Early succession planning is vital

Transferring knowledge takes years, couple says

500,000 owners expected to retire by 2020: Study

SHARDA PRASHAD
BUSINESS REPORTER

Jeff and Michelle Sziklai didn't have to look far from home when they decided to pack in their corporate jobs in Toronto and become entrepreneurs. They were able to develop a succession plan to take over Michelle's father's business, Van Wyck Packaging.

"The first thing we did was hire an outside consulting firm," said Jeff Sziklai. "It involved getting the family members together and going through what our wants and needs were."

The six-year succession plan of the folding carton, label and contract packaging supplier was completed last year. The couple re-mortgaged their house in order to afford a majority stake in Van Wyck.

"The best thing about the succession plan is that it allowed all of the parties to get out of the business what they wanted," he said.

Grant Robinson, chief executive of Success Care Solutions Inc., who worked on the Van Wyck succession plan, said most small and medium-sized enterprises don't implement succession plans.

"People know that succession is important, but they don't think it's urgent," said Robinson. "But someday everybody will sell their business, whether it's voluntary or not voluntary."

And with an aging population, Robinson says the need for succession planning is more important than ever.

A recent study by Canadian Imperial Bank of Commerce predicted 500,000 owners of small businesses — those with less than $5 million in revenue — will retire within five years. And by 2020, the study indicated, half of Canada's small business owners will retire. The study also found that by 2010, $1.2 trillion in business assets will change ownership.

Robinson said the elements of an effective plan include discussions on how succession will work for the owners of the business and for management. Issues including how clients, traditions and product knowledge will be transferred should also be discussed. Consultants, tax advisors and lawyers are often necessary in developing an effective plan.

"The owner of the business (who is often the founder) often has got skills that are critical," said Joel Cohen, partner at consulting company RSM Richter. "It's important to contemplate if the business can't succeed subsequent to (his or her departure)."

Jeff Sziklai left his job in sales in Toronto in 1994 to work alongside his father-in-law to gain an understanding of Van Wyck's operation.

"(Taking over an existing business) allows the younger generation to get started a lot faster, than if they established the business on their own," he said. "I always wanted to be an entrepreneur and this was a great opportunity for my dream."

Today, Sziklai's father-in-law continues to be involved as the chairman of the board and with special projects, like capital campaigns. But the plan was clear that Jeff and Michelle, both 38, would oversee the day-to-day operations.

"One of the worst cases is if the owner `harps' on until they're 80 and doesn't give the (successor) a chance to run the business," said Rein Peterson, professor of family enterprise and entrepreneurship at York University. "You have to train the successor in how to be the owner, and the founder needs to back off."

Peterson said some succession plans provide the owner with the right to interfere in the business operations if certain profit or sales targets are not met.

Before a majority stake in the business changes hands, Peterson said, the successor might be required to reach certain financial targets.

While the ownership of Van Wyck is shared by the two parties — Jeff and Michelle Sziklai own 80 per cent of the business and Michelle's parents own the balance — every situation will vary, said Cohen.

"For the seller, it might be important to get enough (money) out front," said Cohen. "For the purchaser, it's important to get enough financing in place so you're not strangled."

The Sziklais are generating sales in excess of $10 million annually and have more than 100 employees in Toronto, Owen Sound and Vancouver.

"The company needed some enthusiasm and energy to help it grow," said Jeff Sziklais. And a succession plan helped them give the company what it needs.