Business Succession

Running your own business? Thinking about retirement? Advance planning can help you expand your options and make smarter long-term decisions.

Retiring From Your Business

Strategies for Planning Your Retirement

Creating a retirement plan now and fine-tuning it periodically lets you begin a process to protect your investment, create smooth transitions, groom your successor, and more.

  • Why Plan Now?
  • Common Exit Strategies
  • Grooming Your Successor
  • What’s Your Business Worth?
  • Creating a Retirement Plan

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Why Plan Now?

Not expecting to go anywhere soon? Your mortality or current age is not really what this is about.

Creating a retirement plan now and fine-tuning it periodically lets you begin a process that:

  • protects the full value of your investment;
  • generates a potential income stream for retirement or disability;
  • reduces or defers the tax impact on your estate, spouse and family;
  • creates a smooth management transition with little or no business disruption;
  • allows family members or key employees to confidently assume ownership; and
  • enhances the overall worth and strategic direction of your business.

Still need convincing? Consider the significant personal, operational and strategic benefits that can flow from starting your retirement planning now - no matter how old you are.

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Common Exit Strategies

Passing the Business to Family:

For this exit strategy to work it requires as much advance planning as possible. There are many reasons for this, including the possibility of conflicts and tensions between siblings, spouses, non-family executives, and other investors.

If you decide to pass the business to family, you will need to address:

Strategic issues such as leadership and management choices, restructuring of the business, or sale of all or a portion of the business.

Legal & tax issues such as shareholder agreements, prenuptial agreements, marriage or divorce of a child or shareholder, or death of spouses, key employees or a potential successor.

Family policy issues such as share ownership of family vs. non-family executives, shares for new children or grandchildren, impact of illness or disability, the owner's retirement plans, and employment conditions of family members in the business.

Perhaps the most important question is whether a family succession is even feasible. An owner must be objective in assessing the talents and interests of potential family successors.

Questions to ask include:

  • Would a family successor be able to secure your investment and retirement income?
  • Does a potential family successor have the aptitude, intelligence or skills needed to lead the business forward?
  • How would employees, suppliers and customers react?
  • What would objective outside professionals or directors advise?
  • Can family raise the money for the purchase price?
  • Can you divide the value of your business fairly among several family members?
  • What is the most tax-efficient way to transfer ownership?
  • Do you want to retain control for some period?

To sort out these issues, you may want to try forming a family council. These are regular meetings designed to create trust and understanding around estate planning, retirement and wealth management issues.

The family council is also an excellent vehicle for:

  • agreeing on a formal, written policy for family participation in the business;
  • developing a formal, structured performance evaluation process for family members; and
  • deciding who will have a stake in the business among in-laws, spouses and wider family members.

With a forum for discussion and a basis for assessment, you can deal more effectively with legal, tax and operational issues.

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Choosing a Successor:

Whether your exit plan involves family members, business partners or even employees, a great deal of work must be done to ready the company's leadership for continued success.

Choosing a successor involves three steps:

  • Identifying future leadership needs of the business.
  • Assessing existing skills and potential candidates.
  • Creating a feedback and monitoring mechanism to assess the progress of leaders-in-training.

What qualifications are needed for your successor? Apart from business skills and knowledge, you might consider candidates with the following leadership qualities:

  • global thinking;
  • focus on results;
  • performs tasks & projects with speed;
  • keeps a customer focus;
  • has concern for people;
  • respects others; and
  • trusts others and is trustworthy.

Your retirement plan should include a written job description for the chief leadership position that family and other interested candidates can study.

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What's Your Business Worth

Whichever exit strategy you choose, a crucial factor is the business valuation. You'll need to establish an accurate value for the business so you receive a fair price.

You should engage a professional valuator to help you calculate the net worth of your business. Key questions to address include:

  • What do you have to sell (for example, customer lists, contracts, inventory, equipment, etc.)?
  • Is your business more valuable in pieces or as a whole?
  • How can you determine a fair market value?
  • What can you do to improve the value of your business between now and retirement?
  • How much of the value and long-term future in your business is tied to you being at the helm?
  • Is the business actually building any equity?

Professional Valuation Methods

If your business is complex or has significant assets, a professional valuator can use a variety of methods to come up with a fair value, including:

Cost or asset-based approach: Simply, this totals all the business expenditures and investments to date.

Market value approach: Comparable businesses are examined and other similar transactions can help establish a value.

Earnings approach: This most common approach estimates a price based on historical or future earnings. A discounted cash-flow approach is usually applied to the future income stream.

Strategies to Raise Value

What if the value is lower than you expected? With advance planning, you may be able to raise the value before selling.

Increase income: Your accountant can suggest ways to improve your financials and bottom line, which may include spending more on marketing and sales, and cutting administrative costs.

Improve assets: You may be able to dispose of unproductive assets or buy certain assets (such as your company car) to get them off the balance sheet.

Reduce liabilities: Settle any pending lawsuits, unpaid taxes, warranty claims, etc.

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Your Exit Strategy Team

The next step is creating your plan to retire from the business. Start by pulling together a strong team of advisors. Your business may not need the full range of experts out there, but it is worth involving at least one experienced small business advisor. For example, RBC Financial (Caribbean) Limited has advisors who can assess your situation.

The accountant: Accountants may be able to help you make your business more financially sound and attractive to buyers. Another reason to consider hiring a chartered accountant is to start getting audited financial statements-a valuable feature in the eyes of many buyers. Experts suggest your accountant should also work closely with your legal advisor to ensure there is no duplication of effort.

The lawyer: Look for a legal advisor or law firm that specializes in business and estate law and has actual experience in selling businesses, setting up business trusts, planning taxes and drafting shareholder agreements. Ask for client references, if you feel the need.

The appraiser or valuator: There may be a qualified business valuator in your chartered accounting firm or you can find one through the Canadian Institute of Chartered Business Valuators. After studying financial records and learning the strengths and weaknesses of your business, the valuator can offer a reasonably accurate estimate of market value.

The banker or lender: A lender experienced with small or medium-sized businesses can offer valuable advice at each step of retirement planning. Your lender may also be of assistance financing the sale or transfer of your business.

The broker: Brokers have a large pool of potential buyers, can sift out poor prospects, and offer selling tips you can't get from your other advisors. Brokers usually get a commission tied to the final selling price that can range as high as 10-15%. Review the sales agreement with your lawyer.