Why Plan Now?

Michael Bronstine GBK April 2018

The risk of growing old, or infirmed, are not the only reasons that you should be thinking of planning to pass on your business.

Your business value will increase if you are planning for its, and your own, future. By looking ahead to exit strategies you, and your advisors, can strategize a business retirement plan that makes sense now, and as well can be fine-tuned as your situation changes over the next few years.

For now, consider some of the operational, financial and strategic reasons to make a plan to exit your business:

• Protecting your investment and creating the full value of it;
• Generating a potential income stream for your retirement;
• Creating tax benefits that could impact your estate;
• Creating a minimum of disruption to business operations at your exit; and
• Permitting family members of key employees to take over ownership confidently.

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Here are some questions to ask yourself about your business in the context of succession planning:

• If you are a corporation, do you have a shareholders’ agreement or a buy-sell agreement?
• If you were selling your business today, how much do you think it is worth?
• When you retire, what do you think you will do with your business: give it as a gift to family, sell it to family, sell it to a stranger, sell it to your most trusted employee?
• What portion of your estate is tied up in your business?
• In the event of your premature death what would happen to your business?
• If you were to become disabled what would happen to your business?

Common Exit Strategies

You may not have considered all of the exit strategies available to you and your family, so here is a chance to view your options.

Each business succession option is presented with key questions or issues you should consider. Your advisors may bring up additional issues as you move forward with your plan.

1. Passing the Business to Family Members
   So you think you know that family members want to take over your business. You should take a few minutes to consider some of the pitfalls and realities of family business succession plans.

• Do you know from where your family members are going to raise the money to buy the business?
• Have you discussed your retirement plans with family members, or will it come as a surprise? The hint here is: start early on family succession plans!
• Do you want to retain control for some period after retirement?
• Are your family members even interested in the business?
• Should family members be entitled to special compensation?
• Do you want to work part-time while the new leader gets settled in?
• Should family members start at the bottom of the business?
• Must your successor come from within the family?

Examples of issues that will need to be discussed at a family meeting , possibly with a facilitator, are presented below. Some of these topics aren’t that comfortable to deal with, but ignore them at your/your business’ peril:

• Leadership and management selection
• Training steps needed to grow new leaders
• Restructuring requirements for the business
• Sale of all (or a portion of) the business
• Prenuptial agreements, marriage or divorce of a child or shareholder
• Business impact of the death of spouses, key employees or potential successor
• Employment conditions of family member of the business
• Establishment of a clear timeline for the business owner’s retirement, transfer of share ownership and transfer of voting control

2. Selling to Partners or Employees (ESOPs)

   These are the people that have been with your business through the good times and the hard times. They may already have a stake in seeing that it prospers and survives. As a result of their inside knowledge they may even pay more for the business than a third party. The problem most often encountered with this option is that the potential buyer(s) do not have sufficient finances or personal net worth to buy you out – in a hurry. Plan well in advance for this option (maybe even years).

Some questions to ask when selling your business to partners or employees are:

• Will the purchase be through future profits or employees’ own capital?
• Do employees/partners have the skill and financial resources to complete the purchase?
• If you have to finance the purchase price, can the purchaser run the business well enough that your payments will be secure?
• Sell the business to employees using an Employee Share Ownership Plan. In British Columbia, the province offers a 20% provincial tax credit and will share some of the legal and other costs incurred by employers setting up an ESOP (visit the websites listed on this page).

3. Selling to a Third Party
   There are two types of third party buyers: financial and strategic buyers. Whichever route you are choosing in a third party sale, it is important to protect your business against management distractions from the sale preparations, or strategic losses while in the sale period. You will also need to protect yourself against potential law suits for alleged fraud or misrepresentation during the sale of a business to a third party.

• Financial buyers are just that, seeking high return on investments. They will need to see sturdy financial statements and strong assets. Many will also prefer that current management stay on for awhile.
• Strategic buyers may be competitors, a larger business in a related industry or a company remotely related that is looking to diversify product lines, market segments or geographical reach. You will need to safeguard proprietary information in these sorts of deals.

