“Shirtsleeves to shirtsleeves in three generations,” they call it when family-owned enterprises fail by the time the founder’s grandchildren take over. It is a well-documented cycle: three out of 10 family businesses survive into the second generation, but only one out of 10 is handed down to the third.
A significant number of family enterprises are changing hands as Canada’s boomers retire, says Bill Brushett, president and CEO at Family Enterprise Xchange (FEX), and their successful transitions to next-generation leaders will determine the degree to which they’re able to continue their impressive legacy of acting as a primary economic driver in Canada, generating job growth and making sizable philanthropic contributions.
Estimates put the number of family businesses in Canada around 880,000, with five or six million employees. “Some family enterprises are small, others are household names that we all recognize,” he says. “We also have a high number of mid-sized family businesses that operate in every community and city across the country.”
Since family businesses are such an important cornerstone of the Canadian economy, Mr. Brushett believes their long-term success should be supported through policy and strategic decision-making at the leadership level. “Unfortunately, today in Canada, it is more lucrative to sell a business to a third party than to pass it to your children from a tax perspective,” he explains.
“We’d like to see changes that – at a minimum – level the playing field. But ideally, we’d like to see a climate where intergenerational succession is encouraged and really supported.”
While a supportive business climate and tax structure can create better external conditions, Allen Taylor, chair of FEX, also calls on business families to lay the groundwork for successful transitions. “Family businesses that are interested in sustaining the business for longer than one generation need to make this objective part of the ongoing planning process,” he says. “They need to be clear on what they want to achieve and work towards it rather than just reacting when there is a crisis.”
In Mr. Taylor’s view, long-term planning is as important as looking after day-to-day business metrics. “Families often resist discussions [about succession] because they can be uncomfortable, but if they are forced into crisis management versus strategic planning, their number of options is usually much more limited,” he says.
Exploring questions of whether the next generation is ready to step into leadership positions, whether there is harmony in the family and alignment on key goals can facilitate a more holistic approach to transition planning, says Mr. Brushett. “Family businesses with successful successions from generation to generation typically put a lot of time and effort into planning.”
Due to the interplay of family and business dynamics, many family enterprises assume their situation is unique, when in fact their challenges are often similar, says Mr. Brushett. “At FEX, we encourage them to share their knowledge and experiences, either through our programs or peer advisory and mentoring groups, and learn from each other and employ that knowledge and wisdom for creating successful transitions.”
FEX is building a family enterprise community, which Mr. Brushett calls a “safe harbour environment,” where members are encouraged and comfortable to share their personal experiences in a peer advisory group, for example. “This is working extremely well,” he adds. “By studying what successful business families have done, we learn about things that can support intergenerational transitions versus the things that can be problematic.”
Mr. Taylor agrees that with the right planning and advice, the outcomes for business families can be substantially better. “Over the coming decade, a very high number of family enterprises face the situation where the controlling generation will be looking for exit strategies,” he says. “Many want to see a continuation of what they’ve built, and members of younger generations bring their own values, hopes and dreams.”
This renewal carries a potential for revitalization, says Mr. Taylor. “Today’s economy is very different from when the boomers started their businesses. The changes, which affect how resources are gathered and how services and products are distributed, for example, will only accelerate. Involving next-generation leaders can provide answers to the question of how to grow family enterprises in ways that fit this new economy.”