Canadian entrepreneurs are getting older, beginning to think about retirement, and most don’t have a succession plan in place.
“59% of Canadian entrepreneurs are 50 years old or older, where only 32% of Canadian workforce workers are 50 years old or older,” says Statistics Canada.
CBD surveyed over 2,500 owners of Canadian small and medium-sized businesses in 2017, discovering the next wave of succession planning:
- 4 out of 10 said they plan to step away from their business
- Their reason for leaving? 83% of them plan to retire
- 26% will result in a family succession, 52% sale/transfer outside of the family
- 54% expect to leave their business in 4-5 years
- Only 49% of those who plan to sell have a sound financial reporting
- Only 29% are willing to take risks to improve the value of their business
- 83% of entrepreneurs expect transitions to take less than 2 years (It actually takes 3-5 years, or some times 10+)
Based on this study, we can see entrepreneurs are leaving money on the table, and like we’ve discussed before….
This is because succession planning isn’t something anyone really wants to talk about (unless it’s too late and a health issue arises).
Daily business activities take priority and we end up leaving business succession planning as the last subject on our minds.
Succession can be a very sensitive topic to talk about…
Conversations regarding money and death can bring up deep-rooted emotions and be frustrating.
Succession planning is becoming a more important topic for family businesses and entrepreneurs that plan to transition their family business.
So, why is succession planning so important?
- Handing over your business is a critical moment and happens once in a lifetime
- A poorly executed transition will hurt the business and your personal finances
- A well-planned exit will preserve your legacy and make you wealthier
Succession planning is a big subject and has a lot of moving parts, there are many components and steps to follow.
So, how do we get ready to exit?
6 Tips For a
1. Plan early to find the right successor and maximize your selling price.
Start thinking if a family member or manager is the right choice. Maybe it’s time to sell? Maybe sell to a third party, or even sell to the managers and employees?
2. Allow two to five years to implement your succession plan.
Knowing that this takes time, and is something that requires ongoing planning and meetings to keep the conversation going.
3. Keep a cool head, expect delays, be patient.
It’s not a one-time event, it’s best to get comfortable talking about the subject.
4. Communicate consistently with all stakeholders to minimize conflict.
Have frequent meetings to discuss the current state of the process.
5. Keep growing and improving the business to build its value.
The business should always be a priority.
6. Get outside advice and continue building your team.
It always makes sense to have a personal business advisor. Business advisors can provide professional advice and a different perspective.
Basically, there are 3 options for exiting your business:
1. Transfer to a family member(s) or key manager
2. Sell to managers/employees
3. Sell to an outside party
To decide on the best option, here are some questions you should consider asking yourself:
- Is it aligned with your retirement goals?
- Can you keep a role in the business, if you so chose to?
- Will it provide the retirement income desired/necessary?
- Does it secure the future of the business and your legacy?
- How will it affect your family, employees and other stakeholders?
Every Succession Option
Advantages and Disadvantages
If a family successor is your best option…
- Reduces third-party involvement
- Possibility to maintain your influence in business
- Finding the right successor can be difficult
- Potential family conflict and discord
If a family successor is out of the question, and you choose a management buy-out.
- Reduces risk because of managers’ knowledge of the business
- Rewards employees for the success you’ve built together
- Buyers often have limited access to capital
- Failed attempt can damage morale and performance
Lastly, if family or management buy-outs are not an option, you can sell to an outside party.
- Buyers are typically well-capitalized and may offer a higher price
- Have resources to improve business and add value
- To maximize returns, the buyer may make major changes to operations, staffing, and culture
- Sellers often required to stay on for several years after the sale
If you’ve decided to sell the business because it’s the most viable option for you, here are your financial options:
- Secured financing: Having a term loan that is tied to the value of other assets.
- Equity financing: Raising money through the sale of an ownership interest.
- Subordinate financing: Financing subordinated in priority of payment to secured debt.
- Vendor financing: The seller finances a portion of the sale.
Once you’ve decided on a successor for your business and are ready to move on, use these six tips to stay profitable during your exit.
6 Tips to Maximize Your Profits During Your Exit
Continue to invest
Pursue growth and boost profitability
Keep detailed and reliable financial reports
Standardize processes so it can operate without you
Train and empower staff to reduce turnover
Highlight and promote competitive advantages
Secrets To Succession is a book written by a first-hand successor, Gerard Gust, who was groomed from a young age to take over the family business. At only 33 years old, he was able to retire his father in half the time they had planned. Gerard shares his own succession process, what works and what doesn’t in order to help other family businesses prepare, implement, and endure the complex family succession process.
“The odds were stacked against us but the strategies shared in this book helped us succeed, and you can do it too!” – Gerard Gust