This is our blog for business owners and continues the theme of ownership succession and is co-authored by our associate Don Hilton at Distinct Capital Partners.
In Canada, according to RBC, Wealth Management, only 40 percent of business owners have a plan to transition their business. A successful planning process for an orderly transition say at retirement or an unexpected one upon the owner’s death or incapacity will generate greater sales value than would be the case without a plan. Below we identify the key steps that in our experience are the best guide to planning for succession.
Step 1: Start early – it is never too early to start planning succession and besides the more time you can dedicate now will help to enhance the value of your company should an unanticipated event force you to exit the business early.
Step 2: Work with an adviser. Succession planning is not something undertaken everyday, in fact perhaps only once in a career. It can be a complex process and one where you may need advice from independent professionals experienced in mergers and acquisitions (M&A). Involve your key advisers (accountant, lawyer, banker, etc.) at an early stage as well and keep them engaged through the process.
Step 3: Think like a Buyer. Your M&A adviser will tell you what a purchaser will do to improve the value of your business once they have bought it. To ensure your company is presented in the best possible light uncover potential issues and rectify them before engaging in a transaction. This will maximize a favorable price and minimize conditions. In other words, conduct your own due diligence before you embark on a sale.
Step 4: Identify your Successor. The management team, employees, a family member, an external buyer, or a combination all represent potential successors. A different approach will likely be required for each and whether you want to remain involved in the business after the transition on a consultancy arrangement or as a condition of an earn-out.
Step 5: Make a Plan. Your adviser will develop a range in which he anticipates the sales price will fall along with the actions that will likely enhance that. Understand and target the legal structure that will work best for you, the taxation implications, and time frame. Lastly consider communication and how to advise all stakeholders; owners, management, employees, suppliers, and customers to achieve a smooth transition.