November 28, 2023

Transferring a Family Business: The Death of an Entrepreneur, Without and with Planning Financial 1/3

Essential to ensure the continuity of the family business, a good transfer requires a good planning and knowledge transfer, which takes place over a few years.

Waiting for years can be expensive, so it's best to plan the transfer.

What will be the consequences following the premature death of the head of the company in a context where there is no financial planning, and in a context with financial planning:

I. Without planning

Who takes over?
Where do we get the money to pay taxes?
What will be the reaction of bankers, customers, suppliers, employees?

II. With planning

The next generation is identified
A financial and tax planning program is in place to minimize taxes, while an insurance program helps provide the cashflow to pay taxes and certain debts
The company environment is aware of the actions that have been taken to minimize the impact of death

When a successor has not been identified, it often generates conflicts among members of the family – all or some members want to take the president’s chair. When this situation occurs, it often devolves into a chain of events that can lead to the end of the company. Here are some of them:

Banker: Which family member is our point of contact? Who makes the decisions? Will the company survive? Who takes over, and are they endorsed? What are the taxes to be paid, what are the impacts on the company?

Clients: Is company management continued, is company policy with respect to services, to products being maintained?

Suppliers: Will our agreements remain? Are we going to get paid?

Employees: In most small and medium businesses, employees are emotionally attached to the founder/president of the company; an abrupt change can have an impact on the employees’ attachment to the company.

Competitors: They will do everything to amplify bad rumors, minimize the positive, they will try to "steal" the best customers, and do the same with key company employees.

Not planning one's departure is to allow the creation of a cataclysm in the event of a premature death.

– Réginald Barbe

Not planning one's departure is to allow the creation of a cataclysm in the event of a premature death. The examples described probably won't happen, but many of them will happen, we just don't know which ones.

When well planned, the steps following the death of the contractor are less destabilizing to the company. The next generation has been identified and the main employees are informed (bankers, important customers and suppliers, as well as key people in the company). The taxes will not be a cause of great hassle, because financial planning will have been carried out and the required insurance, taken out.

The untimely death of the owner/founder of the company has a significant impact on the company and its environment. Unfortunately, planning is intended to minimize the impact on the business, not to reduce the pain of those who remain.

In the examples cited, I assume that we are dealing with a single owner. If there are two or more partners, other measures will have to be taken. I will talk about it in another article.

Transferring a Family Business: The Death of an Entrepreneur, Without and with Planning Financial 1/3