A millennium ago, primogeniture may have simplified decision-making when it was time for a business owner to leave the family company, but it didn’t necessarily take care of the resulting grumbling, resentment and infighting.

“These issues have always been there,” acknowledges bestselling author Thomas William Deans, who penned Every Family’s Business to help entrepreneurs with exit strategies designed to help preserve family wealth and prevent family friction. “The practice of the oldest male taking over everything destroyed a lot of wealth and a lot of families.”

Similarly, many businesses today are gifted to the next generation who may not be interested in running it, or have the skills to do so well.

“Whether a family business owner sells to a family member or a third party, there is no wrong answer,” says Deans, a PhD and founder of Détente Financial Corp. “The only wrong answer is gifting it. It’s a sure way of destroying family wealth and relationships.”

Although literature and history books are full of the misadventures of siblings feuding over control of the family fortunes, succession planning is gaining momentum as a topic of current national importance.

The Canadian Federation of Independent Business (CFIB) has been vocal about a “looming business succession crisis” for years. Its research, gleaned from surveys of its 100,000-plus membership of Canadian independent businesses, shows 70 per cent of small and medium-sized business owners plan to exit their businesses in the next 10 years, but only a third have a plan for selling or handing over their business.

“Ontario’s economy could end up in shambles if this major demographic shift in business ownership is not recognized by policy makers,” CFIB’s Ontario vice president Judith Andrew said in 2006.

“The lack of attention paid to this issue to date only adds to the concerns about business in this province.”

“The sheer numbers are driving the importance of the issue,” says Deans, whose own family has founded, operated and sold three of their private and publicly-traded companies for a combined value exceeding $100 million.

“There is an unprecedented number of business owners who are turning 60. And, they had smaller families in the ’60s and ’70s and fewer family members to transition the business to.”

Rather than streaming their children into the family business at a young age, as had been the norm, Deans says parents of today’s adults encouraged them to get an education and follow their own dreams – which is exactly what they did. Consequently, no one is left to take over at home.

“When succession planning fails, everyone pays a steep price: the family, employees, customers, suppliers, including financial institutions. The banks are really nervous about this issue,” he says of the 2.4-million family businesses in Canada.

“If current patterns continue, only 30 per cent of these family businesses will pass ownership to the second generation and only three per cent will pass control to the third generation,” said Deans.

“Some will sell, but many of these family businesses will simply close their doors or go bankrupt.”

Barrie CFIB district manager Keith Tribe says this result would be disastrous.

“Independent business owners create seven out of 10 jobs in the country and account for 54 per cent of the gross domestic product (GDP),” he said in a previous interview. “They’re the biggest portion of the business community driving the economy.

"(Most) don’t have any succession plan – this is pretty scary stuff.”

In his practice MSK Associates, small-business advisor Michael Keith works with business owners to plan ahead to plan a successful transition.

“Business decisions can get made based on family members’ emotions and based on being fair, and that’s a recipe for disaster,” says Keith, an accountant by profession who, with years of Chief Financial Officer experience at major corporations behind him, spearheaded the Ontario government’s decentralization project that sent provincial ministries from Toronto to more appropriate locales (like the Ministry of Agriculture to Guelph and the Ministry of Northern Development and Mines to Sudbury, for example).

Keith has seen, for example, two brothers (one is a competent leader and the other is a “worker bee” in the company who doesn’t understand business) be given management positions because their father thinks they should be equal in the business.

”One brother could make bad decisions that could affect the other. The other brother could be resentful,” he explains. “Business decisions get made for family harmony rather than for the sake of the business. And it’s critical to note: this business is feeding everyone. What you’re doing is eroding the family business wealth.

“Across North America, 90 per cent of businesses fail within five years,” he says. The reason is basically mismanagement – they don’t have the right management skills.”

In line with the process suggested in Deans’ book, Keith recommends a family meeting that gets everything on the table prior to the turnover to facilitate planning.

“There’s a series of questions the family goes through every year and the answers need to be in sync,” says Keith, who is the Alliston and District Chamber of Commerce president. “The answers are to preserve the family wealth, not family emotions. The main problem comes when the family members have different objectives for the business and that’s what ultimately rips the business apart and causes it to fail.”

