Succession planning is a critical process that often gets overlooked or delayed by small business owners who are focused on day-to-day operations. However, effective succession planning is vital for maximizing value while simultaneously ensuring continuity for your employees and customers.
In Canada, the urgency of succession planning is rapidly increasing. According to Statistics Canada, 14.6 per cent of business owners are over the age of 65, while a striking 61.5 per cent of business owners are over the age of 50. According to a recent survey by the Canadian Federation of Independent Business, by 2032 over 70 per cent of business owners say they plan to have exited their businesses, which is likely to result in over $2 trillion worth of business assets changing hands over the next 10 years.
In this article, we outline important considerations for small business owners as they prepare their business for sale and navigate the complexities of handing over the reins.
Start early
Succession planning should ideally begin years in advance of a planned transition. The earlier you start, the more time you’ll have to address issues that may arise. Starting early allows you to identify and groom potential successors so they’re prepared to take over.
Identify and develop key talent
Identifying and developing potential successors is crucial. Whether you plan to sell the business to a family member, key employee, or an external buyer, you need individuals who can step into leadership roles and maintain the business's success. Provide them with mentorship and opportunities to learn the ins and outs of the business before you fully transition away from day-to-day operations.
Assess and demonstrate financial health
A critical step is to assess and later demonstrate the true profitability of your business for a potential buyer. Starting several years before you plan to sell your business, take steps to strengthen profitability and improve your financial reporting. You’ll also want to have externally audited or reviewed financial statements from a reputable accounting firm available for at least 2-3 years to help assure buyers of your results.
Decide on the sale structure
Determining how you’ll sell the business is a major decision. You can choose to sell the entire business, sell a portion while retaining some ownership, or pass it down to family members. If you have real estate tied to the business, you may want to retain it or look at selling it as a separate asset.
Understand tax implications
Taxes can significantly impact the proceeds from the sale of your business. Familiarize yourself with the tax implications of your chosen succession plan and seek ways to minimize the tax burden, including through your lifetime capital gains exemption. Tax-efficient strategies can help you retain more of the sale proceeds.
Value the business accurately
Determining the fair market value of your business is important for setting a realistic asking price. Engage a business valuator or trusted advisor to assess your business objectively. Keep in mind that buyers will be looking for a return on their investment, so a realistic valuation is key to attracting serious buyers.
Seek professional guidance
Navigating the complexities of succession planning requires expert advice. Consult with attorneys, accountants, financial advisors, and business brokers to ensure you are making informed decisions and complying with legal and financial regulations. A good broker can also help you find potential buyers, negotiate on your behalf, and streamline the sales process.
Plan for life after business
Consider what you will do after the business transition. Whether you plan to retire, remain an advisor to the business, start a new venture, or pursue other interests, having a clear post-transition plan will ensure a smoother adjustment to life beyond the business.
Conclusion
Succession planning is a multifaceted process that requires careful consideration of various factors. Starting early, identifying potential successors, assessing financial health, and seeking professional guidance are all critical steps to ensuring a smooth transition of ownership. By following these guidelines and planning each aspect of the transition, you can not only maximize the value of your business but also leave a lasting legacy for the next generation to build upon. Remember that succession planning is an investment in the future of your business, ensuring its continued success for years to come.
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