SBLR Chartered Accountants

Planning ahead for a smooth and successful transition.

The statistics surrounding the issue of succession planning in today’s economy are staggering: more than 40% of small and mid-sized enterprises (SMEs) will change ownership in the next five years, and yet only 4% have a formal plan to manage that transition. Experts predict that a major crisis situation will develop over the next decade due to the sheer number of businesses changing hands.

Succession planning is critical. To ensure you can meet your retirement goals, you need every advantage you can get and the best way is to start planning now.

Let’s face it – the ultimate goal in life is to work to live, not live to work. As a business owner, you have worked long and hard to build up a valuable asset and at some point down the road you will likely want to enjoy the fruits of your labour and retire. Between now and then, however, there are a number of questions about succession planning that need to be answered:

• When do you want to retire?
• How are you going to retire?
• Who will run the business if you are unexpectedly injured and no longer able to work between now and your expected retirement date?
• Are you going to sell your business, pass it along to another generation or just close the doors and walk away?

Obviously, deciding when you WANT to retire is not the end of the story. There are many more decisions to be made in the process of succession planning – that is, planning how you will exit the business in order to maximize your return and meet all of your personal, financial and retirement goals.

All business owners, regardless of age or family status, should strongly consider the succession planning issue for their own company – and the earlier, the better. Succession is not always a gradual or predictable process – the issue could be forced by sudden illness or by a new opportunity that you just can’t pass up. The best time to plan, therefore, is when you do not need a plan at all – before a crisis situation occurs.

However, because we are all victims of human nature and generally fear the unknown, this is an issue that is often brushed aside. Addressing your own succession involves answering a lot of difficult questions for both you and many other people involved with the business. Besides, your time is much better spent managing the day-to-day operations of the company, right?

Wrong! Unfortunately, however, this mindset is all too common with entrepreneurs. The old cliché is very true in this case – we are often ‘our own worst enemies.’ A lack of preparedness for the transition of your business can ultimately harm the company and lead to family conflict and discord.

So why should YOU prepare now for the future transition of your business? The benefits of a succession plan are numerous, and include:

• Increase the value of your business on sale - A good succession plan will prepare the business for transition and ensure that the value of your business is not tied up in YOU. A comprehensive plan will also ensure that the proper steps are taken to systematize all processes within the business so that it will run like a well-oiled machine regardless of whether or not you are still there to run it. This is absolutely crucial in order for you to obtain the best possible value upon the sale of your business.
   
• Plan for retirement – Over 70% of business owners plan on using the proceeds from the sale of their business to fund their retirement. The succession planning process forces you to look at your retirement goals and prepare a realistic exit strategy. It also encourages you to put an action plan in place for actually meeting those retirement goals.
   
• Avoid conflicts - Conflict is one of the biggest causes of business failure after transition, particularly in a family succession situation. Sibling rivalry, opposing goals, and different assumptions can lead to major problems when you, as principal owner, are no longer present to manage the daily operations of the business. Succession planning facilitates discussion between family members and/or key stakeholders to resolve potential conflict before it becomes an issue.
   
• Ensure longevity of the business - A good succession plan is proven to help the business prosper both for the future owners and current owners, well in advance of the actual succession.
   
• Reduce taxes on sale - Planning proactively opens the door for many tax and estate planning opportunities that can save you money. If you wait until you are finally ready to sell your business, these options may simply not be available.

The earlier the succession plan is prepared and implemented, the more valuable it will be. Selling a business is not an immediate process; it takes time to explore the different options and prepare the business for sale. This is best started well in advance of actual retirement; 5 years is good, ten years is even better. Thinking with the end in mind (i.e. your retirement goal), is the only way to make certain that all decisions made along the way are consistent with the end goal. Planning early is the best way to ensure a pain-free, smooth transfer, while maximizing your returns.

There are four phases to an effective succession planning process:

Phase One: Determine the requirements of key stakeholders

The starting point of the process is to determine your needs as the owner. What is your expected timeline for exiting the business? What do you need from the business upon retirement? How will the business continue on without you? Once you have answered these questions, it is then crucial to identify the needs and expectations of other key stakeholders in the business, be they other family members, business partners, or even loyal employees. Family, business, and ownership systems are all equally important to the long term success of the business; all should be given equal respect and consideration in succession planning.

Phase Two: Prepare the business for a smooth succession

The next phase of succession planning is to assess the current performance of the business and determine if it is ready for transition. Decisions can then be made on what needs to be done to prepare the business. For example, the company may need to be restructured in order to make it more attractive to an outside purchaser or to take advantage of significant tax-saving opportunities. A potential successor from within the business may require additional training and responsibility. A detailed action plan should be formulated to address each area in need of development.

Phase Three: Research and consider all viable options for succession

There will never be only one option for succession. This third phase involves determining all viable alternatives, given the stakeholder requirements. Options can be grouped into three different levels: 

1. Legal Options – how will the wealth of the business be transferred? e.g. gift, annuity, buy-sell agreement, partnership, etc.
2. Funding Options – how will the transfer be funded? There are many ways to structure a financial transaction e.g. self-funded, insurance, cross purchase, working capital, public offering. Viable alternatives will depend on your specific situation. 
3. Managerial Options - who will ultimately be responsible for leading the business? Will there be more than one leader? How will you transfer your knowledge over to the new leadership? Do you want to be involved with the business after the transfer, or are you willing to walk away?

Phase Four: Select preferred options and develop an implementation plan

The final element is to select the option that best meets the needs of all involved parties identified in Phase One. The document should summarize the decisions made and the rationale behind each decision. It should also clearly communicate everyone’s role going forward. The written succession plan acts as a contract to ensure everyone involved supports and is accountable to the plan.

A word of caution: the succession plan is not a static document; many of the assumptions used in the planning process may change over time. The succession planning document should be reviewed and updated periodically to ensure that it remains in line with your objectives.

Due to the emotional component involved and the in-depth knowledge required of legal, tax, and financial issues, succession planning can be a very complicated process. Working with an experienced and independent professional advisor can help accelerate the process and ensure that thoughtful consideration is given to all issues. SBLR LLP Chartered Accountants brings many years of experience in planning for the succession of small and mid-sized businesses. Our firm has expertise in tax planning, strategic planning, HR and operational consulting to ensure this process proceeds as planned.