There are few certainties in life and unfortunately the inevitable process of aging happens to be one of them. As private family business owners and entrepreneurs reach their retirement years, one of the toughest and most critical business decisions that they face is how and when to step down and pass over the reins of their company to the younger generation. This process is often wrought with complexity and emotion and, unfortunately, in many cases the family legacy and business fails to survive. While there are numerous reasons why succession plans fail, this article addresses the keys to a successful transition of business ownership from one generation to the next.

Step #1 – Evaluate Business Viability

Step #2 – Assess Family Member Skills and Ambitions

Step #3 – Set Family Member Roles

Step #4 – Draft the Shareholders' Agreement

Step #5 – Manage the Transition Step #6 – Provide a Liquidity Mechanism

Step #6 – Provide a Liquidity Mechanism

Step #1 – Evaluate Business Viability

Is the business going to succeed in the next 3 years? 5 years? Long term? This is a question all business owners must ask themselves prior to pursuing a family succession plan. The business owner, senior management team and business advisors must take a step back and look at the positioning of the business and the outlook for its future in the wake of shifting consumer tastes, technology and the economic environment.

This first step helps to identify the best course of action for the business and assess whether value is in fact best transitioned through succession or perhaps a sale of the business to an independent third party. The business owner must be objective throughout this process in order to identify the strengths and weaknesses of the business and assess whether the business is a viable entity in the long term.

Fundamental to the business evaluation is the preparation of a financial forecast and strategic business plan. The financial forecast should project expected operating results and cash flows for 3 to 5 years, having consideration for planned capital expenditure requirements and borrowing and lending activity. A strategic business plan will not only provide direction upon succession, but allows management to buy into a formal course of operations and will aid in the transition process once implemented. Business owners must be aware that successful transition is not completed overnight; it is therefore vital that this business plan be updated on at least an annual basis.

Step #2 – Assess Family Member Skills and Ambitions

In considering a family succession, an assessment must be made of the skill sets and ambitions of the potential successors. This process is used to evaluate and identify the candidate(s) that are most likely to succeed in implementing the business's strategic plan. The assessment should focus on all key management positions and should identify both family and internal management team members that would be most suited to the required roles. Central to retaining existing employees is identifying family members that are capable of taking on the responsibilities required.

It is also critical that the existing business owner communicate with potential successors to attain an understanding of their goals and ambitions. Many business owners simply assume a son or daughter will want to succeed them when in fact this may not be the case.

Step #3 – Setting the Roles

The succession plan must clearly define the roles to be assumed by each family member. As families grow and the ownership group expands, it is necessary to clearly separate those family members who will manage the business from those who will simply own a share of it. Family members must understand that not everyone will be able to have an active role in management and that having a primary leader is essential for the success of the business. In this regard, some family members will have to take a step back and operate as simple investors. Deciding and agreeing on how to divvy up shares in the company and how profit is to be shared and distributed is also necessary.

Family members who take on the active management of the business must be seen both by inactive family and internal management as having earned their position and of being capable of fulfilling the role. Similarly, family members involved in the business must be remunerated at a market rate.

Providing transparent results and reports on the business to all family members is critical to the success of maintaining a cohesive family ownership team. Annual meetings of the family ownership group and participation of non-active family members on the board of directors enables all family members to be knowledgeable of the business and improves family relations.

Step #4 – Shareholders' Agreement

The importance of a well documented shareholders' agreement is often overlooked in the succession process. The shareholders' agreement sets out the rights and responsibilities of each of the shareholders and includes decision making rights, purchase and sale provisions, and arbitration and dispute settlement mechanisms. The shareholders' agreement should:

  • identify voting rights and decision making mechanisms and provide for certain major business decisions that require more than a majority vote (ex. 2/3 or unanimous);
  • address the steps to be taken upon death, departure, disability, and divorce. Preparing for these unforeseeable events prevents dissolution of the company upon occurrence and provides a mechanism for the transfer of shares at an agreeable price;
  • address the transfer of shares and buy and sell provisions. This can be used to prevent the shares from being sold to outside parties or to provide for a right of first refusal where existing shareholders have an opportunity to purchase any shares prior to a third party. Further it will set in place the steps to be taken should a third party sale of the company as a whole be considered; and,
  • provide for dispute resolution mechanisms to prevent a standstill upon a differing of opinion. These may include, at an extreme, clauses to buy out a disputing shareholder at an agreed price.

    An appropriately drafted shareholders' agreement is invaluable to a business with more than one stakeholder and can prevent and resolve many of the issues that a business is likely to face.

Step #5 – Managing the Transition

In determining the structure of the final transaction, be it a tax deferred estate freeze or an actual sale to family members, professional advisors including lawyers, tax specialists and business valuators should be employed to ensure a smooth transition. The cost may be high up front, but these professionals have invaluable experience and are trained to deal with the complexities of these transactions.

During the transition it is critical that you manage business relationships with key customers and suppliers and internal relationships with key employees. Provide introductions and phase in the new family member management team; build confidence in those individuals surrounding your business that the new generation is capable of successfully continuing business operations.

Step #6 – Providing a Liquidity Mechanism

Financial positions and family member objectives change over time and with these changes there comes a time when a family member will inevitably want to divest their share. Properly planning for this event and providing family members with a liquidity mechanism enables a smooth transition out of the family business. The shareholders' agreement should outline the manner in which a shareholder is to go about the process of sale and may include valuation provisions outlining a set price or formula upon which value is determined. Allowing for shareholders to dispose of their interest in a mutually agreeable manner is a vital component as the size and number of family shareholders expands with each generation.


Family succession plans fail for a wide variety of reasons, but by being proactive, evaluating objectively, planning and committing to a set strategic succession plan you can ensure that your business legacy is transitioned successfully.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.