August 2007

Successfully passing the torch

Are you neglecting your business transfer planning?
According to figures published in The Gazette, the average entrepreneur spends approximately 80,000 hours building his business … but only six hours planning for its transfer.

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It’s now time for thousands of business owners to transfer power to their successors. But… are they ready?

According to the Canadian Federation of Independent Business (CFIB), more than one third of all small and medium-sized business executives in Canada will be retiring within 5 years. Within 10 years, two thirds will have left their current role!

Passing the torch to the next generation of entrepreneurs is a daunting challenge, one that
can impact the overall socioeconomic future of two million Canadians whose jobs will be at risk if the transition fails. However, the challenge is, first and foremost, that of the business executives. Since a successful business transfer generally takes about five years to complete, they should take the first steps immediately.

Retirement forecast for small and medium-sized business owners in Canada

Source: CFIB

Four keys for a successful business transfer

1. First, getting the proper support

Chances are very good that small or medium-sized business owners will sell their business to retire only once in their life. So, it’s quite normal for them not to have the experience they need, which is why their top priority should be to set up an advisory committee and a team of professionals from outside the company to coach them during this process.

The external team of professionals should consist of specialists with expertise in this type of transfer, from the perspectives of the business and also its owner. This expertise should include: taxation and corporate law, business valuation, financial and estate planning, investment, insurance and others. Generally, one of these specialists is appointed as the “quarterback” who ensures the exit strategy is implemented properly.

A team of advisors could make all the difference in the world: the general consensus is that bad planning can shave 20% to 25% off a company’s value when it is sold.

2. Involving your spouse and your family

In many cases, it’s also advisable to form a family council. Often, it’s the children who are assumed to be the business owner’s natural successors, but it may be in their interest, and also in the interest of the company, that control be turned over to a more experienced team. Such issues should be discussed very early on.

3. Making sure the transfer process is strategically structured

With the help of their advisory committee and external team, entrepreneurs should take stock of the business’s current situation and its outlook for the future. This consists of three important parts:

  • a) Challenges for the seller
  • b) Identifying key individuals
  • c) Financing the transfer

Each of these contains many important questions, all part of the required diagnostic and strategic transfer plan. For examples of these questions, click this link.

4. Making sure you transfer your know-how

Finally, experts agree on one crucial point: a business transfer cannot be successful unless owners also successfully transfer their knowledge and skills to the succession team. This involves a long, drawn-out process that takes months to complete, sometimes even years. And often, the payment of such a transaction is structured over several years to ensure the transfer of such “knowledge capital” is taken into account.

A buyers’ market looms on the horizon

In a few years, when the current generation of small and medium-sized business owners retire en masse, a huge number of businesses will be up for sale all at the same time. As in all markets, the law of supply and demand will prevail, pushing prices down and financing costs up.

That’s one more reason why small and medium-sized business owners should plan their succession now. If they don’t, they’ll possibly be trapped in this situation, and find themselves unable to reap the full value of their long years of hard work.
Together with the accounting, tax and legal experts, the financial security representative can play an essential role in this process: he ensures the entrepreneur’s financial security and helps him to stay on course with his retirement and estate planning goals.