Speeches

Saint John, NB, July 11, 2005
 

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This is a double pleasure for me. My father was an active Rotarian. I was his guest at lunch and dinner on many occasions, but this is the first time I have been at a meeting on this side of the podium.

Just being in Atlantic Canada brings out special feelings for me. In fact, my great grandfather was a sea captain based out of a port in Newfoundland. His son, my grandfather, became a merchant in that same port. Some of my best memories as a boy involve coming back to Atlantic Canada to visit my grandmother. It’s very special to be in an Atlantic port as beautiful and historic as Saint John.

I was here just last year speaking to the Board of Trade. It was a great event, where I had the opportunity to talk about the rising strength of the “Atlantic Tiger” economy. I’m pleased to say that since my last trip here, the Tiger has continued to roar. New Brunswick’s economy had solid growth of 2.6 per cent last year. Our Economics department is predicting that with stronger consumption and exports, plus the expected investments in the energy sector, growth in both this year and next should reach 3 per cent.

BMO itself is a proud contributor to the economy here, and has been a part of this city’s history for nearly 140 years. We opened our first branch here in July of 1867 – right after Confederation. Today, we have 24 branches and over 200 employees to meet the financial needs of New Brunswickers.

Our customers feed back lots of insights into the kinds of business issues that keep them up at night. One very important issue affects a great number of our small and medium-sized business clients. Although we hear about it far too infrequently, it is vitally important for the future of our economy: namely, succession in closely-held and family businesses.

Succession has a significant impact on the New Brunswick economy, when you consider that small and medium-sized enterprises, SME’s, employ more than half the workers in the province.

Many of these companies are family-run businesses. Most, if not all, of the people hope that the companies they founded will live on after they step down.

We all know of companies that started out small and eventually became major players: the Irving companies and McCain Foods are just two of the more famous examples. In large corporations like these, succession planning is a continuous process.

Unfortunately, this sustained focus on succession planning – which enables a company to survive and grow over the long term – is not commonplace in SMEs. In fact, only one in three SMEs survives the transition to a second generation and only one in ten the transition to a third.

This represents a serious concern when so much of our economy depends on SMEs. Between 80 and 90 per cent of all companies in Canada are small to medium-size businesses. They generate nearly half of the country’s GDP and are responsible for some six million jobs.

The loss of any company, regardless of its size, has an economic and social impact on employees and communities. Jobs, expertise, experience, business networks – all are irretrievably lost when a company shuts down.

Clearly, we all have an interest, directly or indirectly, in the orderly succession of these businesses.

So how do we explain the fact that so few of these companies survive into the second or third generation?

I think there are two main reasons.

First, we know that small business owners are hands-on types. They tend to do everything themselves, to make all the decisions.

Of course, just like everyone else, small business owners want to enjoy the opportunities that life after work offers. But the notion of letting someone else take over something so important and personal can be tough.

Another reason behind the apparent reluctance of business owners to prepare for their retirement is a lack of a framework. After all, small business owners know how to run their businesses, but often have no reference point on that next step of handing it over to someone new.

The consequences of this can be found in a Canadian Federation of Independent Business member survey released last month. It found that 7 out of 10 SME owners intend to exit their businesses over the next ten years, but only one-third of SME owners are currently planning for their future succession.

There can be an opportunity cost to that. Having a well-crafted succession plan adds value to the company and can increase its sale price if selling the business is the desired outcome.

Equally important, implementing a rigorous process to designate a successor to head the business remains absolutely crucial to the company’s survival.

So what’s in this process?

The plan should address the following five questions:

- Is there someone in my family who is not only available to take over, but also qualified?
- If so, what is the best way to prepare him or her to take on this role?
- What should be done to ensure that all family members are treated fairly in the process?
- Should the family retain ownership of the company while entrusting its management to someone else?
- Would it be better just to sell the company outright (to employees perhaps)?

Of course, all of this should lead, in the end, to ensuring you have enough money for a comfortable retirement!

Most small business owners have a huge emotional investment in their business and often worry that no one will do the job like them. This is understandable given that the value accrued in the business is often the result of the leadership and care provided by the owner. It’s such a difficult thing to do, but I can’t say it often enough; the succession planning process must not be guided by those emotions. After all, when the goal is to ensure the company’s long-term survival, you need to be as impartial as possible.

