Succession Planning

Succession Planning
For most business owners in Canada, succession planning is treated almost as an afterthought.  Too often, owners don’t prepare themselves or their businesses adequately enough to exit it at it’s maximum potential value.  This article will examine succession planning from the standpoint of the business owner looking for a transition via the sale of a business within a 24-month time horizon or less.

What can be done to increase business value?
The key to proper succession planning is identifying what can be done to a business to maximize the selling price of the company for when it comes time to exit.  A business owner should be looking at initiatives that can increase revenue and reduce expenses and add efficiencies to the business.
– Can new market opportunities be explored?
– Can existing clients be sold more goods or services?
– Can margins be improved via operating efficiency?
– Overall, can more be done with less?
– Can management responsibility be diversified so that a new owner will have a stable base of staff?

If the intention is to sell a business then the potential buyer will want to see yearly improvements to the results.  A business that has slightly declining results would not command the same valuation as a company that is improving.

Get your books in order

Proper succession planning requires that the financial statements of the business are presentable.  Too many small and medium-sized business owners use their businesses to expense personal or discretionary items in order to save in income taxes.  A business buyer that is considering buying a business for succession will be given a big increase in comfort if the financial statements are accountant-prepared and that the results don’t include too many discretionary adjustments.

Tax planning
The goal of succession planning is to not only map out an exit from the venture but to also determine how you can structure a deal so that your tax exposure is minimized.  Work with a C.A. or other tax specialist to determine what your potential tax hit is on different types of deal structures (eg., asset sale vs. share sale).  Knowing this before you list your business for sale will benefit you greatly during the negotiations.

Get prepared for the sale
Selling a business for succession purposes is not an easy task.  The process can take several months with false starts and difficult compromises that may potentially be required.  Work with a qualified Licensed Realtor to learn more about the process well in advance of listing your company on the market.

Wealth Management
Another issue to consider for planning your business succession is what to do with any funds received after a deal has been completed.  Again, you should talk to your taxation advisers but also to a wealth manager to determine how best to invest your proceeds from the sale.

The points listed above are but a sampling of some of the issues to think about regarding business succession.  If you are seriously considering exiting your business, the best advice you can follow is to plan your succession process early.  Talk to a business broker, accountant, lawyer and succession planning consultant well in advance to map out a strategy that is most beneficial to you.

External Resources:
Business Succession Planning – informative article on family business succession from BDO

For more information please contact Vijay Gandhi.

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