Guide to business succession planning
Building a business, setting it up and watching it grow day and night requires a lot of sacrifices and investment. For this reason, moving on to the next stage of your life can be a rather emotional and complex step to orchestrate. Successful business succession is largely based on strategic planning to ensure the prosperity of your business
A smooth transition will allow you to gradually move away from this source of pride and satisfaction and focus on the other pleasures life has to offer you while having peace of mind about the future of your company. Business succession planning requires meticulousness and attention to detail, but also rigorous collaboration to ensure a smooth transfer.
Why should you start planning your business succession in advance?
The succession plan details the process of transferring ownership of the business, determining the successor, tax planning, as well as the will and power of attorney. This plan guarantees the owner the prosperity of the business following his/her departure and ensures his/her financial security.
Planning a business transfer can take several years, usually five to eight years and sometimes even ten years for a family business. Beginning the business succession planning process requires anticipation and strategic decision-making in order to:
- Ensure a smooth transition
- Guide the company’s strategy
- Maximize business value
- Ensure prosperity
- Help the owner prepare for the next stage of his/her life
When you start planning your succession early, you make sure you have a great ally on your side: time. This allows you to get professional advice and think about the best strategy for your business. In addition, this period allows you to plan the succession recruitment to ensure the economic development of your business.
What are the planning steps?
Each company has a transition plan specific to its needs, but certain steps are required in every succession plan, such as planning objectives, managing legal and financial affairs, and estimating the value of the business.
Here is how your business succession plan should unfold:
- Determine your business and personal goals
- Arm yourself with a competent team to help you achieve them
- Obtain the services of a headhunting agency in order to get help from a succession planning specialist
- Seek advice from your bankers, accountant, lawyer and advisory team
- Recruit professional accountants (interim CFO, etc.) to help you estimate the value of the business objectively and ensure a smooth transfer of the business
- Decide on your type of successor based on your company’s current situation
- Prepare and provide the necessary training for your successor
- Think about your financing options and prepare the structure of the transaction
- Plan the transfer and ensure good communication within your team
- Develop a plan for the next steps
- Document the progress of your plan and evaluate it as you go along
To ensure the success of this plan, you must always involve your transferee and your entire team so that the company remains united throughout the process and continues to prosper following the transfer.
What are your starting options?
This is your exit strategy and you will need to focus as much effort on it as you do on growing your business. There are three different options and you should choose the one that best suits your situation.
1. Transfer to a family member
If you choose this option, establish good communication with your loved ones from the outset to avoid differences of opinion or expectations. This alternative can be quite reassuring for family business owners, but make sure you find the right person.
To do this, certain parameters must be taken into consideration, such as the age, aptitudes and personality of your successor so that the business can remain profitable after you leave. Organizing family meetings can help you discuss the future of the business and plan for a smooth retirement.
2. Sell the company to the management team
The management buyout can ensure the perpetuity of the business and a better fluidity of the transfer. This option can be very advantageous in the sense that your employees have as much interest as you do in ensuring that the business thrives. It is also an option that could guarantee a certain stability that would reassure customers, suppliers and investors.
Usually, this buyout is done through an employee stock purchase plan (ESPP) and allows you to keep the company’s information confidential. This succession requires close collaboration with the management team to ensure that employee performance strives.
3. Sell to outside buyers
This is a definitive alternative and requires great vigor in estimating the market value of the business. Be aware that the sale process can take up to a year from the time the business is put on the market. Your advisory team will have to play an important role during this period to provide you with unbiased advice.
It would be just as wise to use the assistance of a professional broker to help you find a buyer.
There are two types of buyers:
- The financial buyer who is looking for solid assets and capital
- The strategic buyer who sees the purchase of your business as a benefit for its long-term development
If you decide to sell the company to an external buyer, be strategic in your choice of information disclosure: the information needed to establish the initial parameters. The interests and confidentiality of strategic information must be preserved.
What about the value of your business?
Estimating the value of a company takes time and especially the opinion of an expert who will be able to evaluate your assets, liabilities and goodwill objectively.
