Articles

This is the second in a series of articles which deals with succession planning and transitioning your business. We hope you find it thought provoking!

It is a well known fact that entrepreneurial family-owned businesses play a critical role in the health of the Canadian economy. Because of a rapidly aging baby boomer generation, a good many of the existing entrepreneurial community will need to transition their businesses to the next generation in the near term. Even though available evidence indicates that more and more business owners are becoming aware of the need to plan for transition, other studies have indicated that most entrepreneurs are not properly prepared for managing their future.

Many rationalizations can be made justifying this procrastination by baby boomer entrepreneurs. One of these is a strong perception that there are substantial benefits enjoyed by established businesses through retention of their silver haired leaders. This perspective encourages greater longevity of service and justifies hanging in there in the minds of those entrepreneurs. That factor, when combined with predictions of upcoming labour shortages, provides a compelling argument for postponing transition and consequently, deferring a retirement exit strategy.

However, the fact still remains that a transition will have to occur one day. It can be planned and therefore smooth or it can be unplanned and turn into a rough ride. Given a choice, why not choose the easier softer way to exit by doing some planning now?

One day you will need to Sell

“One day, they (entrepreneurs) will sell.  It can be voluntary, or involuntary, but one day, they will sell.”  Grant Robinson, Successcare

If you plan carefully now, you can exit on your own terms and within your own time table.

Don’t wait until the last minute

It can take 3 to 5 years to implement a plan that will assure future success of the business and take advantage of tax structuring and other opportunities arising on your exit. There are many business and tax strategies available to you to maximize your after tax returns. Many of these require implementation well ahead of the event. Careful planning now, can pay big dividends later when you hand over those controls.

Future liquidity requirements also must be considered if you are to face significant tax liabilities on your exit or if cash is required to fund buy outs. Unfunded liabilities will drain working capital and even necessitate the premature sale of business assets, sometimes in soft markets. Life insurance is one way of providing future liquidity. Generally, the younger you are when you apply for it, the cheaper it is. Planning now while you are insurable, will save you dollars later.

In order to maximize the value of your business and create a bigger future, you will need to assemble a team of advisors and formalize some of your business processes so that the success of the ongoing business is not dependant on your constant supervision. By building a strong management team and increasing your profitability in the years from now until you exit, you will enjoy a substantial increase in your exit price (generally based on a multiple of EBITA).

Remember that it takes time to transfer knowledge and wisdom

Over time, as business experience progresses, entrepreneurs move through various stages from data to information and then knowledge and wisdom.  Planning ahead can help the next generation get through the early stages with your guidance and experience, as they develop their own knowledge and wisdom.

Having read the above, ask yourself if you are a candidate for a transition action plan. If you are, why not give us a call and we can help you get rolling! Please call Diane Friedman or Paul Gaster at Wolrige Mahon LLP for further information. (604-684-6212).