Important steps to ensure a successful succession are tax planning and careful legal structuring that helps to maximize a company’s value for sale or sets the stage for the next generation to take over.Getty Images
As the saying goes, nothing is certain but death and taxes. For entrepreneurs, you can add "exiting the business," whether through a sale, transfer to the next generation or their own passing.
But while succession is a major, complex concern for business owners, most are woefully unprepared to ride off into the entrepreneurial sunset.
According to a 2016 survey by BMO Wealth Management, two-thirds of business owners said they had no formal succession plan in place. Only 8 per cent of respondents said they had an up-to-date, written plan.
That lack of preparedness puts entrepreneurs – many of whom will rely on the eventual sale of a business to fund their retirement – at significant risk, says Doug Bruce, vice-president of research with the Canadian Federation of Independent Business. "We ask [in surveys] why they don't have a plan, and the No. 1 answer is that it's too early," he says. "But whether it's health-related or financial, things do happen."
Important steps to ensure a successful succession are tax planning and careful legal structuring that helps to maximize a company's value for sale or sets the stage for the next generation to take over.
If a business owner's ultimate goal is to sell, "you do things to make the company look like a good target," says Richard Niedermayer, a partner with the law firm Stewart McKelvey in Halifax. "That means keeping a clean balance sheet, growing revenue where you can, keeping costs under control and putting repeatable management structures in place."
Many entrepreneurs assume that passing their business along to an adult child will be a smooth transition, but that's not always the case, Mr. Niedermayer says. Sometimes heirs lack the needed expertise, or don't want to take it over. Sometimes when a parent dies suddenly, his or her children are shocked to learn they're the new owner of the business.
"If your goal is internal succession to a family member, then include a growth and development plan for that child or family member so they know how to get from A to B," he says. He or she could work in different parts of the business before moving into a management role, or work elsewhere to gain experience.
Next is understanding what the business is truly worth. Accurate business valuation is complex at the best of times, but it can be complicated by an entrepreneur's emotionally driven perception of a company's worth and (often unrealistic) sale expectations.
"Any time that a business owner can get guidance from a banker, accountant or, in the best case, a business valuator – who is looking with a very critical eye and applying industry-standard multiples of earning and those things – they're better off," Mr. Niedermayer explains.
On the tax front, business owners should take advantage of the lifetime capital gains exemption, which helps to shelter capital gains income from taxes. It can allow owners to sell shares in their business to a purchaser and drastically reduce their tax liability.
An estate freeze can also save on tax when transferring ownership to a family member, explains Kevin Bell, principal at the Victoria-based accounting firm Bell and Co.
In that scenario, an entrepreneur would convert her common shares in an incorporated business into preferred shares, locking in the value of the company. Common shares would then be sold or passed to the family member assuming ownership of the business, allowing any appreciation in value of the company to accrue to the new owner. The move allows for more effective estate planning. "The parents' wealth is safeguarded," Mr. Bell says.
One final consideration, says the CFIB's Mr. Bruce, is to be transparent and communicate to employees any plans to sell or transfer ownership of the business.
This is especially important for service businesses that rely on staff retention and engagement to drive growth and, eventually, attract a buyer willing to pay top dollar.
Rumours of a sale can make employees head for the exits as they fear for their jobs, which could raise red flags for a potential buyer, or even scuttle a deal. "They may have killed the business before you get to the stage of selling it," Mr. Bruce cautions.
"To control any misinformation going around in your business, you need to communicate the change and be open to employees."