Factors that influence the value of your business
Certain factors are important in assessing your situation:
- The history of earnings and potential future earnings
- The company’s contacts and network
- The balance sheet and its assets
- The reputation of the company
- Relationships with suppliers and customers
- The management team
These intrinsic factors differ from company to company and play an important role in determining its value, but global market factors are just as influential and it is important to know when to sell the business.
How to assess the value of your company?
This assessment is very important regardless of the option you choose for the estate. It allows you to determine the market value of your business for tax purposes and you can proceed with various approaches.
There is a cost or asset-based approach. This is a simple method that looks only at the costs and investments of the business. You can also opt for an approach that focuses on market value by doing a comparative study with other recently sold businesses. The third and most common approach is based on past and future profits.
How to increase the value of your business before the transfer?
Here are some tips that could help you increase the value of your business:
- Invest in marketing initiatives
- Search for new markets
- Establish a new strategy and consider new acquisitions
- Expand your network of customers and suppliers
- Modify the infrastructure if necessary
- Collaborate with a team of consultants to detect problems and resolve them quickly
What is the financing plan for the acquisition?
Finding the right financing to secure the capacity of the prospective buyer is an important step to a successful business transfer. The financing plan is different from one business to another and depends on :
- The financial situation of the business
- The sector of activity
- The assets of the company
- The buyer’s background
- Many other factors come into play and solutions are diverse, but the future cash flow and success of your business will determine the value and form of the financing. There are three sources of financing for the buyer:
- A personal investment
- A vendor credit (or balance of sale price)
- External financing by a financial institution
In all cases, a close collaboration between a financial institution, the seller and you is necessary to ensure a smooth transaction. Certain organizations can also guide and support you in your financing plan, such as the Centre de transfert d’entreprise du Québec (CTEQ) or the Fonds de transfert d’entreprise du Québec (FTEQ).
Retirement Planning Options for Business Owners
It is important to review these options with your advisor to choose the one that best suits your situation.
- The Individual Pension Plan (IPP) :
This is a single member defined benefit plan. This plan is for owners over 40 years of age and with a base salary of at least $100,000. The contribution limit is higher than the RRSP and the contributions are tax deductible for the company.
- The Insured Pension Plan (IPP) :
This plan provides tax-free supplemental income through tax-exempt life insurance. If your retirement is only 10 to 15 years away, this plan may be right for you.
- Retirement Compensation Arrangement (RCA) :
The company makes third party contributions in respect of benefits to be paid to the employee following the employee’s departure or retirement. One half of the contribution is deposited in an investment account and the other half is remitted to the Canada Revenue Agency (CRA) as a refundable tax.
A few tips to ensure a successful business succession
Business transfer models are diverse, but transferring your business to someone else is a long and emotional process. It is important, in the search for a successor, to choose a person who is trustworthy and who has all the necessary skills and knowledge about the company’s sector of activity, but who also shares the same mission and values.
Above all, you should think about the company’s future and ensure a smooth transition that does not conflict with the interests of your company while guaranteeing a peaceful departure. Therefore, plan for the time needed to put in place a detailed plan that you will formalize with the support and participation of your entire team.
This means maintaining an open dialogue with all those involved and putting in place the necessary tools for coaching your successor and refining your plan to create a reassuring atmosphere within your team. Establish a clear and detailed division of labor to hold all stakeholders accountable and ensure effective performance.
Always think about the financial development of your company after you leave. The assistance of a financial institution such as Investissement Québec can be very useful in choosing a buyer and clarifying succession issues.
The succession plan is first and foremost a strategic plan to be discussed with your executive committee and your associates. You can also ask for help from organizations and consultants who offer coaching services or obtain information from The Chamber of Commerce of Metropolitan Montreal.
Talinko can help you hire a team of experts
Talinko ensures rigorous management of the recruitment and integration process. A team of experts is at your disposal to participate in the creation of value within your company by offering a rigorous service to attract, manage and retain talent.
At Talinko, we believe that human capital is the key to your success and we make sure to find the best candidates that match your corporate culture. You can contact us to get a consultation.
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