By Robin Wydryk

Over the next 10 years, many owner/managers (i.e. the boomers) will face one of the most important decisions of their business lives: “What to do with my business?” Many prefer not to even think about it, and very few who do think about it, actually plan for it.

Years ago, most businesses would be passed on to the next generation. Today, that is only one alternative, and not necessarily the best one.

Before you even start a succession plan, you must ask yourself three key questions:
 

When?

You need to set a succession target date. The timeframe need not be written in stone, but you need a target so you can eventually implement the steps in your plan. Ideally, you should allow five years to create and carry out the plan. The benefit of creating a succession plan well in advance of the target date is to allow for the unexpected, such as a death or disability. You want to guarantee both your family and your business are protected.
 

Who?

Who would want your business? If it is the next generation, do they really want the business and are they capable of taking it over? These are two very difficult questions, and you must be honest with your answers.

Too often, the correct answer to at least one of the questions is no.

The first question, the when, is really important if it’s the next generation who will be taking over. Timing is key. It cannot be too premature, since the successors need time to develop their necessary skills and knowledge. By contrast, it would be wrong for an aging owner to still call the shots over his middle-aged successors. If the next generation is ready, capable and waiting in the wings, the succession is well overdue.

The best-case scenario occurs when the next generation is able to take the business to a whole new and successful level. Then, the timing of the torch passing is ideal.

If the next generation is not an option, who, then, might want to buy your business? Is the current management capable and willing to be your successor? Have you consciously created your own buyer within your organization? It is possible to groom younger individuals within your company to eventually buy you out? The grooming period and the buyout can be structured over several years. If the payout is properly financed, it will be a win-win situation for both buyer and seller.

Would someone else buy your business, a competitor, a customer or a supplier, perhaps? Who, in your opinion, is best positioned to buy your business? Buying a business is like an investment; it should give the buyer a good rate of return and also pay for itself over a reasonable period of time. If you really give this question serious consideration, you will undoubtedly be able to identify the most suitable buyer.
 

How?

Transferring the business to the next generation usually involves a significant amount of tax planning. Whether you sell, gift or freeze the value of the business, for tax purposes you are expected to sell the business at a fair market value. Every situation is unique and needs the appropriate tax plan. A business valuator can value the business for this purpose. One common method is to freeze the value of the business at the current level and transfer its future growth to the next generation. This method is designed to defer the tax.

If you plan to sell the business to management, financing and a good tax planning structure are essential. Frequently, the business owner will finance a portion of the buyout, but be sure to put the proper security in place.

Selling to an unknown party could take one to two years once the business is ready for sale, especially if a potential buyer has not yet been identified. Normally this process is conducted through a business broker.

There are a number of companies that specialize in selling owner/manager businesses. If you are going to sell your business, make sure that it is saleable. It should have a strong management team and not be totally reliant on you. Also, you want to ensure you get the highest price possible. To accomplish this, you must maximize your profits. There are numerous value-enhancing techniques that businesses can undertake to achieve this; but that topic is for another article. Just remember, it may take three to five years to get your company ready for sale.

Ask yourself all three questions above, and be honest with your answers.

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Robin Wydryk is a partner in SB Partners LLP, Burlington.