January 23, 2017

A glance at the horizon

By Jacki Hart CLP
Prosperity Partners program manager

At this time of year, many of us are pushing hard for production, switching seasonal services and products, clearing out summer stock, changing retail and office displays, finalizing late season project details, quoting on snow contracts, and perhaps, flipping through travel websites dreaming of some down time in the months ahead.

Believe it or not, Congress is less than three months away! It’s time to start thinking about professional development over the winter. You should also take time to review which systems need improvement and debrief the past seven months of activity, profitability and successes.

One area many business owners seem to look away from or are “too busy” to consider is an exit strategy (sometimes referred to as a succession plan).

I have met many small business owners who work very hard, year after year, making the common assumption that when they are ready to retire or sell their business they will have built-up a valuable company and can make an easy return on all they have invested.

The reality is, it’s just not that simple. Selling a business is not at all like selling a house. There can be deep layers to the way in which a business is valued and there are simple ways too. This depends on who is buying, who is selling, the urgency, the structure of the business, the current market, the assets, profitability, and at times, who may stay with the business through a transition, who will leave, and how quickly the owner expects to exit.

Of the many business transactions and offers to purchase I’ve seen over the past 10 years, every transaction is different. There is no golden formula.

I’ve seen a large company move in on a small, struggling service operator, offer to cut a cheque for 15 per cent of gross sales, and tell the owner to keep the used equipment and trucks, dispose of them at will, and keep the cash. I’ve seen others purchase a business just to get a strategically located yard at a discount, because the owner can’t manage the debt load and requires a quick bail-out. The seller may even stay on to manage the yard for the new owner. Typically, the seller wins in the short term and the purchaser wins in the long run.

At the opposite end of the scale, I’ve seen very well run businesses, with solid financial track records, real estate assets and low debt ratios, negotiate excellent returns on their time invested and the soft value of their business — resulting in a win-win for both parties. I’ve also seen quite a few in between.

When it comes to selling a business, it’s rare someone will walk through your door, look and make you an offer as if they were buying your house. It’s also rare to find a buyer prepared to cut you a cheque for full payment within days, weeks or months of your decision to sell. Selling a business can take months, if not years, to transpire. Payment schedules and methods to fund succession vary greatly and can take years to execute until the new owner has full control and the exiting owner has payment in full.

The point I’m making here is that if you own a business and you plan to move on, retire, or take on a partner, you need to turn some attention to a long-term (three- to five- year) strategy to prepare your business for sale in order to get the best possible return and to prepare for the tax implications of the transaction.

The CRA (Canada Revenue Agency) has strict guidelines and rules for disposing of shares and assets in a business, as well as when capital gains exemptions can and cannot be applied. It can be extremely complicated, or simple, depending on how your business is structured and how the transaction is negotiated (for example, a purchase of assets versus a purchase of shares), and with whom.

For business owners with family members in line to succeed, there are also considerations to include who is the right fit for each role, what the business needs, and whether or not the succeeding generation has the necessary skills, temperament and passion to successfully carry on. Many businesses fail in their second generation, even more fail in their third. Just because they’re related doesn’t mean they are qualified