The way to do this (and I know it’s not easy) is to isolate the key stakeholders from the succession process itself:

• the family
• the shareholders
• and the business itself.

Surprisingly, the business itself gets the least attention in the succession planning process, and probably needs the most.

We at BMO have given a great deal of thought to ways to help our clients deal with succession. We recognize that succession planning is part of a larger wealth management picture, and that all the elements, like estate and trust planning, investment management, and plans for philanthropy need to be considered. The division of the bank that specializes in this is called BMO Harris Private Banking and, by the way, it reports up to Gilles Ouellette, who hails from Grand Falls. One of BMO Harris Private Banking’s roles is to help owners carefully consider the strategic options for their businesses.

In order to try to take the emotion out of the difficult process of selecting who will lead from among the owners' children, or trying to treat them equally and fairly, we ask our clients to focus first on the business itself, assess its Strengths, Weaknesses, Opportunities and Threats and determine what it needs from its leadership in order to continue to grow.

We ask them to enlist the key employees in this discussion. Once the needs of the business are understood, we ask them to look at the children objectively to the extent they can AND with the assistance of some key external advisors. We then interview each family member individually. We often find a gap in the expectations and assumptions of the parents and the children. For instance, Dad has his heart set on Junior taking over the business, but Junior secretly wants to become a teacher. We frequently find that family members don't effectively communicate or understand each other.

We try to assess the skills of the children who are considered for leadership against the needs of the business and identify skill gaps. We try to help prepare a development plan to address the gaps, which may include more education and, most importantly, the gaining of experience outside the business.

While this process is going on, we help the owner buy time, usually through suggesting the use of trusts and voting trusts. Trusts put legal ownership or voting control in the hands of the parents or others as Trustees. This separates control from use of the shares and serves to defer decision making around the vesting of shares. The Trust document specifies what happens in the event of unforeseen events such as death, disability of a key trustee (the founder), all while allowing the children to season and develop before the decision is made to vest shares and control in one beneficiary or the other.

Let me give you a real life example of a manufacturing business that we helped. The founder has four children, two of whom are very active, one as President and one as General Manager. The founder still has all voting control at age 75. He divided common equity into five shares of 20 per cent each. Each of the children has 20 per cent and the parents own 20 per cent. The founder was reluctant to put one in charge and he mistakenly thinks their titles send a message for now while he makes up his mind.

We put a voting trust in place, with a trustee panel which includes the owner and the two active children and some external advisors to deal with the ultimate vesting of voting control. This gave the owner the comfort of knowing he has a mechanism in place to make a decision in the event of his incapacity or death, while allowing time to pass to see how the two active children perform and work together.

We emphasized the importance of flexible planning that can be altered or undone, while deferring and reducing the tax consequences of moving the corporate pieces around. We also encouraged the retiring owner to truly let go by pursuing other interests such as philanthropy, travel etc.

In short, we helped develop a framework and process to help them turn emotional decisions into business decisions, and we helped them find a flexible way to buy time to allow for the best decision to be made. We urged them to take action, to commit to a plan and communicate it early enough so that the founder could mentor and prepare the future leader.

Finally, we used the power of our internal and external networks to find the right advisor, required capital, required temporary or full time human capital and diversified investment choices. I could tell you even more stories like this, and I’m proud to say that this kind of work has helped us get to second place among the Big Five banks in market share in small business banking. We’re clearly punching well above our weight.

We understand succession planning isn’t easy, and sometimes it’s painful. But so much is at stake, both for the businesses themselves and the wider community and economy. If you are a small business owner, and you haven’t started a succession plan yet, or if you need your current plan to be better, now is the time to deal with it. And as I said, we at BMO are proud to work with you.

Although this is a very serious topic, I’d like to close by sharing with you something some of us at BMO call the Top Five Rules of Succession Planning for entrepreneurs, their families and partners.
• Do something about succession planning before you reach “the Big 5-O”.
• Avoid confusion; it can only lead to future confrontation.
• The child who honours mother and father is a good candidate for succession.
• If you decide to sell, do your best to find local buyers and investors.
• Enjoy your retirement.

Naturally, we’d like to help you as you work your way through this challenging exercise, so, if you have any questions about how we can help, I know my friend Jim Quigley would be more than happy to talk to you.

Thank you again for the opportunity to speak to you this afternoon. It is indeed a privilege, because I admire the work you do in this community, especially your many projects involving seniors and young people.