By Danielle Walsh

Do you have a succession plan? When I meet with potential clients, I am often told the answer to this question is “yes.” Once I dig a bit deeper, though, I realize what these small business owners mean to say is, “I have a will,” which, quite possibly, has not been updated since their adult children were in diapers, or “I have life insurance,” which, likely, has not been revised since the date it was purchased.

Wills and life insurance do not equate to a succession plan. What’s more, given how busy business owners are, once the will and insurance have been obtained, these documents are often forgotten about. Most of the clients I work with have outdated wills—ones that, worse still, do not reflect the owner’s current view of the succession plan for their business.

Indeed, unfortunately, many businesses do not have a formal succession plan, which can explain why the death of an owner often takes an irreversible toll on continued operations.

Why a succession binder?

Ultimately, all businesses need a succession plan. While many owners believe they have one in place, experience would indicate that, unless this is documented and reviewed on a regular basis, it is common to find multiple owners have varying expectations about their operation’s succession plan.

This, naturally, becomes a source of conflict. As such, it is recommended all businesses put a succession binder in place for each owner to ensure the plan is documented, supported, and understood by all. In the case of a family business, this becomes the road map for all future family owners. This takes the form of a binder (believe or not, I still prefer this in paper format) or USB, containing all relevant documents comprising the succession plan.

The contents of the binder address all questions related to the business’s succession, such as:

• How does one join the business?
• How does one become an owner?—Who decides? Based on what?
• How does one amicably exit the business?
• How is the value of the business determined?—What if owners do not agree? Will one be paid for their ownership shares over time or up front?
• What happens if an owner dies?—What role does life insurance play? What if an owner becomes incapacitated?
• What governance structures do we have in place for both the business and the family?
• Are all owners’ wills in sync with the succession plan?
• Do owners have a prenuptial agreement or marriage contract in place to protect the business?—Is this a requirement?
• Does the business have a comprehensive shareholders’ agreement incorporating the answers to the above questions?

Upon reviewing the questions above, it is clear a will and life insurance alone fall short of sufficient in the grand scheme of things.

As mentioned, this lack of clarity becomes even more problematic when there are multiple owners who have outlined various plans on how to deal with their ownership in their own respective wills—plans which, in all likelihood, have not been disclosed to the other owners. Putting a succession binder together often serves as a jumping-off point for difficult-but-necessary conversations and helps keep succession planning top of mind for all owners.

All together now

When compiling your succession binder, there are several key documents that should be included.

1) Family business guiding principles

In family-owned businesses, the succession process is greatly facilitated if all members (especially those with a current and/or future ownership interest in the business) can agree on some proven business guiding principles. This can help steer the process and guide decisions pertaining to the future management, leadership, and ownership of the family business. Applying these principles facilitates the discussion pertaining to the specifics/details of the succession plan and lays the foundation for the development of the formal family business rules.

2) Business rules

Family- and non-family-owned businesses alike can benefit from having a set of rules clarifying expectations surrounding some key challenging and often painful subjects (e.g. compensation, dividends, decision-making, making it into ownership, need for domestic contracts, etc.).

3) Code of conduct

While an established code of conduct can be useful for all businesses, it is especially beneficial for family businesses. Namely, this is because these owners often work alongside their parents and siblings. (How, for instance, should family members working together address one another while in their jewellery store, attending to customers?)

4) Shareholders’ agreement (with pre-determined exit strategies)

All businesses would benefit from putting to paper the terms and conditions for all potential exits from ownership (i.e. death, incapacity, voluntary, retirement, termination) and having these terms outlined in an up-to-date shareholders’ agreement. Clearly outlining decision-making terms, valuation methodologies, and exit strategies can save a business from many costly disputes.

5) Life insurance policies

It is advisable for family-run businesses to hold sufficient life insurance to cover the tax liability on death of an owner. By including life insurance policies and any updates within the succession binder, all owners will know what to expect and what will happen upon death.

6) Domestic/marriage contracts

An owner’s divorce can have a profound impact on the business and its partners and, as such, it is vital for all parties to understand what will happen in these cases of separation. Family business owners generally do not take issue with including a copy of their marriage contract in the succession binder. In cases where an owner does not want to include this document, a letter from a corporate lawyer stating the marriage contract in question has been reviewed and is in line with the shareholders’ agreement can, instead, be obtained.

