August 15, 2013
By Jacki Hart CLP
Prosperity Partners Program Manager

Jacki HartMost of us, when we begin our business journey, never think about how we will get out of it. Of course, expectations are that we will have something worthwhile to show for the years of effort. However, without careful planning, selling a business can be sometimes be less lucrative than you may think.

Most entrepreneurs are juggling the day-to-day challenges of their business, leaving no time for planning an exit strategy.

Thought and preparation

But, planning that exit requires a lot of thought and preparation. Selling a business involve determining its value without the owner. It’s not like selling a car, or real estate. There are complicated negotiations, tax implications, flexibility, and ensuring a smooth transition with the new owners, customers and staff.

You must have a clear understanding about your organization’s current needs and where you want to be in the future. It’s important to plan how you will take care of everything between when you decide to exit and the actual closing of the sale. It’s your exit plan.

Everyone in business needs an exit strategy. Much like death and taxes, it is inevitable at some point in the future that someone other than you will own and operate your business. The question is, when will this happen?

Maximize value

All smart business owners I have spoken to say they considered succession planning within the first five years of starting their business. They want to maximize the value of their business. With an aim toward that objective, it will assist in making decisions about infrastructure, employee training and other long-term investments that will increase the value of your business.

No one plans to suffer a serious illness or experience an accident that will prevent them from working their company. But, as we all know, life is an uncertain adventure. You should ask yourself the following questions: What would happen to your business without you at the helm? Who could run it effectively in your absence? Who would you want to run your business, and who would you choose to actually run your business? Are they ready? What income will you or your family require to continue your lifestyle? What is the value of your business? Do you have enough insurance coverage? Are all your legal papers in place, such as wills, shareholder agreements, etc.? Once you have answered these questions, you are ready for the next step to fulfil your succession plan.

Along with your company’s assets, its value is measured by the ability for it to generate cash flow, in addition to the potential risks in relation to that cash flow. To arrive at a valuation, we use a multiple projected annual cash flow over the past three to five years. The numbers normally reflect the risk factors associated with the company and the industry in which it operates.

A variety of factors include the reputation of the owner, level of infrastructure in place, diversity of customer base, stability of supply, and stability of company revenue stream. These are all factored in to determine the value of your business.

Never a solo effort

Developing a succession plan is never a solo effort. It requires the involvement of a variety of sources that will include a chartered accountant, lawyer, insurance specialist, banker, personal financial planner and probably a specialist in succession planning.

Of course with any sale, there are tax implications. These will vary on how the sale is structured. A straight-up sale to a third party generally results in a taxable gain, while handing the business over to the next generation should involve a tax deferment through a freeze transaction. There are a number of planning opportunities such as utilization of lifetime capital gains exemptions that should be considered. If you are to stay abreast of the ever-changing tax environment, you absolutely require a chartered accountant in planning for the sale.

Another important player in the succession process is a lawyer to manoeuvre through the negotiation process with the sale. Proper planning will have a huge influence on the tax implications of the transaction. Ask the right questions, and make sure your advisors are experienced in purchase and sale of businesses.

You may or may not have a family member who wants the business, or is capable of managing it. You may or may not have employees who want the business, or are capable of managing it. Perhaps a sale to a third party will provide the best possible outcome for you and your family. A good succession plan will provide the answer.

An emotional time

When it comes to letting go of your business, many times emotions take over from common sense. By having an independent facilitator, it makes the transition process easier for the business owner and family members. It is an important factor in resolving emotional and potentially toxic disagreements. An independent facilitator will greatly assist to smoothly move through these problems.

Take a moment to think about your retirement plan, and your future in your business. Succession planning is a topic well worth researching to ensure your prosperity in the years ahead.

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