This new Advisor to Client series helps clients learn about the elements of financial planning through the examples of their favourite fictional characters.
Subject: Claire Dunphy, Modern Family
- Succession and contingency plans (this article)
- Tax strategies to protect family businesses (tomorrow)
Watch: Wednesdays at 9 p.m. on City
Scenario: Claire Dunphy took over the family custom closet-making business when her father Jay retired. The transition was far from smooth.
At first, Claire struggles to gain legitimacy in the eyes of other workers, who see her as the boss’s daughter. When it’s clear she’s good at her job, Jay feels like his position at the company is being squeezed out. After less than a year in retirement, Jay returns to the company as an employee while Claire keeps running the business.
Claire has three children: Haley, Alex and Luke. None of them have expressed interest in going into the family business. Jay’s grown son Mitchell is a lawyer by training who is trying to figure out his next career move. Jay’s stepson Manny and his third son, Joe (a toddler, to be fair), also haven’t shown any interest in the business.
Claire is in her 40s, so she has time to start looking for her successor and shaping her legacy and exit strategy.
Assumption: In this case, though Claire is president of Pritchett’s Closets and Blinds, we assume Jay still controls the shares. We also use Canadian laws and tax planning strategies.
Organizing a succession plan
Though Claire, who is in her 40s, is years away from retirement, there are several reasons why creating a succession plan for the family business is a good idea. First, Jay is still the owner of the company and Claire is the figurehead; since Jay is about to turn 70, there’s a shorter time horizon to determine how his shares should be allocated.
Add to that the fact that Jay has three children with two different women, a wife, a stepson, an ex-wife and four grandchildren — the show is called Modern Family after all — and the puzzle becomes increasingly complex.
Peter Hobb, partner at Collins Barrow’s Durham Region office, says the first step in creating a succession plan for Pritchett’s Closets and Blinds would be interviewing Jay and Claire.
He would ask for their short and long-term expectations and goals for the business. “Normally we would interview each of them individually,” he adds, “because they’re more apt to say things individually than they would together.”
During those interviews, “you want to find out if there are any issues that need to be addressed.” For instance, if there’s conflict between Jay and the kids, or Jay doesn’t think the kids are capable of running the business.
The next step would be to resolve those issues. “Usually, conflict arises when expectations aren’t in alignment, in this case how Jay and Claire see things unfolding,” Hobb says, “Once you find out where the soft issues are, lay that card on the table. Now you can start the conversation about how they can be resolved.”
Richard Niedermeyer, a partner at law firm Stewart McKelvey in Halifax, says to determine Jay’s and Claire’s time horizons for their goals. “If Claire says my goal is to be in charge for the next 20 years, that’s a fairly long time. If she says, ‘At the end of the day, I don’t see myself here more than 10 years,’ that changes the plan.”
To prepare to pass his company on to his family, Jay could put his shares into an alter ego or family trust and choose his beneficiaries, says Marco Faccone, a financial planner at MGF Advisory Inc. in Vancouver. The trust’s deed would explain what to do with the shares when he dies.
It’s currently unclear which of Claire’s children will succeed her — if they do at all. Sarah Netley, a tax manager at Collins Barrow’s Durham Region office, says the family trust is flexible, so decisions about who will be Claire’s successor can be made later.
“It sets you up for the children to serve a purpose and get involved but defer that ownership transition down the road until you see which of the children has interest in the operation,” she explains.
Jay could make Claire the trustee, so she would retain control over who succeeds her. If Jay instead transferred a specific number of shares to each child, there could be fighting as they get older. Imagine Claire’s youngest child Luke taking over the day-to-day running of the company, while his older sisters Haley and Alex dictate decisions because they have combined majority control of the company.
Faccone says a trust would be Claire’s smartest strategy for tax planning purposes. Claire’s husband and children could be beneficiaries of the trust, so as the company grows in the future, they would share in that growth.
Since Claire’s kids aren’t interested in working for the family business right now, she could start grooming internal management for succession. “That would typically involve an education or skill assessment for the management team currently.” The assessment would identify qualification or experience gaps, which could then be addressed. It would also deter outside charges of nepotism, he adds.
The plan wouldn’t have to be permanent, but it should be written down. “If the plan changes because one of the kids gets interested and wants to come work in the business then you can revise it,” Niedermeyer says. “If the plan is in someone’s head, it doesn’t help anyone else.”
A contingency plan for Claire and Jay in case of emergency should be part of the succession plan. “Health can change quickly,” notes Niedermeyer. “Right now the contingency plan could be that Jay would step back in if something happened to Claire - but that won’t be an option forever.”
Or, depending on the time of the contingency, he says, “If you’re in a situation where none of the kids or spouses are involved, typically you look to your internal management or an external person being brought in.”
Claire should look for someone she trusts, who has the skills and knowledge to operate the business on short notice. “If something happens suddenly you want to have the confidence the lights will go on and deposits will get made the next day without you being there,” he explains.
Her longer-term contingency plan would be akin to an exit strategy if, at a later date, she chooses to retire. “If no one’s going to succeed in terms of ownership from a family perspective, you’re looking at a sale. Your other option is to just wind the thing up, but that obviously is not a great way to maximize value.”
Niedermeyer says Claire could consider selling to either a member of internal management or to a third party. If she looks outside the company, “You’re either looking to sell to a financial buyer – someone who’s interested in the business because of its economics – or a competitor who wants to buy that business to capitalize on growing market share in the industry.”
Tune in for part two, on tax strategies to project the business, tomorrow.