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.
We have not waded into all of the legal and accounting/tax implications of business succession, but have provided places to go for more information in the Succession Resources section.
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:
- Tax Advisor
- Financial or business planning consultant
The next page in this section will discuss how to valuate your business.