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5 succession planning tips for privately held business owners


The last few years have been tough for privately held business owners, and experts predict challenging times. If you're thinking about exiting your business and handing over the reins to a successor—whether to a family member, an individual in management or a third party—it's important to start your transition plan as soon as possible. 

You need to consider who will take over when you step down, how they'll manage the company, and whether this person or company is willing and able to do so. You will also want to get your capital out and your risk off the table.

BDO Canada’s Jeff Noble, Director, Private Wealth and Ashwin Nath, Director, M&A and Capital Markets, have five tips to help you transition your private company to the next stage in its lifecycle.

number 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., through a sale, retirement, or other lifestyle choices) or involuntarily. An involuntary exit could involve an untimely death, disability (business owner or 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 in advance. The longer you wait, the fewer options you will have." 

Economic headwinds such as high-interest rates, rising costs due to inflation and overall economic uncertainty have left many business owners unsure of the impact on their business as they think about a transaction or transition process.

“Regardless of the type of buyer, it is not unusual for an M&A process to take anywhere from 6 to 12 months or more in the current economic environment. Planning is a great way to extract maximum value during a sales process. Ultimately, these processes are a marathon, not a sprint,” said Ashwin.

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 but also identifies and prepares future leaders within the organization. A successful plan involves an integrated approach to transition, including: 

  • Management 
  • Leadership 
  • Ownership 
  • Control 

A succession plan should also address the business owner’s key objectives, including their legacy and future vision for business growth and development. A strategic plan will make the transition smoother for you, your family, your successor, and the business. 

number 2

Assess your company in the current economy

Rising interest rates have increased the cost of transactions. It also impacts valuations, what purchasers are willing to pay and the terms under which they will buy. In the current economic environment, purchasers and lenders have increased the due diligence required to satisfy their risk appetites. Here is a short but not exhaustive list of questions for business owners to better assess their readiness for a transaction:

  • How reliable is your historical and current financial information? Can financial data and reports be accessed in real-time?
  • Can you easily convey the qualitative and quantitative profitability and cash flow drivers?
  • What are the key sustainable competitive advantages when comparing your business to others in the same industry?
  • Are there tangible growth opportunities that a potential purchaser could capture?
  • Are relationships with customers and suppliers managed personally or by various team members?
  • Is the management team capable of taking a more significant role, or will the company require external resources to succeed?

Assessing your company early on will assist you in identifying the key areas you’ll likely need to focus on as part of your succession planning.

number 3

Choose your successor

It's important to start thinking about who will take over your business before you're ready to retire or exit. If you don't have anyone in mind, begin by mapping out the knowledge, ability, skills, habits and experience needed for future success.  

"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, owners should choose a successor based on the needs of their business going forward. What knowledge, skills, and habits are needed for the company to succeed in the next 10, 15 - 25 years? Where is the business in its lifecycle? Where is the industry headed? Where is the potential new owner in their lifecycle?  Additionally, choosing the successor will have cascading consequences, especially if they occupy a key leadership role in the company.

Canada has seen increased private equity activity in the past few years. Private equity has emerged as a viable exit strategy for Canadian business owners. These groups typically have improved access to expertise, resources and capital allowing a business to achieve its long-term goals.

“A full divestiture process run by an M&A advisor would allow a business owner to understand all the options available for a transaction. This could include a sale to a financial buyer such as private equity, a strategic buyer or internally to the management team,” said Ashwin. “Looking at all the options will provide the peace of mind in knowing that the decision aligns with the necessary objectives.”

number 4

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 should be intentional and, by definition, takes time. It could be done before a transaction with the internal management team or post-transaction with a third-party purchaser.

"It's different from 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 listening to the chosen successor," said Jeff. 

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

  • Purpose
  • Vision & strategy
  • Marketing
  • Sales
  • Finance 
  • Human resources  
  • Systems and processes 
  • Business model 

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. This will take several months for some businesses; several years for others.   

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

number 5

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 or a conversation with an M&A advisor.

The owner will want to create comprehensive financial plans alongside the valuation process. The current owner will need a financial plan to know they can live out their life based on the purchase price and repayment terms. Will they hold a vendor take-back note? Should they retain a percentage of equity to take advantage of the future growth of the business? Additionally, if a sale is to the management team, there must be a plan to prevent a liquidity crisis since funds will likely come from within the 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. It may make sense to utilize your lifetime capital gains exemption within a transaction if eligible. There may be opportunities to multiply this exemption.

You may want to consider an estate freeze if utilizing a sale to a management team or family member. Canadian Controlled Private Corporations (CCPC) widely use this tax strategy to contemplate 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. 

An M&A and tax advisor will help business owners understand the impact of the purchase price, transaction structure and timing on the net proceeds of a sale.

You want to sell or transition your business. We are here. 

For a business to succeed, its founder must plan in advance and ensure that the company will continue operating after their exit.

"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 will do next, so they procrastinate planning,” said Jeff. “And remember, your exit is not an if; it is when.”

“Talking to an M&A advisor will help a business owner gain clarity on the various options available to them and allow them to make the most educated decision for their business,” said Ashwin.

Rely on BDO advisors to provide knowledgeable support as you transition your business. We offer services in valuation, M&A, financial & wealth planning, and estate planning—all underpinned by our tax expertise. A BDO advisor will show you several succession options and help implement the right strategy for you and your successor.

For more information, contact: 

Jeff Noble, Director, Private Wealth

Ashwin Nath, Director, M&A and Capital Markets

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