Here’s what women entrepreneurs need to know about succession planning

In February’s federal budget, Ottawa announced increased support for female entrepreneurs as part of a broader effort to tighten up the gender gap in the economy.

And no wonder: Currently, only 16 per cent of businesses in Canada are majority-owned by women, and they often face a unique set of challenges.

When it comes to leaving their jobs for self-employment, for example, women cite personal or family reasons as a rationale twice as often as men do.

A 2016 Statistics Canada study found that “becoming a new mother increases the probability of making a transition from wage employment to self-employment,” particularly if a woman feels that becoming self-employed will benefit her family.

Once their businesses succeed, these same family obligations can sometimes force female entrepreneurs to step away, either temporarily or permanently, making it critically important to have a succession plan in place.

So, where should you start?

These are three commonly considered strategies for business succession planning:

1. A successor (or successors) is identified and the business owner makes plans with that successor in mind. Successors may include family members or an existing employee of the business.

2. Buyout by existing employees or management. A group of employees or an existing management team collectively purchase the interest of the business, when one or two individual successors have not been identified.

3. Sale to a third party.

To determine the right strategy for you, consider these factors:

Has a successor been identified for the long or short term? If you want to pass your business to your children, for example, are they ready to take over if something happens to you tomorrow, or do you need an interim plan until they have the maturity and experience to step into your shoes?

How quickly do you need your capital out of the company? Your retirement planning and need for funds over the short and long term may affect the pool of potential candidates to purchase your interest in the business.

Is there an existing buy-sell or shareholders agreement with a co-owner, and how does this align with your plan?

Does your will reflect your wishes when it comes to the business succession plan? It is important to have alignment here as well: Without further planning in place, your executor may end up as sole shareholder (on behalf of the estate) and may have to step into the role of director/officer of the company.

Women should also consider their own role as a successor. Statistics show that women continue to outlive men (on average almost five years longer) and the trend is projected to continue. This means that women whose partners are business owners may themselves become successors, even if they are not currently involved in the business. This responsibility would come paired with the need to develop yet another plan for passing on this business when the time comes.

Regardless of which succession path you take, effective communication is critical.

Communication helps gauge the interest of potential successors, and helps them understand the factors you are considering in choosing your successor.

If family members, particularly children, are candidates, communication allows them to be involved from an early age, which can make the transition easier when the time comes.

Leanne Kaufman is the head of RBC Estate & Trust Services and president of Royal Trust Corporation of Canada and The Royal Trust Company