Half of family business owners intend to pass their business on to family members, but 74% do not have a thorough or even a basic succession plan. In an article published on April 10, 2019 the website www.conseiller.ca reports that private and family businesses account for 60% of Canada’s GDP. Among family businesses, about half of the owners intend to pass control of their business to their family members. Unfortunately, 47% of them do not have a succession plan, while 27% have a plan without the participation of their successors. The situation is serious, but the solution is simple: planning.
Who is the plan for?
Who benefits from planning a transfer? Everyone involved in the transfer of a business has a vested interested in its outcome. They will want to be aware of the transfer plan. Who are these players? The transferor who has at heart the durability of the company. The buyer who wants to get their money’s worth. Employees whose livelihoods depend on the success of the transition. The customers, suppliers and financiers of the company who would lose to see it disappear.
Why should I make a plan?
The transfer of a business is often the most important decision you or your owners will make. The success of the transfer process depends on the continuity of the company and its value.
Good planning can make all the difference in the price that the transferor can get. Even if they do not think of passing on the business during their lifetime, the transferor must ensure that their death does not result in the dissolution of their business and the evaporation of its capital.
The transferor(s) who wish to enjoy their retirement after the sale of their business must have made the right choices in terms of investment. They must also have given themselves enough time to step away from their business and to think about how they will deal with it after the transaction has been completed. It is often a very personal approach and it would be wrong to underestimate its complexity. Even though this analysis can be difficult, it is a necessary step to help examine, question and ideally resolve any anxieties or insecurities regarding the sale of one’s business.
Business owners fear leaving their enterprise in “the hands of a stranger,” but how is leaving it in inexperienced hands any less frightening for a business owner? We cannot, in fact we can never assume, that family members will have the interest to take over the management of the business. Even when they are interested in taking over, one must ensure that they have the knowledge and skills to enable them to succeed at the helm of the company.
As in any business decision, we must think about the tax impacts of the transfer. The sooner these issues are addressed, the easier it is to find options to reduce the fiscal cost of this transaction.
Finally, the passage of the torch between the transferor and the buyer will doubtless result in some sort of transformation of the company. We must therefore prepare to manage the organizational change that this entails. It is also necessary to guard against the risks of loss of knowledge and expertise of the organization.
In all of these cases, making a plan that considers all of the aspects of a business transaction will make the difference. Do you want to face change head on, or be surprised as things change around you?
When is the right time to consider planning?
There is no rule saying you can’t start planning to sell your business from the day you open your doors. The book La vente d’une entreprise : une check-list multidisciplinaire [Selling a business: a multidisciplinary check-list], written by Nancy Fortin, suggests that sellers start preparing two years before the sale. Others prefer to start the process many years in advance. This is especially true in the context of family businesses. It also applies to companies that will be taken over by their employees and managers.
In reality, we must recognize that many entrepreneurs will only have a few months to prepare for the transaction. Unplanned situations can cause the founder to withdraw well before what was planned.
What counts, ultimately, is to make sure to work in a way that avoids improvisation.
How do I start planning?
The transfer of a company involves human, operational, fiscal and legal facets. It is important to surround yourself well. Your business lawyer, if specially trained to handle business transfer files, can help you compose your team of specialists. The right business lawyer can act as a conductor to coordinate the work of each of these specialists.