Business Management Articles
Plan a Safe Exit from Your Business
Ed Brink, CA
Enterprise Magazine
Do you ever dream about the day when you “cash in” on your business?
While many SME owners are reluctant to contemplate the idea of retirement, you may be looking forward to reducing the amount of time you spend working. Or at least you’ll want to ensure that when you do pass along or sell your business, you get the most value possible from the transaction. Given today’s economic picture and its impact on the retirement savings of many Canadians, this is becoming an even more important priority.
Preparing a company for succession or sale involves determining a strategy, building the value of the business, grooming successors or identifying prospective buyers and timing the transaction for optimal results. Thus to secure the best possible financial returns, you should begin planning now to exit from your business – even if that exit may be years down the road. Following are some of the options to consider.
Family Succession
Many owners dream of passing along their companies to their children. If you determine that your children or other family members are interested in succeeding you and are capable of leading the business, you will need to develop and implement a succession plan. This plan defines the roles of the successor(s), establishes a training process and sets out a timetable for transition. You will also need a personal financial plan to ensure you achieve your goals. For example, you may want to maximize your Registered Retirement Savings Plan or Individual Pension Plan contributions before you retire. Perhaps you want to draw funds over time from the business or receive a retiring allowance. Or you may prefer to set up an estate freeze where you hold preferred shares of a fixed value that you would redeem over time during your retirement.
Each option has financial and tax implications that have to be carefully evaluated and planned.
Management buyout
If you have a loyal, capable management team, a management buyout might be a possible exit option. This type of sale is often structured as a series of payments over a period of several months to several years as the transfer of ownership proceeds.
You’ll need to determine whether your managers are capable of successfully operating the business without your ongoing support and whether funds can be secured to finance the transaction.
Sale to an external buyer
Seeking an external buyer is another option. Potential purchasers often come from a company’s own or a related industry. Many are interested in purchasing businesses because of key attributes they can leverage, such as new distribution channels or trademarks.
Sales to external buyers generally involve valuing the business, identifying prospects, positioning and preparing the company, structuring the transaction and assembling an appealing financing arrangement.
In some cases, owners are reluctant to put their companies on the market, even if the timing looks promising, because the business is growing and they want to continue working in the company and benefit from that growth. In these instances, another option may be to seek a business partner who will eventually purchase the company.
Equity earn out arrangements can be structured to facilitate these types of arrangements. The buyer generally contributes a portion of the total purchase price of the company and agrees to make additional future payments according to established financial targets over an agreed earn-out period.
When it comes to evaluating the potential of a business, most prospective purchasers look for attributes that contribute to the quantity and quality of future earnings and cash flows. Some of the ones most prized by buyers include:
- a growing base of loyal, long-term customers;
- a management team with breadth, depth and longevity;
- a skilled, loyal work force;
- a strong market position;
- strategic advantages such as alliances, recognized brands, intellectual property;
- healthy financial statements; and
- a sustainable debt load.
You can potentially achieve a higher sale price for your company by strengthening attributes like these that will enhance future earnings/cash flow.
If the economic slowdown is affecting your company however, and it is struggling, you may require a restructuring plan prior to a sale or succession plan. Refinancing or selling non-essential assets or a portion of the business, for example, may stabilize or strengthen the company. It’s always helpful to seek the advice of professionals who can provide objective advice about the best solutions.
Start planning now for a safe exit from your business. The sooner you explore your options, the more opportunities you have to build the value and appeal of your company, prepare it for succession or sale – and achieve your financial goals.
Ed Brink, CA, is a senior manager at BDO Dunwoody LLP (www.bdo.ca). BDO, one of Canada’s leading accounting and advisory firms, helps entrepreneurs and family businesses succeed. You can reach Ed in the Hamilton, Ontario office at (905) 525-6800 or ebrink@bdo.ca.