7) Wills

It is important to ensure all owners’ wills are in sync with the overall succession plan and the shareholders’ agreement. Far too often, these documents are put together at different times for each owner and can contain contradictory information—which, in the case of death, can cause major conflict, as well as costly legal fees. If owners do not want to include a copy of their will in the succession binder, a letter from a corporate lawyer stating it has been reviewed and is in line with the shareholders’ agreement, instead, be obtained.

8) Trusts and holding companies (if required)

If there are trusts and/or holding companies involved in the corporate structure, it is important these are in sync with the overall succession plan and shareholders’ agreement. Having these documents in the binder helps to ensure any time the corporate structure changes, it remains in sync with the succession plan. 

9) Retirement or financial plan

Each owner should have their own financial plan included in their binder. This is not to say each owner’s financial plan must be shared with one another, but it should be kept in each owner’s respective succession binder to ensure it is in line with the terms and conditions of the potential exits outlined in the shareholders’ agreement. Do not underestimate the importance of this issue to the owner’s spouse/partner. Knowing what to expect upon retirement is an essential ingredient for a happy and much deserved retirement.

10) Employment contracts for owner/managers

Executive employment contracts for senior managers (particularly senior family managers) should be included in each binder. The roles, responsibilities, compensation, expected hours of work, and so forth of each individual should be clearly outlined and understood by all. In the case of family business, the next generation owners should also have executive employment contracts included in the succession binder.

11) Service contracts for retired owners

An individual who has retired from ownership but continues to work for the business needs to have a clear arrangement, as well. As in the employment contracts outlined above, the roles, responsibilities, compensation, and overall expectations of the retired owner need to be outlined.

12) Grooming plans

Including outlined plans for future successors allows for these to be reviewed annually by current owners to ensure they are still aligned with retirement plans. This is a great way to observe if there are potential gaps in skillsets that should be addressed as part of the overall succession plan, which can help with long-term human resource planning and identify where the next generation successors need to focus their learning.

13) Dividend philosophy and policy

Dividends, like any form of compensation, tend to create conflict and discomfort among owners. To help remove uncertainty around this topic, implementing a dividend philosophy and policy where all parties can calculate the expected dividend can be very helpful in minimizing long-term conflict.

14) Terms of reference for governance structures

Each business will have a different set of governance structures. There are many to choose from, such as board of directors, board of advisors, family council, family business meetings, and dispute resolution process, just to name a few. The important thing is for the succession plan and succession binder to have clear terms of reference for each structure: What is the objective of the structure? Who participates? What is discussed? How are decisions made?

Including these items as part of an overall plan ensures that, as an owner, you know what to expect when you are ready to retire or if one of your business partners dies or becomes incapacitated. All owners should have the same understanding, and one of the best ways to achieve this is to have a detailed succession plan documented with all relevant supporting documentation in place.

An annual meeting should be held to review the succession binder. This way, all owners will be well-versed in its contents, as well as any changes that may be required. This can also help keep succession planning in the forefront as opposed to on the backburner (where it too often finds itself).

Success in planning

While it may seem like a daunting task, assembling a complete, thorough succession binder is essential for the longevity of a business. Indeed, I can tell you from experience, the owners who get it done inevitably come to realize what they had in place before they carried out this exercise left them exposed and vulnerable to numerous pitfalls and potential conflict. With these risks behind them, they are able to focus their attention on the business. Without exception, those who have a comprehensive succession binder will tell you they view it as one of the best business investments they ever made. Clearly, this strategy would benefit all businesses.

Danielle Walsh is founder of Walsh Family Business Advisory Services, a consulting company specializing in helping family-owned and operated businesses navigate management and ownership succession. She is a chartered professional accountant (CPA), chartered accountant (CA), and holds certificates in family business advising and family wealth advising from the Family Firm Institute (FFI). Walsh developed her philosophy and desire to help family businesses from her father, Grant Walsh, who has worked as a family business practitioner for the last 25 years. She and her father published a book titled, A Practical Guide to Family Business Succession Planning: The Advice You Won’t Get from Accountants and Lawyers. Walsh also currently teaches the first family business course offered at the undergraduate level at Carleton University in Ottawa. She can be reached at danielle@walshfbas.com.