4. Winding Down the Business
   You will want to wind down the business legally and with the most in your pocket as possible. While you can simply stop taking sales, have a closing out sale or pass on your clients to other service providers, you cannot suddenly cease your obligations to the government or tax department. If your business is a corporation, you can cease doing the business, but keep the corporation alive. This may present certain advantages/disadvantages from a tax or capital gains angle, and you will want to consult your legal, tax and accounting experts as you dispose of inventory, assets and property.
5. Do Nothing
   Business owners don’t consciously choose this option, but if you have not come up with a plan for succession, however rudimentary, you are in fact doing nothing. Do you have a will? Do you have a disability plan that involves business continuation? Succession planning pushes most owners-managers out of their comfort zone, which means its a low priority. Doing nothing is what the majority of small business owners choose.

 Whatever your plan for passing on your business, your retirement or exit strategy team will likely be made up of the following experts and consultants:

• Accountant
• Lawyer
• Tax Advisor
• Valuator
• Banker
• Broker
• Financial or business planning consultant

Valuating Your Business

It’s important to be honest here. For most business owners the value of their business is a complete unknown.

In calculating your business’ net worth you will need to consider:

• What do you have to sell (this could be customer contact lists, contracts, inventory, equipment, property, intellectual property, special licenses, etc.)?
• Are any of your special licenses or patents transferrable?
• Is your business more valuable in one or more pieces?
• What method will you use to determine fair market value?
• What can you do to improve the value of your business as you go forward in your retirement or succession plan?

The first step is to valuate your business, and there are three methods for determining fair market value:

• Asset-based approach – Total all asset and personal investments in the business to date. If possible, choose fair market values for assets.
• Market value approach – Look at comparable businesses that have sold recently and estimate your business’ value.
• Earnings approach – Use one or more years of historical or future earnings. If possible, use net present value calculations to discount the future cash flow.

Next, look at ways to improve the value of the business with the following methods. Devise ways in each area that will make a difference to your business value:

• Increase income?
• Improve assets?
• Reduce liabilities?

Often in a small business much of the real value rests in the owner’s realm of expertise, knowledge and intellect. If you (the business owner/manager) are planning to retire you will want to develop a plan for transferring knowledge, know-how and leadership responsibility. If your business is merely surviving and creating a job for the owner or just getting by day-to-day, it may not be worth more than the salvage value.

Grooming Your Successors

It is easiest to take the path of least resistance and to choose a candidate just like yourself..

There are many, many resources on business leadership and management for you to refer to. Typical leadership qualities are:

• Global thinking
• Focus on results that get to the main goal, with the ability to think analytically
• Source of inspiration and good motivator of the team
• Performance of tasks and projects with speed and accuracy, especially in times of uncertainty
• Enthusiasm for the business, its products and services
• Trustworthy
• Lives with integrity and honesty
• Respect for people
• Capacity for hard work and commitment to excellence
• Tolerance for ambiguity
• The source of calm and reason during crises

Creating the climate for leaders to develop to their fullest potential is the real challenge at hand. The pitfalls of creating business leaders are many, and this even more prevalent in a family-led business. Finding the right person, whether a family member or not, is a process that can take minimally six months.

Here are some signals that you are off-track with your leadership and/or the incumbent’s leadership:

• Lack of high level leadership skills – strategic visioning and effective communications
• Continually caught up in the day-to-day of the business and inability to focus on the big picture
• No feedback – learn to “take it” from family, employees and customers
• Limited ability to adapt to changing conditions, or change the corporate culture, or adapt to global technologies, if need be
• Habit of avoiding conflict
• Failure to hold people accountable

Most business owners are strong-willed and independent. It may be hard for you to step away, especially if you still have a financial stake. But, once you decide to leave, it will be best for all if you do so gracefully. Enjoy the next chapter in your life as a business expert.