The Next Chapter: Exiting The Business
Whether a business is at the stage of attracting investors, or an owner is considering handing the business off to pursue other opportunities or retire, having a formal written succession plan is essential for business owners. A recent study found that close to 60 per cent of Canadian small and medium-sized business owners are age 50 or older, and close to 40 per cent plan to exit their business within the next five years. The majority of those surveyed cited retirement as their main reason for moving on. Yet just nine per cent of small and medium-sized business owners have a formal written succession plan.
Why plan now?
If you are a business owner, a well-developed transition plan can help maximize the value that you have built over years of hard work and can allow you to maintain good relationships with employees and business partners. It can ensure the business is in a position to act quickly should an expression of interest arise from a potential investor, partner or buyer. Not only will a formal succession plan help protect the legacy of your business, but it can assist in the event of death or illness, and provide a framework for planning for your own future beyond the business.
The sooner business owners start planning for transition, the better. Finding appropriate investors, partners or buyers can take several years. You’ll need time to lay groundwork to make the transition as smooth as possible for you and your company’s managers, employees, customers and suppliers. And you may need room to manoeuvre if economic conditions accelerate or postpone a sale.
Furthermore, planning ahead provides more opportunity to maximize the business’s efficiency and profitability leading up to a transition. Streamlining day-to-day operations and enhancing stability (for example, through long-term contracts and supply chain integration) can make a business more attractive to an investor, partner or buyer.
What are your options?
Here are some of the ways business owners can implement a transition:
Transfer the business to a family member
Sell the business to an internal or external buyer
Switch from private to public ownership
Merge with another organization
Close up shop and wind down the business
All these options involve relinquishing some, if not all, control over the business, and it’s important to consider how to do that. Would you step away when the deal is inked? Or perhaps stay to assist through the transition? Some business owners stick around as a consultant well beyond the transition. It’s important to think about how much of a role you want to play after new ownership begins to call the shots.
Beyond business planning, it’s critical to evolve your personal financial plan. A business transition can have a significant effect on an owner’s personal wealth, and may require a different approach to investment, tax and estate planning. Consider how you’ll remain personally protected with health benefits and insurance. If you are retiring, you will also want to set up a tax-efficient and sustainable income stream.
These are all topics to discuss with your advisor, who may also be able to refer you to other business transition specialists, such as a lawyer, an accountant and a business valuator. With the right team around you, helping to implement a sound succession plan, you’ll be in a stronger position to achieve your business and personal goals.
Some key questions to consider when creating a succession plan for your business
Who has a stake in the business (e.g., business partners, employees, franchisors, distributors, your family)?
Do you have business interruption insurance?
Do you have key person insurance?
What is the business worth?
How will the legal transfer of ownership occur?
How will the transfer be funded (e.g., with life insurance following an owner or partner’s death)?
What are the tax consequences of a sale?
How will profits be allocated?
What role will you and others in the company have during and after the transition?
How will you ensure the business runs smoothly through the transition?
How will you keep up employee morale
Discipline is what it takes to block out the noise, commitment is what it takes to walk the path to financial success and patience is what it takes to reach the goal.