When it comes to succession planning regarding passing a family business from one generation to the next, it's not always easy to preserve both business performance and family harmony. At times you might even need the involvement of "a psychologist", according to Richard Leipsic, Managing Director of Acumen Corporation Development.
 
Leipsic and  Anita Wortzman ,  CEO of Acumen  Corporation Development, gave an interesting talk on the subject of  successful  succession planning relating to a family business at The Jewish Foundation of Manitoba's Professional Advisory Committee annual luncheon held at Bergmann's on Lombard on June 5th.  Wortzman is a member of the Board and the Executive of the Jewish Foundation.
 
 Joe Wilder, the new President of the Jewish Foundation gave brief opening remarks at the event, noting that the Jewish Foundation's capital is over 80 million dollars, a very impressive amount for a Jewish community of our size. He also pointed out that the Jewish Foundation is the second largest community foundation in Manitoba (after the Winnipeg Foundation), and $3.6 million was donated in 2012 alone.  Wilder added that the Jewish Foundation "contributes liberally outside of the  Jewish community"  and made reference to the fact that  the Foundation, which was founded in 1964 will be celebrating its 50th anniversary soon (June 2014-June 2015).

Leipsic, (B.A., L.L.B.) began the session by noting that less than 50% of Canadian family business owners intend on passing the business to the next generation. Leipsic and Wortzman see their role in advising either the buyer or the seller, "the Founder" or "the son (or daughter) of the Founder" as  ultimately  being "an arbitrator of common sense." ( Alternatively, Leipsic also described his role as being like “Henry Kissinger shuttling between Jerusalem and Cairo”).

As Leipsic pointed out,  "As a general rule of thumb succession planning takes longer than expected." (Editor’s note: As a general rule of thumb writing up an article about succession planning also takes longer than expected).  He noted that according to a  recent U.S. survey of 300 business owners who sold their business, to family members or outsiders ….Only 25% indicated the sale accomplished their personal and business goals; principally due to a lack of  proper planning.

Leipsic added that often "human emotions are a large part of the mediations."

Leipsic, who has carved out a niche quarterbacking mergers and acquisitions from both the seller and acquirer perspective and navigating succession planning for privately held companies, said that "I recently had a client who transitioned a family business , but then asked “who gets  the Jets tickets," since it was not something that was part of the formal agreement .  He noted that generational transfers , if not properly managed can  accomplish business objectives but fail to maintain the family relations such that the question may become" not who would host the next Friday night dinner but whether there would be  a Friday night dinner at all."
 
Wortzman, who has helped many companies plan and execute growth strategies while addressing  succession and other business transaction issues, told the Winnipeg Jewish Review after the event that in her experience about 10%  of families won't be speaking to each other after the succession planning, but that can improve over time.
 
Leipsic emphasized that since one is dealing with the health of a family, "you can’t afford to have a family 'winner' or 'loser' in the succession planning."

He noted that "unanimous shareholder agreements are generally out of date" and that in advising the Founder of the business you "want clear financial statements" and "equally important is what's not in the statements. "  Learning the "share structure of the company is important" since you want to know "who actually has formal versus de facto decision making powers."

In the event that  some of the shares are held by a discretionary family trust (beneficiaries can include the Founder's wife, children or grandchildren,) "the trust provisions are important and raise a number of governance issues , including the duties of the trustees towards the beneficiaries  .”

A Founder of a company looking to pass it on to the next generation is  dealing with  issues of "their mortality', "their legacy" and  the process of succession planning "can tax their stamina," according to Leipsic.

In dealing with a Founder of the company, an advisor will need to consider "What is his exit strategy?" as Leipsic said.

If a Founder is considering passing on the company to his child, for example, in a situation where some of the company's shares are held by discretionary family trust benefitting his children who are not in the business, a Founder will want to consider whether it is realistic to have the acquiring child look out for his other children’s interests or that of their respective children.

Wortzman said that from the perspective of the son who is interested in purchasing the company, it is important to talk about the "fair value of the company", and "whether there is unrealized value." An advisor for the son will need to look at "comparable sales" and whether there are "items there of a non-monetary value" at issue.

An advisor for the son will also want to consider the "cash flow needs" of the Founder and his wife, who will want to have that cash flow remain to fund their lifestyle.

An advisor for the son will also want to consider why the son wants to buy out the company.  As Wortzman said "what are his plans?...Does he still need his Dad in the business? Does he see that he is working hard to the benefit of his sisters, but he thinks his brothers in law don't work hard enough...Did his sisters tease him when he was younger?" (That memory of being teased could become a factor in the negotiations!)

Wortzman, who is also a public representative for the Institution of Chartered Accountants of Manitoba, noted that the role of the advisor can include “letting a family member know when he or she needs to let go of emotional issues."

An advisor for buyer (ie. the son, in our example) "will want to do a full due diligence of the business" and “'will want to look at the worst case scenario" ("a shotgun transaction” where the son puts out an offer of purchase and if it isn't a go, the other side buys him out).

As Wortzman advised, in general "a negotiated settlement is preferred" over a "shotgun transaction"

Wortzman noted that one important consideration is whether "'a sale to a third party is a viable alternative?." An advisor for the son may want to know "what is the cost of borrowing money so that the son can buy out his father, "how “could 3rd party financing be raised," "are there redundant assets" or "will the son offer a personal guarantee?" If obtaining third party financing is too difficult, the son may want to pay the purchase price for the company with some cash and a vendor take back for the balance 
 
Additionally, Wortzman suggested "maybe there are personal expenses that shouldn't be going through the company" such that “there may really be more cash in the company when these expenses are taken out."

Leipsic said that in the negotiations, maybe the Founder of the company, “will want the trust to be liquidated and  his daughters paid out rather than have it dependant on their sibling for dividends.”

A "cold turkey termination" of the Founder of the company "may be too much" emotionally, and maybe the Founder will want some sort of continuing presence in the office. The Founder also may want to ensure that the next generation continues the “'corporate culture", which will include certain "charitable giving, at least as long as the [the Founder] is alive."

On the whole, as both  Leipsic and Wortzman stressed, the goal is not only to  have both generations in a family business meet their business objectives in transitioning it , but also to ensure that the Jets tickets will still be passed around and of course, that the family Friday night dinners will continue.

 As Marsha Cowan, CEO of the Jewish Foundation  told the Winnipeg Jewish Review after the event the topic of a family business is a relevant one for the Jewish Foundation: "Our community is in no small way indeed a family and the  Jewish Foundation of Manitoba is a solid foundation upon which our future can be built. As in all families, success is based on partnership, good communication, empathy, and passion. The Jewish Foundation is committed to all of those values and more."