Smooth successions and smart exits by founders are the keys to sustaining company success, says a new study.
“Well-managed exits ensure that investors get their original money out, and that the entrepreneur is adequately compensated for the years of time and effort spent building the company,” says the Managing for Growth study.
The study was commissioned by RBC Financial Group, the Canadian Manufacturers & Exporters Association and Queen’s School of Business to review internal stumbling blocks to viable businesses. It says successful succession means passing the company to the next generation, selling it, or delegating responsibility and authority.
Having a planning process to do this can increase the value of a business in the eyes of investors, lenders, suppliers and customers.
“Both successions and exits require considerable advance planning,” said Rod Hunt of the RBC Financial Group. “Ideally, a succession plan should be in place when a business first opens, because you never know when it will be needed.
“At the very least, a business should have a comprehensive plan two to five years before the owner’s exit date.”
A written succession plan can be a blueprint for a company’s future. Such plans involve identifying future leadership needs; assessing potential candidates; monitoring progress; describing how candidates will be trained and a successor declared; and outlining a timeline for succession.
They can also reveal operational weaknesses that can be fixed in time to maximize the value of the business as an owner nears retirement.
Owners shouldn’t look for a clone of themselves, suggests the study, but for the right mix of skills, knowledge and leadership qualities to take the company to the next level.
The study shows many owners are keen to pass the torch to the next generation, to fund the family’s fortunes for years to come. However, promoting the next generation without alienating the staff or other relatives can be challenging.
Only 30 per cent of Canadian family-owned businesses pass the company to a second generation, and only one in 10 to a third generation.
One solution recommended is to encourage potential successors to work outside the business for several years to build credibility and gain knowledge of other corporate practices.
Royal Bank of Canada (RY-TSX, NYSE) uses the initials RBC as a prefix for its businesses and operating subsidiaries, which operate under the master brand name of RBC Financial Group.
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