All in the Family
By Dianne Choma | October 31, 1999
In the early 1940s, when most teenage girls were going to the movies on weekends, whiling away their time, the Lamothe girls were in their father's small bakery in Ottawa learning the tricks of the family trade.
Grete Hale, chair of Morrison Lamothe, was one of those girls. She started in the bakery when she was 13 years old, took over the presidency from her older sister, Jean Pigott, in 1978, then chose her successor, her nephew John Pigott, to take over for her in 1988 while she stayed on as chair.
Now, at age 70, Hale says she can look back at the trials and triumphs of her career with no regrets. After three generations and several buy-out offers, Morrison Lamothe is still family-run and still contains what Hale calls the "magic ingredients" that make a family business work: love and respect.
"We work hard and we have a good time," she said. "We're very proud of our product. We make good products and we have such a team. It makes for a wonderful, rich life."
In the Scottish Lamothe clan, there was no succession plan for the family business in the early days; it was simply expected that the children would take over for their father. Even 10 years ago, when Hale asked her nephew to take over as president, it was a spur of the moment decision, she said. No one ever told her to plan for succession. She simply did what seemed right when the time came.
Times are Changing
Unfortunately, not many family-business owners know how to plan or where to look for help, said Don Emerson, a partner and family-business expert at Grant Thornton in Toronto. And one of the major pitfalls of running a family business is that few survive.
Studies show that only three in 10 family businesses survive the transition from the first generation to the next, while only one in 10 survives to the third generation. The problem is usually a lack of planning, said Emerson.
Grant Thornton recently conducted a survey to gauge the opinions of Canadian family-business owners about corporate and family issues. The survey asked owners to select their highest business priorities and to identify the issues they had difficulty dealing with. Four issues stood out:
- Resolving conflicts among family members who are in the business
- Formulating a succession plan
- Developing a strategic plan
- Developing a retirement and estate plan
Three of the top four issues involve some sort of business planning. However, Emerson said family businesses often have trouble planning for the future because they are near-sighted and don't know how to break down the process into components.
"It's a process that the big, public companies are more comfortable with, whereas the family business isn't. They're focusing on the day to day, and strategic planning means really taking the long-term view."
Some view the recent collapse of the Eaton's chain of department stores as a case study in poor strategic planning, Emerson said. Started in 1869 by Irish immigrant Timothy Eaton, the company survived through four generations and boasted about 65 stores and 13,000 employees nationwide before it filed for bankruptcy in August.
"It seems like their biggest issue was probably in the area of strategic planning, as far as the strategic decisions they were making about what market to be in and what customers they were trying to attract," he said.
For small businesses, the strategic planning process is even more difficult, said Joan Berta, national executive director of the Canadian Association of Family Enterprise. Family businesses often lack the resources that large companies have for formal strategic planning and, therefore, overlook its importance. Berta estimated that less than 50 per cent of family businesses have a formal strategic plan.
Berta outlined five basic steps toward devising a strategic plan:
- Look at your business. Ask yourself what are your company's mandates, values and goals.
- Do a SWOT analysis: figure out what are your strengths, weaknesses, opportunities and threats.
- Identify your company's strategic issues and problems.
- Formulate strategies to deal with those issues.
- Have a vision for the future.
Planning is "an opportunity to focus your business on outcomes rather than on happenstance or chance," said Berta. The first step in designing a strategic plan, she said, is to realize that you have probably already done strategic planning and you don't even realize it. "Most of us do strategic planning in our heads. It just doesn't work as well as when you sit down and document your plans, and keep revisiting, making that a living document."
There are many questions that go into strategic planning, such as:
- What do you want for your business?
- Do you want the company to survive you?
- Where do you want to be in the next few years?
- What do you want for your family?
Family-business owners can find it difficult to talk about such private issues, said Berta. And they are often reluctant to turn to outsiders for help, which is another hindrance to strategic planning. In addition, family-business owners don't always have a formal business education and may not be aware of the benefits of strategic planning, she said. They may never have worked for another company and may not have seen strategic planning in action. They may also be reluctant to tinker with the business or may not see a need to change their ways.
But no matter how stable and successful a family business may seem, it is always important to think about the future.
Berta recommended holding strategic planning sessions once or twice a year. Strategic plans should cover the next three to five years for small businesses and should be flexible enough to change as the business changes, she said. Business owners need to be able to look at their plans and ask whether the company is still on the right track, whether something should be done differently or whether it should be done the same.
Most important, have a contingency plan in case something goes wrong. Berta said that at her family-run marketing research company, she and her husband have a three-person team set up to take over the company's leadership for a year in the event that something prevents them from training their successors.
Few people like to think about what would happen if they suddenly suffered an illness or accident. But if families do not talk about succession early on, it can lead to a crisis when the time comes to hand down the business. Succession planning is a major part of a company's overall strategic plan.
"It's really one of the most agonizing things that family businesses have to deal with," said Emerson. "But it's also one of the most important because if all the good will in the business rests with the founder, once that leader leaves, the value of the company, the profitability of the company, just plummets."
