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Money matters – Succession Planning

Don, 66, and Ellie, 55, had spent the night in emergency at Timmins and District Hospital after Don suffered a sudden stroke.

Don, 66, and Ellie, 55, had spent the night in emergency at Timmins and District Hospital after Don suffered a sudden stroke.

He owned a quarry business and had no succession plan. While Don’s grown children were flying to Timmins from across Canada to visit, none of them wanted to get involved in the family business.  Ellie’s role was limited to being a shareholder in the business and helping with the books.

Dictate your terms of retirement
Don and Ellie’s situation is common, witnessed by the fact that only one third of Canadian businesses have succession plans, most of which are unwritten.
(Source: The Canadian Federation of Independent Business).

"Creating a succession plan for a client is similar to knowing the reserves in your pit or quarry," says Sanderson.

Jim Sanderson, senior wealth advisor with The Jim Sanderson Group at ScotiaMcLeod, says, ”A succession plan is critical to defining your “terms of retirement.” Without a plan, you have nothing with which to negotiate and others will take control of your retirement destiny.”

Sanderson was trained as a geologist and spent three years in the field before deciding his calling was wealth management. He still had an affinity for geology and went to trade shows such as the Prospectors and Developers Convention (PDAC) to reminisce with old friends and talk rocks.

He determined there was a real need for wealth management (with succession planning being a large part of that process) among aggregate and road building business owners and found business succession gaps that he knew he could help fill.

After two years of research that involved talking to many stakeholders with the aggregates and road building industries, he was proven right and began to carve out a niche for himself as one of the few senior wealth advisors in North America who truly understands the aggregate and road building industries and what keeps its business owners up at night. The fear of having to sell quickly at a reduced price due to health, family or cash flow reasons weighed in at number one.

A senior wealth advisor for 28 years, Jim says, “Better that owners be in control of the destiny of their business rather than rely on the goodwill of a third party they have never met who is shopping for a rock bottom prices.”

“Regardless of their situation, they have only two options: to sell when they want to, or when they have to."

Walk a mile in my shoes
The adage walk a mile in my shoes rings true where Sanderson is concerned.

He travels frequently to visit clients and prospects and to attend trade shows staged specifically for the aggregate and road building industries.

He belongs to the Ontario Road Builder’s Association (ORBA), the Ontario Stone, Sand, & Gravel Association (OSSGA), and the B.C. Stone, Sand and Gravel Association (BCSSGA). Sanderson has taken a booth at each OSSGA annual general meeting for the past five years and will continue making himself accessible to prospects and clients alike.

Sometimes other delegates at trade shows will ask him why he is attending as a non-business owner. He responds, “I was a geologist before I got into the business. I worked in the Quaternary Section of the Ontario Geological Survey, which is all about gravel and rocks. So I understand what you’re working with and what it means. But there’s a lot I don’t know, and that’s why I come.”

(Source. Advisor.ca: Court Clients in the Road Building Industry by Melissa Shin June 6, 2014).

His connections within the aggregates industry position him to help bring sellers and buyers together. He recently introduced a pit and quarry buyer to a quarry owner who wanted to sell. With Sanderson as the catalyst, introductions were made and the deal was done.

Momentum drives succession planning
Sanderson wants to help people and corporations who are looking for an advisor for the long term. This fits with his investment philosophy, which is geared to the long-term returns of the markets while charging low fees to ensure his clients have a successful investment experience. He and his team of experts will happily work beside an owner’s trusted advisors to get the best results for the client. He is a good listener and reserves judgment of a situation until he has all the facts. For example, he writes detailed summaries of his client conversations with next steps to fuel momentum. “Momentum keeps owners thinking about succession planning, investing outside the business or any other topic we need to address.”

Having all of one’s capital tied up in a business is like owning just one stock. Sanderson believes in diversification using an investment portfolio set up to manage risk and benefit the potential for increasing wealth. He says diversification is, “The only free lunch.” Divesting some of the capital outside the business for the long term will provide a nest egg, independent of the business, and allow owners to retire on their terms, versus being forced to sell when there are no willing buyers.

Build a succession plan like a survey
“Creating a succession plan for a client is similar to knowing the reserves in your pit or quarry,” says Sanderson. “You need to uncover as many details about the site as possible, which includes understanding the deposit, depletion rates, looking at the site’s history and controlling the variables that could affect the project’s outcome – in this case, the future financial well-being of the business owners and their families.”

He says business owners must make their company attractive to potential buyers daily. “It’s like keeping your machinery in shape to avoid repairs and downtime.”

Succession plans vary
Sanderson offers four succession-planning scenarios, each requiring a lawyer’s and tax advisor’s input.

Sale to family members 
Your reasons for choosing this option may include preserving the family legacy, ensuring a discreet and quick transaction and being more focused on the quality of the transaction for all parties than the value you derive from it.

Risks may be involved.  For example, family members may not be experienced enough to lead the business; infighting may result from equitable share distribution; or some family members may not want the responsibility of taking over the business.

Sale to your management team
Your driving goal here may be to: get fair value for your business; reward the management team; and ensure a smooth transition of business and employees and a discreet transaction. Risks you face include being unable to raise the money to fund the transaction, or you become distracted from running the business as the transaction details are negotiated. You also need to manage three entities – the seller, management and capital providers.

Recapitalization/partial sale to keep you in the game
You may want liquidity now, while remaining committed to the growth of the company. You may also want to participate in the company’s future growth while ensuring a discreet and smooth transaction.

This can be a moderately complex process as a business plan and growth strategy will need to be built and sold. Your willingness to remain in business can help the transaction go smoothly.

Sale to a third party
In this case, you will want to quickly maximize the value and proceeds you receive. Sanderson says, “Third party sales work well when there is a Win-Win for the parties involved.”

Increasing numbers of senior business owners who will soon want to move on to something else but have no succession plan prompt Sanderson’s indisputable statement: “Selling when you want to is better than selling when you have to.”

Evan Thompson is a writer and founder of Evan Thompson and Associates www.evanthompsonandassociates.com , a communications firm in Toronto.