Why does a privately held family business need a succession and key-person plan?
Anyone who has worked with a privately held family business can point to a cautionary tale: a company left scrambling after the unexpected loss of a founder, entrepreneur or key person through untimely death, disability, or the unplanned departure of a key executive for a more compelling opportunity. In most cases, the business is left scrambling only because the loss occurred in the absence of appropriate planning. The vulnerability was known — yet no plan was in place. Why wait until a crisis strikes to fix a known weakness?
The stakes are high: fewer than one-third of family-owned businesses survive into the second generation. Many of these failures result from a lack of leadership succession and ownership transition planning — a particularly avoidable outcome, given that succession planning is not a novel concept.
Who in the organization needs a succession plan — just the CEO?
No. Many key employees need a plan to leave, not only the CEO. This includes each key executive and members of the C-suite. A robust succession plan involves:
- Starting the conversation early with shareholders, partners, board members, the head of human resources, key executives and other advisors
- Identifying successors for each critical role
- Choosing the appropriate strategy to fund the succession plan
What is key-person insurance and how does it protect a business?
Key-person insurance is an effective way to protect a business from the financial risk of losing a key executive, business partner or owner-operator shareholder due to illness or death. Policies can be funded from the company's ongoing cash flow and are inexpensive relative to the value they provide to the organization and its remaining stakeholders — giving the business financial breathing room to absorb the loss, recruit a replacement and reassure customers, lenders and employees.
How can long-term incentive compensation help retain key talent?
Long-term, performance-based compensation plans are a common way for employers to retain key talent. They can be funded from the company's treasury through stock options, which require no immediate cash and are inexpensive relative to the value they create. Because these incentives are tied to the growth in the value of the business above its current valuation, they align key executives' interests with the long-term success of the enterprise.
How can private equity support succession and de-risking?
Private equity has become another way for private company shareholders to de-risk their investments and plan for an eventual exit. Private equity investment funds invest in the business as financial partners, allowing the owner to:
- Continue leading and growing the organization using “other people's money,” if they wish; or
- Transition the business to the next generation's leadership through a management buyout
When should a Canadian business owner start succession planning?
Now. If your business does not yet have an appropriate succession plan, the good news is that you still have time — but the time to act is now, while you can plan deliberately rather than react to a crisis. Starting early gives you the runway to identify successors, fund the plan and protect the value you have built.
Key facts: succession and key-person planning for family businesses
Survival rate: fewer than one-third of family-owned businesses survive into the second generation
Common failure cause: lack of leadership succession and ownership transition planning
Who needs a plan: the CEO and every key executive / C-suite member, not just the owner
Key-person insurance: protects against the financial loss of a key person; funded from cash flow; inexpensive relative to value
Long-term incentives: stock options and performance plans retain talent, require no immediate cash, and align interests with business growth
Private equity option: financial partners enable continued leadership with outside capital or a management buyout
Best time to plan: before a crisis — start the conversation early with shareholders, board, HR, executives and advisors
Disclaimer: This article is for general informational purposes only and does not constitute legal, tax, insurance or financial advice. Consult qualified advisors regarding your specific circumstances.