Regardless of whether the intent is to pass the business on to family members or to a third party, Deans says the answer to all problems is selling the company, never simply giving it away.

“The succeeding generation needs to risk their capital in order to protect the wealth,” he says.

“What I’ve experienced is family businesses that gift the business, make it easy for family to stay on and run the business, and usually for all the wrong reasons.”

The problem with this, he adds, is gifting the business makes it something necessary to preserve without alteration.

“Change is the cornerstone of business and the lack of innovation is the main reason only three per cent of family businesses make it to the third generation, and gifting is the culprit,” he explains. “When someone borrows the money and buys the business, it ends all the family rivalry.”

If two or more family members want to collaborate, then “they can work out their partnership agreement themselves as shareholders.”

But, he continues, rarely has he seen this happen.

“One (sibling) is usually the natural leader and owner.” The 12 questions Deans suggests in his book as planning tools are “driving transparency in the family and letting talent rise to the top.”

If the ownership remains in parents’ hands while the younger generation operates it, there is simply a succession of management, not of ownership. And because the assets of the retiring founders are tied up in the business, everyone’s finances are reliant on the business’s ongoing success.

“If they don’t run the business well, they’ve just screwed up their parents’ retirement fund,” says Keith bluntly.

Deans agrees.

“Parents who sell will invest the money not in one stock but into a variety of things and protect their wealth,” he says. “When parents don’t sell their company, they’re playing roulette with their wealth everyday – it’s all in one place.”

Another route to go is to incorporate the company set up a trust to run it, says lawyer Andrew Rogerson, who specializes in estate planning and asset protection.

“Put the shares in a trust so the family gets an income without being involved,” says Rogerson, a Barrie resident who maintains an office in downtown Toronto. “That’s the way to avoid family squabbles bringing down the business.”

In this model, the business would be run by professional managers, just as any other business, he explains. One of the children of the founder may wish to work there, but they’d be appointed based on merit and would draw a salary in addition to the share income.

“If you are going to appoint one of your children, you must have a proper agreement with the other children that everyone agrees with so it’s a win-win,” he continues. “Otherwise, years of unhappiness and litigation may ensue.

“A lot of competitors are just waiting for this to happen: division in the family, so they can get it at a price lower than market.”

Counter, perhaps, to intuitive thinking, succession planning isn’t something to be tackled as thoughts turn to other interests.

Patrick Hebert, who started the computer recycling company Thriftopia.com in April 2007, says he’d barely got his fledgling venture off the ground when he was approached with requests for franchises and licences.

“Our objective was to create a job for me, my fiancée (Tammy Markham) and my brother (Jon),” recalls Hebert.

“Even though we’re such a young company we’ve been approached by someone out of Michigan asking about buying a franchise. (Keith) introduced the idea that someone might come along who wants to buy it before we’re actually ready.”

Hebert and his team (which now includes employees he’s recruited through Careers for Inclusion) dismantles computers, televisions, monitors, DVD players and gaming systems.

They reconstruct and sell usable units, but send the rest to responsible processors who pay for the material.

“One tonne of old electronics actually contains more gold than a tonne of ore mined out of the ground, which is why big companies are interested in this business,” Hebert says.

Early planning is the critical issue in being prepared for what’s to come.

“All too often, owners do a business plan for a bank or to say it’s done and throw it on a shelf. A business strategic plan is the foundation of a good business plan,” says Keith.

“What’s critical with an exit strategy is business owners typically do their financials to minimize their incomes taxes legally. What this does in some cases though, is undervalues the company.

“And when a potential buyer looks at the last four or five years of financial statements, if the financial statements have been done to minimize taxes, then he minimized the value.”

There are other advantageous ways to set up the financial picture to avoid get caught short when it’s time to sell, whether the founding ownership lasts three years or 30.

“Often the business owner has a great idea – they’re good at one thing, but they’re not good at everything.” says Keith, who regularly works with his clients as part of a corporate advisory team. “You need a very good tax accountant to bring into the equation, a wealth management advisor to figure out what to do with the money, and a good corporate lawyer.”

Then, having taken care of the business and family, it’s time to focus on the retirement fund.