Business Value and Transition 2.0

Advancing owner and advisor business value and transition insight

Does Corporate Governance Impact Business Value Growth and Transition Success?

by | April 23, 2019 | Corporate Governance

Does Corporate Governance Impact Business Value Growth and Transition Success?

How Necessary is Good Corporate Governance to Business Value Growth and Business Transition Success?

Answer: Very necessary! It is not a stretch to suggest that for privately-held companies it is a fair generalization to suggest that business value growth and business transition success on the one hand, and corporate governance on the other, are interdependent. Further, at any given point in time assessing the veracity of a company’s corporate governance is fundamental to developing either its notional value or negotiating an open market price for all of its outstanding shares.

Commentary:  We live in a business and social environment evermore influenced by continual transitioning globalization factors, central bank policies, government-related business and societal uncertainties, ongoing technological advances, and ongoing business combinations activity. It follows that Implementation and ongoing compliance with superior corporate governance practices are increasingly important to promote ongoing viability, value growth and successful ownership transition in individual private companies. See related blog posts Business Transition – General: The Right Overview Question and Recession Impact by Industry and Business is a ‘Right Question’! .

Why a Chrysalis -> Butterfly image?

Question:  Why a chrysalis -> butterfly image as a lead-in to a discussion of corporate governance?

Answer: We live today in a world of continual transition on many important fronts. If the butterfly does not react to climate change and hence does not successfully transition from its chrysalis state, it will not survive. Parallels in this regard between the butterfly and a privately-owned company are very easy to identify.

What is Corporate Governance?

Answer: Corporate governance is a term used to describe the system of mechanisms and processes by which a business is controlled and directed. Broadly, a corporate governance system:

  • details the rights and responsibilities of the board of directors, members of an advisory board if one exists, owners, executives, managers, and other employees.
  • establishes and continually adjusts the rules, practices, and processes:
    • that influence and appropriately align and balance the mutual and individual interests of all stakeholders.
    • for making business decisions.
    • that collectively coordinate and monitor the company’s objectives through strategic plans, business plans and forecasts, and the like.
  • Ensures all of those things are complied with on an ongoing basis through a continuous monitoring process.

Corporate Governance Initiatives. Which Should Private Company Owners Prioritize?

Answer:  If corporate governance excellence is absent in their company, business owners should:

  • consider engaging an independent, objective consultant with experience in their industry to conduct a detailed Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis of their business.
  • based on that SWOT analysis, decide whether the business:
    • is likely to be viable as a going concern In the long-term, or
    • should be organized for sale to an arm’s length purchaser.
  • if the business is assessed as likely to be viable as a going concern in the long-term:
    • identify recently retired (preferably same-industry) executives or other qualified people and invite them to join the company’s board of directors.
    • alternately, establish an advisory board of such arm’s length people if candidates are not willing to accept the fiduciary responsibilities director’s shoulder – or if an advisory board is a preferred course.
    • If a family business, elect a non-family member as Chairperson of the Board or Advisory Committee as the case may be.
    • make that Chairperson responsible for developing, implementing, and thereafter monitoring, a sound corporate governance system for your company going forward.

Important Corporate Governance Comment

There are advisors, be they directors, business advisors or professional advisors – and then there are advisors. A business owner should only engage advisors where mutual respect and trust exists, and where the advisors ‘speak truth to power’ – and are listened to and not resented for doing that. I am particularly emphatic on these things in the case of family business owners who employ family members.

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Ian R. Campbell has provided business valuation and transition advice to business owners and advisers for 50 years. See Profile.

In his retirement from active practice he:

  • Advises a limited number of business owners with respect to valuation and their business transitions.
  • Works to provide business owners and their advisors with thought-proviking business value and transition commentary.

Disclaimer: Blog content ('Content') does not constitute individualized business valuation, transition, economic, technology or investment advice. The ideas, views and opinions expressed in the Content are solely those of the author. Provided 'as is', Content is general in nature and may not be relevant to individual business facts and circumstances, may change without prior notice, may be incomplete, inexact, or incorrect for jurisdiction-specific or other reasons. Content is used at the reader's own risk.

© 2019 Transitus Corp. All Rights Reserved.

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Is an Estate Freeze a Powerful Transition Tool?

by | April 16, 2019 | Generational Transition

Is an Estate Freeze a Powerful Transition Tool?