Training a successor can take five to eight years, Emerson said, so it's important to start the process well before the owner plans to retire. When clients come to Grant Thornton for help with succession planning, Emerson said he advises them to answer these key questions:
- What attributes are needed to run the business?
- Can the business be sustained with a change in leadership?
- If the answer is yes, is there another family member with the ability and interest to take over?
- If a family member is willing but not qualified to take over, can the owner hire outside talent to help fill in the gaps? Where else can the potential successor get training in the field?
No matter how much the company leader wants to keep the business in the family, it's important that other family members have choices and not feel pressured, Emerson said. Business owners can avoid this sort of pressure by planning early and having a detailed, documented succession plan, complete with a timetable for the transition process and a contingency plan in case the successor is unable to take over.
Estate and Retirement Planning
The final stage of strategic planning is to think about your retirement. A comfortable retirement should never be taken for granted, said Norman Goldman, a Quebec notary who advises clients on retirement and estate planning. Business owners should start to prepare for retirement as soon as they start their businesses, Goldman said.
Estate and retirement planning involves deciding how to divide up your assets in your will and how you want to live after retirement. It raises a lot of questions about the future, said Goldman, such as:
- When do you want to retire?
- Are you going to fully retire or continue to work part time?
- Where do you want to live when you retire?
- How will you finance your living expenses?
- Do you have a budget to account for the lost income?
- What will you do after you retire (e.g. hobbies, volunteer work)?
Goldman recommends following certain steps when planning for retirement:
- Draw up an inventory of all your assets. Make it as complete as possible and include stocks, bonds, cash, bank accounts, property, pensions, retirement benefits and life insurance, if applicable.
- List all your liabilities. Ask yourself what short- and long-term debts and obligations you have. Think about how these will be financed, what will happen in case of an emergency, and how you will provide for your own medical and nursing care in your retirement.
- Do your paperwork. Make sure you have a properly executed will and a durable power of attorney.
- Take taxes into account. Make sure your estate can cover your taxes when you die so your family does not have to deal with them.
- Consider your matrimonial status. Do you have obligations to a spouse or children from a previous marriage?
- Think about your business relationships. Are there partners or shareholders with whom you hold agreements that may affect your estate?
Selling Your Business
Income is one of the main concerns for family-business owners when planning their retirement. Business owners are required to contribute either to the Canada Pension Plan or Quebec Pension Plan, which provides them with some income when they retire. Some business owners may also have investments or additional retirement savings plans. Others may be relying on the sale of their business to fund their retirement.
J. Christa Thomas, a Toronto lawyer who specializes in estate planning at Jellinek & Road, said there are a number of legal issues to consider when it comes to handing over or selling a family business.
If the business is to be transferred to relatives, for example, their capability, age, involvement in the business and other factors have to be considered. Also, owners may want to secure profits for surviving family members before they transfer control of the business, Thomas said.
The owner must also decide if the business will be transferred through a sale, through a gift of shares or through an estate freeze. Each option raises new legal issues, said Thomas:
- Giving the shares away can entail a loss of control over the company unless the owner is issued voting, non-participating shares.
- Selling the business, even to a family member, must be at fair market value. In addition to a cash down payment, the family member can issue a promissory note, which can be forgiven in the owner's will.
- An estate freeze is a strategy to minimize the capital gains tax due after death. It freezes an asset's value and passes on future growth or profit to the next generation.
Thomas said business owners may want to consider dividing up their business assets before they die, in effect, creating several smaller businesses. Splitting up the business or separating non-business assets can allow greater planning flexibility and can make it easier to involve multiple beneficiaries, she said.
In addition to a will, business owners may also want to prepare shareholder agreements or obtain buy-sell insurance, said Thomas. When there are multiple shareholders or partners, a shareholder agreement stipulates the conditions of the sale and ensures that the surviving partners will be able to buy the deceased or retiring shareholder's interest. Buy-sell insurance works the same way, allowing the shareholders to use the insurance payment to purchase the remaining shares.
All of these issues suggest that retirement can be difficult and confusing if it's not properly planned for.
A family business can be seen as operating within two separate systems: the inward-looking family system and the outward-looking business system, said Emerson. Finding a balance between the two is not easy, but it can be the key to successful strategic planning.
In the early 1940s, when Morrison Lamothe Inc. was just a twinkle in an Ottawa baker's eye, strategic planning was not much of a consideration. The company was handed down to relatives without a succession plan and decisions were made sitting around the dinner table with the family.
Fortunately, Morrison Lamothe is an exceptional company. It has survived three generations of succession and has grown from a small bakery into a large frozen food company without much formal planning. Hale, its current chair, said that she has always just listened to her instincts or "ticks," as her mother called them, when making business decisions.
Looking back on her company's success, however, Hale said she knows now that planning must be a top priority for any family business. "It's one of the most important parts of a company. There's lots of help out there," she said.