Succession planning does not take place in isolation from the larger issue of your overall financial security. An effective succession plan will examine all aspects of your financial situation. This includes:
A) Distribution of Ownership
If transferring ownership of your business, a shareholder agreement is a key tool that should be considered.
B) Selecting and Grooming Your Successor
Identifying the right person to take over when you leave is a process that requires thought and planning.
C) Business Maximization Strategies
There are many strategies you should consider prior to the sale or transfer of ownership.
D) The Role of Key Employees
Key employees are vital to the success of ownership transition, and can help in the planning process.
E) Business Valuation
While you may have a good idea of what your business is worth, you should still consult with a professional business valuator to confirm or determine this crucial figure.
F) Financing and the Mechanics of Sale
Financing the change of ownership should be a key part of your succession plan.
G) Taxation and Legal Considerations
It is important that you consult with your tax and legal advisors early in the process to make sure that your plan achieves your objectives.
H) Retirement and Estate Considerations
Since your investment in your business is probably your most significant asset, there are a number of important retirement and estate planning issues that should be addressed.
I) Timetable
Ensure there is a clear timetable so those involved know what will be expected of them, and when.
J) Monitoring Process
Be sure to update plan as necessary when there are changes to your business and/or personal situation.
K) Contingency Considerations and Risk Management
If you were suddenly unavailable to manage the business, who would take over your responsibilities?
Working with your professional advisors, we can help you develop a business succession plan and personal financial plan that are aligned to create a superior, overall plan.
A) Distribution of Ownership
If you are contemplating transferring ownership of your business in the future, a shareholder agreement is a key tool that should be considered.
A shareholder agreement is an agreement that governs the conduct of shareholders and determines ownership rules. It should address all areas of possible concern, including who can hold shares, if and how shares can be sold or transferred, and to whom, and what happens in the event of a marriage breakdown, disability or death.
B) Selecting and Grooming Your Successor
Identifying the right person to take over the reins when you leave is a process that requires careful thought and planning, particularly if your successor is a family member or key employee.
When selecting a successor, you’ll need to:
- Establish measurable criteria for assessing potential successors
- Identify suitable candidates
- Identify gaps in their skill and experience
- Create and implement management development plans
- Evaluate successor candidates
- Select a successor
- Train and prepare your successor to run the business
- Communicate to key stakeholders
- Manage the transition
C) Business Maximization Strategies
To ensure that your business can be successfully sold, and to maximize the price you receive, there are many strategies you should consider prior to sale or transfer of ownership.
Implementing some of these may be a relatively lengthy process, which is another reason planning well in advance of your target exit date is important.
Focus on business growth and profitability
- Diversification of customer and supplier base
- Reduction of operating costs
- Evaluation of discretionary expenses
- Tax minimization strategies, including potential business re-structuring
- Development of good management infrastructure to reduce reliance on yourself and ensure that knowledge is not overly concentrated
- Removal of non-operating assets
D) The Role of Key Employees
Key employees are critical to the success of ownership transition, as they provide continuity in the day-today operations of the business. They can also offer real help in the planning process and involving them will help prevent the rumours and innuendo that might otherwise arise on the employee ‘grapevine’ in the absence of official information.
You can protect your business against the risk of these employees suffering from premature death, by insuring them with key person insurance. Your business would purchase life insurance on the employee, pay the premiums and become the beneficiary of the policy. In the event of a key person’s death, the business would receive the insurance proceeds, which can provide the funds necessary to help survive the tragic occurrence.
E) Business Valuation
In order to receive a fair price from the sale of your business, you need to establish its value accurately.
While you may have a good idea of what your business is worth, you should still consult with a professional business valuator to confirm or determine this crucial figure. A professional valuator will help you examine what it is you have to sell (eg. inventory, equipment, customer lists, contracts), whether your business is worth more whole or in pieces, how much of the value is dependent upon you being at the helm, and what actions you can take to improve value between now and sale.
In Canada, professional business valuators are governed by The Canadian Institute of Chartered Business Valuators (CICBV). Members of the CICBV are financial professionals who meet rigorous professional and education standards and have received the designation of Chartered Business Valuator (CBV). Businesses of all sizes rely on CBVs to provide expert valuations for many kinds of business transactions.
Valuators use a variety of measures to establish value and will consider factors such as:
- Nature and history of the business
- Outlook for the business and the industry in which it operates
- Financial position and capital structure of the company
- The company’s historical earnings record and estimated future earnings
- Comparable businesses and sale transactions
F) Financing and the Mechanics of Sale
Whether your strategy involves family succession, management buy-out or sale of the business, financing the change of ownership should be a key part of your succession plan.
The key elements you need to determine are:
- What is being sold – assets of the business or shares (which include the ongoing rights and obligations of the business)?