Note: The term Estate Freeze is broadly used in Canada by business advisors and owners. Other jurisdictions may be subject to different laws, terms and practices. Readers should discuss the contents of this post with their professional advisors.

Why an Iceberg image?

Question:  Why an iceberg as a lead-in to an estate freeze discussion?

Answer: Approximately 90% of an iceberg is a submerged, hidden danger. An estate freeze is a related series of transactions in issued private company shares that likewise often is not all it seems to be.

An Estate Freeze – Be Surprised – Ask Professional Advisors Two Questions

Question: Would professional advisors themselves act on their estate freeze advice?

Commentary: Discussion over many years suggests that if one ask a room full of professional advisors:

  1. if they would like to be in business with their brothers and sisters. Less than 10% are likely to answer in the affirmative.
  2. how many of them have advised their family business clients to complete an estate freeze principally to defer income tax. More than 90% are likely to answer in the affirmative.

It follows that many of those advisors have:

  1. effectively created partnerships for their client’s next generation that they may not have created for themselves.
  2. typically done that without concurrently working with their client to develop a comprehensive family business transition plan – or as a minimum recommending that be done.

 Estate Freeze Defined

Question: What is meant in Canada by the term estate freeze?

Answer and Commentary: In a family business context, estate freeze is a term to describe a transaction that results in one generation of family business shareholders ‘freezing’ the value of their respective share interests at an amount equal to a notionally determined fair market value at a specific point in time.

The principal objectives of an estate freeze are to:

  1. pass growth in capital (i.e., family company share) value, typically at nominal cost, on to one or more subsequent generations.
  2. minimize what otherwise would be a larger income tax on a disposition or deemed disposition at the time of the death of shareholder-members of the current generation.

Typically, this is done in income tax jurisdictions that allow it by:

  1. having the current owners:
  • exchange their common shares for fixed value preferred shares in the family business.
  • file prescribed income tax forms necessary to complete the estate freeze
  1. issuing treasury (new) common shares to subsequent family generation members at a nominal cost.

Estate Freeze Discussed

The Important Question: Is an estate freeze implemented in isolation a comprehensive generational business transition?

Answer and commentary: The simple answer is no. A more complete answer follows.

In some jurisdictions an estate freeze can:

  1. potentially result in significant income tax deferral.
  2. result in family members thinking they have completed a comprehensive family business transition plan, which they have not.
  3. result in the pre-freeze common shareholders imposing a family partnership on subsequent generation family members without the latter individually or collectively:
  • understanding the possible business and personal potential consequences of that – both good and bad.
  • seeking independent legal advice.
  • paying only a nominal amount for capital assets (i.e., company shares) that are expected to increase in value, where this may contribute to next generation:
    • business partners who aren’t interested in the family business other than for the lifestyle it provides them.
    • business partners not equipped to effectively participate in the family business as directors, executives or employees.
    • entitled attitudes, unrealistic value systems, and unrealistic monetary expectations.

Further, estate freezes:

  1. frequently are completed without concurrent execution of a well-documented shareholder agreement.
  2. may lead to acrimonious family relationships and at extremes litigation.

An Estate Freeze – Conclusions

An estate freeze:

  1. can prove to be an effective way for business owners to manage income taxes.
  2. may solve short-term problems while concurrently laying the foundation for substantive long-term issues.

can be a useful monetary tool if all stakeholders understand its principal purpose and use it as a catalyst in the development of a comprehensive family business transition plan.

 

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Receive email notice of new blog posts. Add your email address in our blog's right navigation. You will receive an email from WordPress asking you to confirm your signup.

Ian R. Campbell has provided business valuation and transition advice to business owners and advisers for 50 years. See Profile.

In his retirement from active practice he:

  • Advises a limited number of business owners with respect to valuation and their business transitions.
  • Works to provide business owners and their advisors with thought-proviking business value and transition commentary.

Disclaimer: Blog content ('Content') does not constitute individualized business valuation, transition, economic, technology or investment advice. The ideas, views and opinions expressed in the Content are solely those of the author. Provided 'as is', Content is general in nature and may not be relevant to individual business facts and circumstances, may change without prior notice, may be incomplete, inexact, or incorrect for jurisdiction-specific or other reasons. Content is used at the reader's own risk.

© 2019 Transitus Corp. All Rights Reserved.

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Comments are closed.