Interactive Activity

Passing the Baton: Interactive Decision Tree Tool for Continuity Planning

Danielle Saputo and Jeff Halpern
Published: May 27, 2022

Passing the Family Enterprise Baton

A Decision Tree Tool Can Help

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Part 1

According to a study conducted by Family Enterprise Canada (FEC), 75% of family businesses are owner-managed, and of those, 15% transition to the second generation and only 3% transition beyond the second generation.

When I first read these statistics, I thought to myself, “what a shame”.  After-all, it is so hard to launch and build up a successful family enterprise, and to then only have 3% pass down to Gen 3 is a tragedy! 

Over the years, after working with countless families to help validate their most logical continuity plans, I have determined that, in fact, the reason so few family enterprises pass down the generations is, because it is frankly the best decision for the family.  Ok, I said it.

These days, the sale of a family business does not mean the end of the family enterprise.  To the contrary, many families are reimagining and reinventing their family businesses from operating businesses to actively managed investment businesses and family offices.  It is not a failure whatsoever to reinvent a family enterprise in that manner.  And they still need good governance for successful continuity. Preparing for the passing of the baton is still very present even if it is not top of mind.

Family members sit in the Family Circle under the “3 Circle Model” developed by Professors Taguiri and Davis at Harvard Business School, in their analysis of the different perspectives interested in the outcome of a family enterprise transition.  Family members have a vested interest in the successful outcome of every family enterprise transition, to ensure they still get along, and avoid the breakdown of family harmony. 

To optimize the outcome of family harmony, good governance systems are needed in each of the 3 circles (Family Circle, Business Circle and Ownership Circle) to ensure a successful continuity plan. According to a research report put together by Family Enterprise Foundation in 2021, called “Ready, Willing And Interested – or Not? Canadian Family Business Transition Intentions”, ownership of more than 60% of Family Enterprises will be changing hands within the next decade.  That is the largest and most valuable transition of family business wealth in Canadian history.

Part 2

The fact is, it is hard to build good governance systems to successfully pass an enterprise down over the generations, and a lot of advance planning is needed.  Let’s face it, in the early years, it is easier to manage the family dynamics, as there are fewer decision makers, egos, owners and collaborative decisions needed.

The study: “Ready, Willing, and Interested – or Not? Canadian Family Business Transition Intentions” also states that the two greatest concerns found in passing on the business are: The next generation is not ready, and the next generation members are not interested.  Is this just perceived, or is it the truth?  Good open communication is the key to being sure. Think of it as a relay race…the runners need to be sure they are running the same race and on the same team. Then both the person handing off the baton as well as the one receiving it must train and learn their role and responsibilities.  Only when all parties involved are part of and are fully aligned in the process can the baton be passed successfully.

As the family enterprise baton is passed down from one generation to the next, decisions move from Founders (Founder-Owners) to their Children (Sibling Partnerships), then to Cousins (Cousin Consortiums) and finally to more diluted relations (Family Syndicates). 

Besides the inter-family personal reasons that transitions can be challenging, there are also financial considerations.  If the owner needs the proceeds from the sale of the business to finance their lifestyle, it is financially more challenging to pass the enterprise down to the next Gens.  And market conditions, health considerations, and preparedness of the next Gen (and their desire to take the baton) also greatly influence the decision to pass the family business on or to sell. 

When Family Enterprise Advisors counsel owners of a family enterprise on the conditions needed to ensure a successful inter-generational family transition, we typically say, let’s think ahead: “imagine you are your great-grandchild (i.e., Gen 4), in 60 years’ time.  You have just inherited your family enterprise, along with 15 second cousins”.  What governance mechanisms do you need to have in place to accept the baton as a successful Gen 4 active owner, as part of a family syndicate?  And what skills do you need to possess, attitudes and values do you need, and who has formally mentored you in preparation? 

Part 3

Research has shown that the best governance systems for the Family Circle include a Family Constitution, Family Counsel, Family Meetings, and a Family Assembly, along with tools such a pre-nuptial agreement.  But how many families actually have these in place, understand when and how to build them, or know who to turn to for help?

The Family Enterprise Advisor community is uniquely placed to help families navigate this challenging family enterprise lifecycle path.

The best time to start a successful family continuity plan is NOW!  If the current stewards are prepared to invest the time, energy, and money to develop governance systems for tomorrow’s generations today, they stand a better chance of maximizing the successful outcome.  Conversely, if they aren’t willing to invest in what’s needed, maybe the best decision is to sell the enterprise to avoid the repercussions of an unsuccessful transition.  And that, very likely, is why only 3% of all family businesses pass beyond the second Gen.  Of course, even if there is a business sale, it doesn’t mean that the family cannot establish a Family Office with the proceeds of sale, as the new enterprise for future generations to be a part of.

Perhaps Bob Dylan said it best way back in 1962: “it’s a hard, it’s hard, it’s a hard, and it’s a hard, it’s hard rain’s a-gonna fall”.  Don’t let the rain ruin your family enterprise succession. 

To help you navigate this challenging process, a couple of FEA colleagues have collaborated to design a “decision tree” as a tool for the FEA community.  We hope you find the tool, and series of articles on the topics helpful to assist you make the best decisions possible. Take your time as there is a lot of information and reflection needed to properly answer the questions presented.

-Danielle Saputo, FEA and Jeff Halpern, FEA

This Decision Tree Tool is thought provoking and comprehensive. We strongly advise that you take your time and reflect on each question before you answer. Articles for each question are included, which will help you put the question in the proper context before answering.

If you ever find yourself unable to answer a question, don’t worry, there are always additional resources available to you in your Resource Centre. If you decide that it would be best to work with an advisor on this tool, explore the FEA Directory and find a qualified FEA to help you through this process.

This Decision Tree was developed by Danielle Saputo and Jeff Halpern, in collaboration with Family Enterprise Canada

Danielle Saputo

Danielle is a Life Learner dedicated to bringing out the best in herself and others. As a Family Advisor she is clarifying purpose, resolving conflict, and amplifying total wealth, where wealth is much more than financial capital – the focus here is on Human Capital.

The basis of her family advisory role is: “Are you communicating in a way that the family is in Harmony?” As a professionally trained Coach, Danielle’s goal is to hold a safe space for her clients. She provides accountability, clarity and support on their journey of self-discovery and forward motion. The basis of her coaching is: “Are you living the Legacy you want to be remembered for?”

Danielle also engages at speaking events sharing her story, knowledge and experience to help other Canadian families overcome the proverbial saying; “shirtsleeve to shirtsleeve in 3 generations”.

Learn More About Danielle

Jeff Halpern

Jeff is an experienced Business Succession Advisor who holds the Chartered Professional Accountant/Chartered Accountant designations with cross-border tax and estate planning experience.

Jeff has been actively focused on helping high net worth business owners plan for the future transfer of ownership and control of their businesses to their chosen successors, as well as ensuring the co-ordination of various TD Specialists (i.e investment, banking, insurance, trust) in the succession process. Jeff has gained extensive experience while working in America, Asia, and Europe over almost 4 decades.

Learn More About Jeff

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    *For the best experience, please complete this activity on a laptop or desktop computer.

    To be a healthy family enterprise the following characteristics are needed.

    • Communication is open and clear
    • Family has the ability to resolve conflict
    • There is high trust between family members
    • Goals and values of the family are clear and documented
    • The boundaries between family and business are clear
    • Succession is planned early
    • There is a functioning independent board of directors
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