Preparing for the next phase of the family business

(As originally published in the Financial Post, May 2013)

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By Pearl E. Schusheim, Partner, Transaction Tax, EY; and Joe Pernica and William (Bill) Armitage, Partners, Transaction Services, EY

Managing any business involves many challenges. But managing a family business brings with it a unique set of issues, many due to the added degree of emotional relationships involved. One of the most difficult issues is family dynamics, and how they can affect the future of the company.

A family enterprise can flounder when the senior generation is no longer active in the business, and control passes onto the next generation. As difficult as it is to consider, the senior generation must take into account what will happen next: equal inheritance doesn't always mean equality in management. The owners of family businesses must consider a succession plan. This requires being able to see — and prepare for — the unforeseeable.

In addition to management succession, other issues that must be addressed include any assets that may be in an estate or trust, including both business and non-business assets. A myriad of issues can contribute to conflicts among family members if they're not confronted in advance. Competing interests among beneficiaries, incomplete or missing accounting records, illiquid investments or business interests and complex tax structures are just some of the concerns that must be considered.

Many of these concerns may require special expertise, especially when handing over your business or selling it to another party. The senior generation may want to consider seeking professional advice when creating a succession plan, particularly as it relates to the following areas.

Valuation and tax
Tax can be one of the most complex elements in structuring and administering a trust or estate, so receiving counsel in this area is crucial. When crafting your succession plan, it's important to consider the following:

  • Valuation of the business is necessary for several reasons, including equitable treatment of beneficiaries, structuring an estate freeze or share capital reorganization, preparing the terminal tax return and dealing with the 21-year deemed disposition.
  • Post mortem planning may be required to avoid double tax, and to minimize the overall tax burden.
  • Existing beneficiaries in foreign jurisdictions may affect distribution decisions.
  • Potential complexities around income tax filing requirements, as well as assessments and audits by the CRA.

Real estate
Real estate is one of the assets in a trust or estate mostly likely to be in dispute. Consider the following when including real estate in a succession plan:

  • Most forms of real estate are illiquid and take time to monetize at fair market value.
  • Some capital investment may be necessary to ready an asset for market.
  • Different levels of beneficiaries often debate about making additional investments, versus selling quickly on an “as is” basis at a discount to the market.
  • The value of the business may be eroded as a result of costly court disputes due to differing opinions on realization strategy.

Handling disputes
One of the most unpleasant unforeseeable situations that must be considered is potential disputes, or even allegations of wrongdoing. While it may not be possible to foresee everything, there are some potential scenarios that could be considered when planning succession:

  • Some beneficiaries may feel unfairly treated, and may dispute decisions made by trustees. They may act to alienate parts of the business or otherwise behave.
  • Complex accounting structures may require "unwinding" to a point in time to best facilitate distribution of earnings, assets or ownership.

The exit strategy
An essential part of any business plan for private companies is to formulate a full or partial exit strategy. In the absence of a divesture plan, a long-term illness or death of the business owner or manager may leave the company without a viable successor. If the business is to succeed through the next generation, a contingency plan is crucial.

The successor overseeing the family business, as well as other family members, must understand the values and operations of the business early on. With this understanding, backed by a solid succession plan, the transition of the business to the next generation can be made smooth and efficient for all concerned.

For more information on planning for family businesses, and how Ernst & Young can assist with the wide range of issues involved, visit and download your copy of A focused approach for estates and trusts.