It’s a familiar story. The entrepreneur has worked hard all their life. Maybe they have even inherited the business from their parents or grandparents. Now they are getting on in years and there is retirement to consider. One or two of the kids stayed and worked in the family business. One or two left for a different life. How does it all get divided up? Who has time to even think about all that or pay for the lawyers and accountants to handle this? There are shareholders to keep happy, inventory to plan and expansions to manage. This continuity planning thing will work itself out, right?
No. It does not. Without actively participating in continuity planning, all that is left behind is a family and business in ruin.
Derryn Shrosbree, founder of 33seven, knows this scenario all too well. He opened his firm to help families with a proven, tax-advantaged, affordable and best of all – easily obtainable – solution that keeps the business, the family and everyone’s sanity intact.
“The biggest hurdle is psychological,” says Shrosbree of why so many businesspeople opt out of secession planning. “It comes with a feeling of ‘I am now obsolete in the firm. The brand that I built, I spent my life’s work on and now that I’m transitioning from; I feel that I am no longer needed,’ which is exactly the opposite of what actually is happening. You are definitely needed.”
Shrosbree is both a farmer and a family man, with 103 acres of market garden and three children – one on the farm and two off. He knows continuity planning starts only when the founder realizes that doing nothing will result in a disaster. The reason why Shrosbree cares so much is intensely personal.
“My story is so very similar to many others. We were a family of five – three brothers and two sisters – when my father passed away. We were left with a huge tax bill. One of my brothers and one of my sisters took the cash inheritance and refused to pay my father’s tax liability. So, the three of us ended up paying the entire tax bill while the other two took the money and left us hanging. This action split the family into two parts. The three siblings who paid our father’s tax bill still have supper together, and the two that did not pay, well I presume they have supper together, but they certainly don’t have supper with us. This entire situation was 100 per cent avoidable if my father had done continuity planning.”
He says to family business owners, “You’re not diminishing the firm, you’re growing it. Knowledge plus experience equals wisdom. The entrepreneur is wise, they have knowledge and experience and that wisdom needs to be transferred to the next generation.”
Okay… but how?
Shrosbree is happy to share the answer.
“You, dear founder, will be doing one transition in your life. I do one transition per month, for 10 months of the year. For 15 years I have done 10 per year – that is 150 transitions. I have done it so many times that there is no scenario that I haven’t seen and that I cannot handle. We only onboard 10 families per year to ensure we provide them with the best possible, most experienced, error-free results. We do not make mistakes about your future.”
He continues, “The answer is unlocking liquidity and this is done through the following:
- The Tax Free Zone
- Business evaluations
- Estate freezes
- Family trusts
- Offshore financial instruments”
Let’s explore one of these options to show you a quick and easy aspect of continuity planning and estate equalization. Enter, the Tax Free Zone:
- Step 1: The firm purchases permanent tax-exempt life insurance on the key person (the founder/CEO, etc.). The firm is the owner and beneficiary of the policy.
- Step 2: Premiums are paid using the firm’s cash flow or retained earnings.
- Step 3: The policy is the collateral for the loan.
- Step 4: The loan’s proceeds are re-invested into the firm to generate income. Therefore, you have no opportunity cost of dollars. You do not have to choose between growing your firm or equalizing your estate, aka not ruining your family when you die.
- Step 5: Upon the passing of the key person, the death benefit pays off the loan. The remainder of the death benefit is paid out to the family.
“I go to a founder and I say, ‘Hey, how are you doing?’ He says, ‘I’ve got an issue. I’ve got a company worth millions and four kids. Two work in the family business and two left the province to become musicians. How do I divide this?’ A firm is not a pie. You cannot cut a firm up four ways and give each child an equal share.
“Let’s just say that firm is worth $20 million. So, there will be $5 million per kid… but the two in-firm children have worked for 10 years for their parents. They have never taken a dime out of the firm. The two off-firm children live in Toronto and do whatever they want.
“Now it is time to reconcile the money and the children. ‘I love my children equally. I want to give them an equal amount of money when I die.’ This is noble, but it’s not fair. In this day and age where a company that was worth $1 million is now $20 million or more, there is simply no way you can divide it up dollar-for-dollar equally.
“It will wreck the family, which means the two siblings who have worked tirelessly for a decade on the business and have taken nothing will never have supper again with the two siblings who left and expect a cash payout for doing nothing.”
What options does an entrepreneur have?
- Option 1: Sell shares, which makes the business economically unviable.
- Option 2: Take on additional debt to pay off the off-firm children’s inheritance.
- Option 3: Do absolutely nothing (panic mode/freeze)
Shrosbree says from lived experience, “When you do nothing, be very, very clear in your mind, you’ve made a decision. The do nothing option results in those siblings not having Christmas dinner together ever again. Now that the firm is so valuable and is worth so much money, with big money comes big problems. Whereas before the siblings in Toronto couldn’t care less, the firm was worth a million bucks. Now the firm is worth $20 million and attitudes have changed. All of a sudden, the non-firm kids become very interested in the business… or more specifically, very interested in the money from the family business.”
He reiterates again that there is a solution; one so easy and effortless that most doubt its effectiveness. For those that take the few moments to learn about it, however, the daunting issue of continuity is simply solved no matter how many siblings are involved.
So, why isn’t everyone doing this?
“Math is easy. Emotions are hard. Humans are not rational,” he sighs. “I spend 80 per cent of my time listening to people tell me they don’t have time or don’t want to have this conversation. The remaining 20 per cent is implementing the solution for the people that overcome their resistance and listen. I feel like I’m handing out a gold bar, and most people simply say no and walk away. Just overcome that fear. Overcome the notion that ‘meh, the kids will be fine.’ No, they won’t. They absolutely will not.”
Shrosbree’s father made a choice and that choice was to do nothing. It had an impact on the farm, the finances, and most devastatingly – the family. It had an impact on Shrosbree in that he never wanted anyone else to have to go through that nightmare. He spent countless hours and energy on finding a legal, viable, workable solution that is scalable and obtainable for all business owners. If you are interested in this solution don’t panic. Don’t freeze. Don’t do nothing. Take action so you can rest easy that the business – and your family – remains intact.
