Features Geothermal
Business Advisor: Summer 2011

At some point, water well contracting businesses have to consider an
exit strategy, which may include the transition of the business to the
next generation, or sale to an employee or a third party. The following
case study will outline some of the key issues that can arise when
considering succession planning.

Just as moving into a new life stage requires careful preparation, so does transitioning your business.

At some point, water well contracting businesses have to consider an exit strategy, which may include the transition of the business to the next generation, or sale to an employee or a third party. The following case study will outline some of the key issues that can arise when considering succession planning.

Joe is the owner of a successful water well drilling operation that has been a family business for two generations. Joe acquired his shares from his father about 40 years ago. Joe’s son and one of his two daughters are actively involved in the business. Anthony is in charge of operations and Elena is responsible for sales. Joe’s other daughter Emily is married to Robert, an investment advisor. Joe, age 70, is not ready to retire, as he still enjoys coming into work and does not know what he would do if he were not working. Joe’s wife, Arlene, would like him to retire so that they can travel together and enjoy life with less stress. Arlene is concerned about how much money they will need in their retirement years and how they will manage.

When it comes to choosing a successor, Joe’s vision has always been that Anthony will take the reins. While Anthony, age 45, did not go to university, he has been involved in the business longer than Elena. Joe acknowledges that Anthony has a temper that sometimes puts people off, but he thinks Anthony will be able to overcome this trait as he matures. Anthony and his wife have three children, ages 10, eight and five. Elena, age 38, is an MBA who worked in sales for a geothermal energy contractor for four years before joining the family business. She is much more outgoing than her brother, is well liked and has excelled in growing the company’s sales. However, she does not have experience on the operations and finance side of the business. Elena is married to Scott and they have one young child.

Anthony and Elena do not own shares of the business.

All major management decisions are made by Joe. He does discuss certain issues with Anthony and the chief financial officer, Richard, but ultimately, Joe makes the decisions. Richard has been with the company for five years and wishes to have an ownership interest.

Joe decides it’s time to arrange a meeting with Bill, a family business advisor. During the meeting, Bill helps Joe outline points to consider in his business succession plan. They include the following:

• Meet individually with Joe, Richard and each member of the family, including those not working in the company (such as Arlene, Emily, Robert and Scott) to learn their vision for the business, as well as their values and their goals. As business advisor, Bill will do the following:

• Create a strategic plan for the business with input from Joe, Richard, Anthony and Elena. A key point will be discussing Elena’s interest in focusing more on geothermal technology.
• Determine Joe and Arlene’s income needs, including how to fund this income, and to establish Joe’s role in the business going forward.
• Obtain an independent assessment of the skill sets of Anthony and Elena to recommend who would be the most appropriate successor. This may include retaining an interim manager to improve and/or assess the skills of possible successors.
• Develop a governance system that will define management roles and responsibilities, and consider establishing a board of directors. Prepare employment agreements.
• Consider an equitable allocation of Joe’s assets, bearing in mind that Anthony and Elena work in the business and Emily does not.
• Plan for income tax consequences of a sale of shares. For example, if the business satisfies the criteria for a Qualified Small Business Corporation, a sale of shares could qualify for a $750,000 capital gains exemption. If the business does not satisfy the criteria, it may be possible to implement a plan that would result in the exemption being available.
• Obtain a current valuation of the business prepared by a chartered business valuator. A valuation will be required for a non-arm’s length transaction and to proactively manage the value drivers of the business: contracts, rights and trademarks, suppliers and customers.
• Prepare a shareholders’ agreement at the time Anthony, Elena and Richard become shareholders. A shareholders’ agreement will cover issues such as death, divorce, disability or retirement of shareholders, and provide a mechanism for dispute resolution.

After the two-hour meeting, Joe realizes there is a lot of work to do in order to properly plan for the succession of his business. By planning carefully, Joe can help make the process smoother for everyone.

Bruce Roher is a partner in the business valuations practice at the Toronto office of Fuller Landau LLP, Chartered Accountants. He can be reached at broher@fullerlandau.com or at 416-645-6526.