- Purchase price – may be affected by the payment structure and type you negotiate
- Timing and method of payment – for example, lump sum, periodic payments, regular dividends?
- Purchaser’s arrangements for financing the transaction
Finding the right financial structure for the transfer or sale of ownership in your business will depend on your own objectives and the different tax and legal considerations of each alternative approach, which must be weighed along with lifestyle considerations. The success of your deal often relies on your ability to involve the right financial, legal and succession planning advisors to help you sort through and evaluate the different options available.
For the Purchaser, the key considerations are:
- Identifying the sources and amount of financing which will be available
- Being able to raise required financing on favourable terms
The Purchaser’s financing may come from a variety of sources, including but not limited to:
- A line of operating credit secured by the operations of the business
- A long-term loan, often to finance fixed assets such as real estate, machinery and equipment
- A vendor take-back, through which you, as the seller, provide a loan or become an investor in the business
- An equity investment
- Outside capital
As a seller of your business, it is important that you evaluate your purchaser’s ability to invest in the business early in the process. If the buyer is unable to raise the necessary financing, the closing of the sale could be delayed or even jeopardized. If the purchaser has difficulty raising the necessary financing, it may be advisable to move on to another purchaser, even it you have to accept a lower sale price.
G) Taxation and Legal Considerations
There is a wide range of tax and legal issues you will need to consider when selling or transferring ownership of your business. While there are common methods of dealing with these considerations, each situation is unique and your tax specialist and lawyer can advise you in the context of your own particular circumstances.
If your business is a qualifying small business corporation, your shares may be eligible for a capital gains exemption of up to $750,000. If your business is larger or does not qualify for the exemption, the disposition may trigger a sizable capital gain. Fortunately, there are several strategies you can use to minimize the tax impact and your tax advisor can help determine which of these may be appropriate for you.
Your lawyer will need to prepare several legal documents to give effect to your succession plan. Some of these relate directly to the transfer of ownership – such as the purchase and sale agreement – while others – such as your Will and power of attorney – relate to your personal financial and estate planning. It is important that you consult with your tax and legal advisors early in the process to make sure that your plan achieves your objectives. Do not attempt to undertake a tax planning strategy, enter into an agreement or sign a legal document without first seeking the appropriate financial, tax and legal advice.
H) Retirement and Estate Considerations
It is important to ensure that your personal retirement and estate goals are coordinated with your business succession plan. Since your investment in your business is probably your most significant asset, there are a number of important retirement and estate planning issues that should be addressed, including:
- Freezing the value of your shares / estate
- Insurance
- Retirement planning
- Preserving your estate
All of these items require considerable thought and a good knowledge of understanding of your options.
This is why it’s particularly important to obtain expert advice from specialists in tax, legal, investment, estate management and other disciplines in developing your succession plan.
I) Timetable
When you deliver your plan, you should ensure that there is a clear timetable, so those involved know exactly what will be expected of them and when. Vague time references should be avoided. For example, if your plan is to continue working until the day-to-day responsibilities become too much to handle, this could mean that your successor is waiting for the inevitable – illness or death.
As a minimum, dates should be set for the following:
- Retirement of the business owner
- Transfer of share ownership
- Transfer of voting control
One final point to keep in mind is that once you have set a specific timetable, you should stick to it. If the timetable is not followed, the credibility of the entire plan will suffer greatly in the eyes of all involved.
J) Monitoring Process
Finally, your succession plan should include a process for regular reviews of scheduled activities to ensure that things are on track. It is also important to communicate your plan with key stakeholders and keep them informed of progress and any changes along the way. Be sure to update and adjust your plan as necessary if and when there are changes to your business and/or personal situation.
Even the ‘best laid’ plans do not always foresee every eventuality or prevent disagreements between key stakeholders from occurring. Your plan should include methods for resolving disputes between stakeholders, family members and other relevant stakeholders, if and when they arise.
K) Contingency Considerations and Risk Management
Your succession plan should include a contingency or back-up plan. If illness or death meant that you were suddenly unavailable to manage the business, who would take over your responsibilities?
A contingency plan provides guidance on how the business should carry on in the event of your sudden death or disability. It sets out who would take charge in your absence in order to keep the business running. The contingency plan also takes into consideration how the succession process would be affected and how it should continue if you are no longer there to manage it. Insurance can be an effective tool in managing risk prior to business ownership transition. Some of the key items and effective insurance plan can address include:
- Key person protection
- Buy-out funding
- Funding of capital gains tax
- Estate equalization
Using insurance strategically within a succession plan can be complex, so it’s important to work with an insurance expert who can recommend the best approach for you.
When developing your succession plan it’s important to assemble the right team of professionals.
