Many business owners are outstanding when it comes to working in their business yet put aside very little time to work on their business. This includes time for one of the most important milestones that every businesses will eventually face. How to effectively sell, transition or even close the business. Putting aside time to work on something so far out into the future or even within the next five years is simply not a priority. It is akin to saving money for the future or making pre-arrangements for the inevitable. We know from experience that setting time aside to take care of this is an excellent idea, but very few of us really seems to know where to start and this could be the main reason for procrastinating. Studies show that 60% of business owners aged between 55 and 64 have yet to start discussing their exit plans with their family or even a business partner or partners. That being said just like anything else worth doing for your business, adequate succession planning and risk management requires time and may take up to two years or even more to create the right conditions. Consequently avoidance is not the best action plan.
Some examples of why an “action plan” or “exit plan” should be considered:
1. Surprize, a partner decides he wants out of the business.
2. The founder decides to transfer the business to a son or daughter.
3. The results of a sudden death.
4. Surprize, a sudden disability or illness.
5. The decision to sell.
6. The decision to wind-down the business and shut-down.
7. Surprize, the sudden need to sell due to cash flow issues.
Canadian business demographic studies reveal that approximately 30% of the 500,000 thousand small businesses are at risk of becoming either a transition statistic or a potential success story. This scenario would represents a massive hit to the economy, supply chain and employment in the cases where a large number of these businesses fail to transition.
Here are some interesting estimates on what is expected to happen.
- Businesses with less than 10 employees only 1 in 6 will sell or transition successfully.
- Businesses with 10 to 20 employees only 1 in 4 will sell or transition successfully.
The aforementioned is not really great news for those looking to sell or transition successfully, so hopefully they will have considered creating a transition plan B or even plan C.
As an example when I transitioned from my management position to become an Entrepreneur, I had created a plan A, B, C, D and G. It has now been 14 years and expect to be in business for another 15. Regardless I have been working on my transition plan for the last two years and this year found a viable solution. With some work over the next two years I will be able to ensure that the plan is sustainable.
In most small businesses the principle strength in terms of human capital is the owner. That strength also represents a weakness because every aspect of the business relies on the KASH (Knowledge, Aptitude, Skills and Habits) of the owner. In the case of a family-owned business the weakness is amplified where the founder has not delegated some control to other family members or key employees.
Twenty-five percent of family owned businesses survive from first to second generation because the founder holds on to the reigns too long and fails to develop the next generation. While succession planning and risk management are common practices for large businesses, in the case of small and mid-sized companies it is often seen as an overwhelming burden that is often pushed to one side. Only to be addressed when emergency situations such as the death or illness of the owner/partner or when a new partnership is necessary following a cash-flow crisis. As time goes by, options disappear and it is more difficult to create the right conditions.
As you develop a plan, consider the following:
If you are considering giving the business to a family member for free, ascertain that they are up to the challenge. Alternatively you might consider as one of my clients did, sell equity in the business to the family member. In this case the son worked towards buying his father out over several years but was well worth it.
Remember to give yourself enough time because ttransitioning is a process rather than an event. You can increase your chances for success by starting early. Ensure your plan has a clear timetable, and once you have set the timetable stick to it and do not deviate. Consider as well developing a business plan that extends beyond the transition period for the benefit for your successor. Although your successor may take the business in a different direction after the transition, at least your proposed plan could provide them with a good start.
It is equally important to discuss tax strategies with your accountant to minimize any impact. Buyers are always looking for ROI, max profits and minimum risk, so you will need to show more of the potential of the business vs what you have done regarding tax planning in the past. An initial step should be a study to understand how attractive your business is to potential buyers or even family.
Consider as well working one year with the new owners to help ensure a successful transition. Remember that every business is an essential part of the Canadian economy. So take the time to pass the torch on to the next generation. They are counting on all of us to do what is right. Do you have the audacity to make your business transition a Great Success?
By Ken Ingram, MQA