Business Management Articles
Taking Care of Business: Plan for Succession
Business Times
February 2006
Within 15 years, half of Canada’s current small business owners will be retired.*
While this is an interesting projection, when it is combined with another statistic, the facts become alarming: more than half of these entrepreneurs don’t have a plan to exit their business.**
These figures make you wonder whether the entrepreneurs who are planning on retiring in the next decade will be able to afford to -- and whether they are doing all they should to make themselves financially able to retire.
Are you one of these small business owners? If so, have you taken care of business? Have you created a succession plan?
Why do you need a succession plan? Just as it took you years to successfully build your business, it will take years for you to successfully exit your business. If you don’t plan for succession, you can end up with a painful and costly transition – or no transition at all.
Most small business owners are likely to choose one of two options when it comes to exiting their business. Here’s why you need to have a plan to prepare for these choices.
Sell the business to an outsider, relative or employee
If you intend to eventually sell the business, you need to prepare the company to achieve the highest possible price and to minimize the tax impact of the sale. A business that is primed for sale can generate up to twice as much value as one that is unprepared. It can take up to five years to prepare a business for sale, however, so advance planning is vital.
Retain ownership but let a relative or employee run it
Similarly, there are a number of steps that business owners planning on transferring the
business to a family member should take to ensure a smooth transition. You need to identify likely successors and ensure that the selected individual is thoroughly trained and prepared to take over the reins. Most founders want to know that they are passing along a valuable legacy into capable hands. Again, this process may require several years.
Succession planning is a process that must be tailored to your own circumstances. A skilled advisor who will put your interests first can help you navigate the process from
start to finish. There are three basic components of a succession plan:
- a business plan that outlines the potential financial strength and growth of the company
- a personal financial plan that sets out your goals for yourself and your immediate family
- an estate plan that documents your legacy and determines the tax consequences of your intended strategies.
Once you have the appropriate plans in place, you can begin implementation.
Identifying a successor or prospective buyer
If you decide to pass along the business to a successor, you need to review the leadership and management capabilities of possible successors and who is best qualified and most suited to the role. Of course, you also have to determine whether this individual is interested in running the business.
If the plan is to sell the business, then you need to determine the value of the company, remove potential impediments to a sale and/or strengthen the company to add value.
Transition or preparation period
Once you’ve selected a successor, you’ll need to outline the process so that everyone involved understands the goals and their roles. The document should also set out timelines for the transfer of responsibilities, a training program for the successor and the structure of the post-transition management team.
If your intent is to sell the business, then you will need to research, approach and attract prospective buyers. Ultimately, you will have to negotiate a deal and complete the transaction for the best price and tax implications.
Many family business founders resist the idea of succession planning because it marks the first step in the process of relinquishing control. However, you need time to prepare
emotionally and financially for a new phase of your life separate from your business. You’ve worked very hard to create this business -- now’s the time to reap the benefits of what you have created
Bob McMahon, CA, is a partner with BDO Dunwoody LLP (www.bdo.ca). One of Canada’s leading accounting firms, BDO helps entrepreneurs and family businesses succeed. If you have questions about this article or you would like to receive BDO’s Tax Factor newsletter, contact Bob in the Mississauga office at (905) 270-7700 or bmcmahon@bdo.ca.
