Business Succession Planning (Exit Planning)
Selling your small business is a complicated and stressful endeavour. We have found that the transaction process is easier and more likely to succeed if business owners properly prepare for the sale in advance.
Many business owners don’t realize that selling a small business is completely different from selling almost anything else. First, some of the value of a business lies in something called goodwill, which cannot be seen or measured. Second, you cannot look up the list price of a business or use any other objective means to get a price. The value of a business depends on a number of things and is actually very subjective.
Complicating matters, business sales are usually confidential, making it very difficult to market them. They are also risky for buyers who are investing large amounts of money. That risk has to be addressed in the terms of the transaction.
It is no surprise, then, that selling your small business is not that easy. In fact, studies show that only about 10-25% of businesses put on the market actually do sell.
When you plan the sale of your business ahead of time through business succession/exit planning, you are more likely to see success.
Business Succession Planning Benefits
Your business is likely your biggest, or one of your biggest, assets. Succession planning helps you maximize the value of that asset. Even if you’re not planning to sell your business in the near future, it’s wise to have an exit plan in place to protect your business against unexpected events.
When you put your business up for sale, you’ll have competition in the form of other similar businesses on the market. Thorough planning, preparation, and value enhancement measures will ensure your business will stand out from the other businesses.
According to research by the Canadian Federation of Independent Business, only 49% of business owners have a succession plan and of these, only 8% have a formal written plan. It would appear that most people don’t fully understand the benefits of having an exit strategy for a small business. But doing the work that they haven’t done gives you an upper hand.
The major succession planning benefits are:
Improve Your Chances of a Successful Sale
A succession plan can prevent you from having a business that doesn’t sell. It’s more likely to:
- Attract a number of good quality buyers.
- Result in a higher selling price and better terms.
- Ensure a smooth transition to new owners.
Implementing an optimal organizational structure can help minimize the taxes you’ll pay when your business is sold. Some of the strategies are:
- Setting up a holding company.
- Placing the operating assets of the business in a separate company.
- Creating a family trust.
- Doing an estate freeze.
- Issuing shares to your spouse.
To take full advantage of the tax savings, some of these strategies must be implemented at least two years before the sale.
The type of sale can also have a major impact on your taxes. If you sell shares, you and your spouse may be able to use your lifetime capital gains exemptions. In an asset sale, the gains on the sale stay in the company and are not eligible for this exemption.
Buyers most often prefer an asset sale as this reduces their legal risk. Therefore, it’s important to set up an organizational structure that anticipates either type of sale.
Controlling the Sale Process
A plan ensures that you will be ready for every step of the sale process. Otherwise, the buyer will be in control and you’ll be unprepared for their requests. This will create a lot of stress and, potentially, a number of errors, putting you in a weak position.
If you fail to plan ahead, your employees and possibly your clients may become suspicious of your reasons for making a number of changes all at once. They might assume that you’re going to sell the business, and this can lead to a breach of confidentiality.
Succession Planning Considerations
Are You Really Committed to Selling?
If you’re like most business owners, you’ve probably entertained the thought of selling your business. Maybe it’s the feeling of freedom from all your business responsibilities that you find attractive. Or maybe you’ve always wanted to pursue a hobby or travel the world.
While those may be pleasant thoughts, you might want to ask yourself some other questions:
- How will selling your business impact your family?
- How do you feel about someone else running your business?
- Is it important to you that your business legacy is honoured?
- Would you really be able to spend all your time on your hobby or travelling?
Even if you decide you don’t want to sell in the foreseeable future, succession planning will prepare the business for a sale in case you have an accident or illness, or if a buyer approaches with an irresistible offer.
When Do You Want to Sell Your Business?
When it comes to timing, there are many factors to take into account, such as the current and expected economic conditions, your future financial requirements, the timeline required for tax and estate planning, and the time required to enhance the value of your business.
You might also want to take into consideration that it might take up to a year or longer to complete the sale after you decide to go to market. And buyers will quite often want you to remain in the business for a period of time.
What is Your Business Worth?
Before you finalize your decision to sell, you need to have a good idea of the value of your business. Many owners overestimate the value and are left disappointed that they weren’t able to sell their businesses, or couldn’t get the money they expected from the sale.
You don’t have to do an expensive, formal valuation at this early stage. It’s probably sufficient to ask one or more experienced business brokers or M&A advisors.
You might also speak to a financial or tax advisor to get a sense of what you’ll get to keep after taxes.
Choosing Your Advisors
One of the most important ingredients in your succession planning efforts is having a team of knowledgeable and experienced advisors, which may include some or all of the following:
- Tax expert
- Financial / estate planner
- Business broker or M&A advisor
- Business consultant (if you’re planning to grow the business before selling)
Some of your current advisors may not be the best choice if they’re not experienced in the sale of businesses. If that’s the case, do your research, get recommendations from others, and ask questions to make sure you’ve got a great team that will help you financially and emotionally.