4 succession planning tips for small-medium business owners 

February 10, 2023

The last few years have been tough for small-medium business owners, and experts are predicting some challenging years ahead. If you're thinking about exiting your business and handing over the reins to a successor—whether to a family member or an individual in management—it's important to start a succession plan as soon as possible. 

You'll need to consider who will take over when you step down, how they'll manage the company, and whether this person is willing and able to do so. 

BDO Canada’s Jeff Noble, Director, Private Wealth, has four tips to help you transition your private company from one generation of leadership to another. 

1. Plan ahead:  

It's inevitable that you will, at some point, exit your business. There are two ways that can happen, voluntarily (e.g., retirement or other lifestyle choices) or involuntarily. An involuntary exit could involve an untimely death, disability (either the business owner or their family member), disenchantment, disagreement or divorce.  

"Unfortunately, an involuntary exit happens a lot more than we would hope," said Jeff. "My biggest piece of advice to owners is to plan ahead. The longer you wait, the fewer options you will have." 

A detailed succession plan is an integral part of a well-managed company. It should be an ongoing process that not only determines who should take over your company if you retire or pass on, it also identifies and prepares future leaders within the organization. A successful plan involves an integrated approach to transition: 

  • management, 
  • leadership, 
  • ownership, 
  • and control. 

Having a plan in place will make the transition smoother for you, your family, your successor, and the business. 

2. Choose your successor: 

It's important to start thinking about who will take over your business well in advance of when you're ready to retire or exit. If you don't have anyone in mind, start by mapping out the skills and experience needed for the successor to succeed.  

"When choosing a successor, founders and business owners tend to default to someone who looks, sounds, and acts just like them," said Jeff. "The idea being, they've been successful thus far, so they need someone with the same skills, knowledge, and attitude to continue that success." 

In reality, business owners should choose a successor based on the needs of the business going forward. What knowledge, skills, and habits are needed for the business to succeed in the next 25 years? Where is the business is in its lifecycle? Where is the industry headed? Where is the potential new owner in their lifecycle? 

Once you've identified a prospective successor who has the qualities needed to succeed, a key next step is communicating that decision to them and making sure they are ready and willing to take over the business.  

Additionally, choosing the successor will have cascading consequences, especially if they occupy a key leadership role in the company. You'll also need to identify someone who can assume the successor's role as they transition to take over your position. 

3. Mentor your successor  

Once you've determined the skills needed for your business to succeed in the future, identify any knowledge gaps between what your successor has now and what they'll need going forward. 

From there, develop a mentorship plan. The sooner you start, the better. Mentorship is something that should be done intentionally and, by definition, takes time. 

"It's different than coaching, you'll be on the same side of the desk versus opposite sides. It involves the owner spending a lot of time actively speaking with and actively listening to the chosen successor," said Jeff. 

The successor will need to understand everything about the business including: 

  • marketing, 
  • sales, 
  • finance, 
  • human resources,  
  • systems and processes, 
  • the business model, 
  • And vision and strategy. 

Training and mentoring will involve job shadowing your role and other roles within the organization, regular check-ins or meetings, external educational opportunities, and sharing your experiences.  

Mentorship is not just a one-way street. The owner should also be willing to learn from their successor and take on board any feedback that they offer. This can help ensure the business continues to grow in the right direction. 

"I also recommend that successors become involved in conversations with the business's professional advisors, accountants, lawyers, and bankers. The new owner should have an opportunity to learn how to work with these advisors because they'll be relying on them for help," Jeff added. 

4. Create a financial and tax plan: 

A well thought out financial and tax plan will help ensure a smooth succession. You'll likely start with a business valuation. Both owner and successor will need to know what the business is worth.  

Alongside the valuation process, the owner and successor will want to create comprehensive financial plans. For the new owner, this will outline how they intend to pay for the business and over what period of time. Will they get outside financing?  

The current owner will need a financial plan so they know they can live out their life based on the purchase price and terms of repayment. Will they hold a vendor take-back note? Additionally, there needs to be a plan in place to prevent a liquidity crisis in the business, since funds will likely come from the within business. 

On the tax front, a transaction structured to minimize your tax liability will ensure owner and successor get the most out of the deal. You may want to consider an estate freeze. This tax strategy is widely used by Canadian Controlled Private Corporations (CCPC) in contemplation of internal succession. An estate freeze can be used to restructure the ownership of your corporation by capping the value of your assets and transferring future growth and incentive to the next generation of owners. 

The recently passed Bill C-208 also provides another opportunity for genuine intergenerational transfers of shares of small businesses. Learn more about Bill C-208 here. 

You want to sell or transition your business, we’re here 

For a business to be successful in the future, its founder must plan ahead and make sure that the company will continue operating after they're gone. 

"Business owners need to think about what their life will look like once they are no longer a part of the business. I often see this hold people back, they don't know what they are going to do next, so they procrastinate planning,” said Jeff. 

You can rely on BDO advisors to provide expert support as you transition your business. We offer services in valuation, financial planning, and estate planning—all underpinned by our tax expertise. A BDO advisor will show you several succession options and help implement the strategy that's right for you and your successor. 

For more information, contact: 

Jeff Noble
Director, Private Wealth

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