Plan Family System Ownership System Business System Model of Family Business Family Council Family Policies Management Development Team Management Development Plan Board of Directors/ Advisory Committee Strategic Plan

20. Typical Objectives Identified • Maintaining economic independence • Ensuring short-term and long-term success of the business • Maintaining family harmony • Minimizing tax

21. Legal Documents Wills Powers of Attorney Shareholders’ Agreement Domestic Agreement Trust document Other Plans and Policies Contingency Plan Management Development Plan Personal Development Plans Strategic Plan Family Participation Plan Other Succession Planning – How to plan…Planning Documents

22. Succession Options • Inter-generational transfer • Management buy-out/employee buy-in • Sale to third party • Other

23. Case StudyIntergenerational transfer • Parents started business • 4 active children, 1 inactive • Reorganization • Poor communication • Inadequate training of successors • No contingency plan (not aware)

24. Case StudyManagement buy-out • No next generation successors • Proposal to entrepreneur to buy-out • Entrepreneur vs manager • Value • Funding • Timing

25. Case StudySale to Third Party • No next generation successors • No management interest • Contacts in industry

26. Succession PlanningBest Practices

27. Succession PlanningBest Practices • Open communication • Understanding perspectives • Building trust • Harmony • Good Governance • Values, Vision, Mission • Plans and Policies • Clear ARAs • Education

28. Succession Planning Toolkit for Business Owners • This toolkit is a guide to covering key and typical aspects business owners face when exiting their business. The 10 chapters guide you through the process of creating a succession plan, including: • Chapter 1 – Your roadmap to success; • Chapter 2 – Exploring your options; • Chapter 3 – Keeping the business in the family; • Chapter 4 – Selecting and grooming a successor; • Chapter 5 – Planning a management buy-out; • Chapter 6 – Selling the business; • Chapter 7 – Determining the value of the business; • Chapter 8 – Financing the succession plan; • Chapter 9 – Understanding tax and legal issues; and • Chapter 10 – Managing your wealth to secure your future. • www.cica.ca/businessowners