A shared concern in the back of the mind of many small to medium business owners is – Who is going to take over when I retire?
According to a 2013 Canadian Federation of Independent Businesses survey, 75% of Canadian business owners will exit their business by 2022. That’s only 3 more years. Let that sink in. For business owners who haven’t put much thought into succession planning, the continuity of their hard built business is at stake.
A succession plan addresses many complex issues from tax and legal issues to successor qualifications, training, and purchase details. We have broken down important steps for succession planning to fit your unique business.
1. Define Goals and Objectives
The classic first step in any process, no surprises here. Ideally, succession plans are developed 3-5 years before retirement. Think about future business objectives and where the business will be in 5-10 years to ensure decisions support this growth. To make the process more manageable, set a timeline with milestones that represent each objective.
2. Determine What Skills Pay the Bills
Start to analyze what qualifications, experience, and training would be needed for someone to lead your business. Consider not just your own position, but all upcoming key personnel changes to make sure current hiring and training decisions support skill retention in this upcoming attrition.
3. Seek Out Your Successor
Finding a suitable successor is one of the most common barriers to a succession plan. With this in mind, the earlier you start looking the better. Successors to consider could be a co-owner, family member, key employee, outside party or you can even sell shares back to the company. Other considerations – Internal successors generally bring more understanding and developed skill to the role. As for keeping it in the family, a shocking statistic is that only 30% of family-owned businesses survive into the second generation.
4. Finances, Laws, and Taxes Oh My!
Financial security planning provides the framework on which your plan is carried out. It encompasses how debts will be paid, what assets, savings, and insurance programs are in place, and potential financial risks to the business from things like loss of key people.
Address tax strategies in your plan to keep capital gains and other taxes to a minimum. Whether you plan to sell or transfer the business as a sole proprietor, owner or partner will influence the right strategy.
Valuing the business is another key component and potential barrier to a succession plan. Cash flow, EBITDA and fixed assets are some ways to determine the value of your business. If you don’t know what EBITDA is, then you may want to consult a valuation specialist. A professional opinion is even more important if the successor needs to obtain loans to finance purchasing the business.
5. Consider the Dirty Details
Create an exit strategy that includes contingency plans for unexpected events like death or disability. A smooth transition is critical in these events. Being psychologically and financially ready to retire is also an important detail of your plan – don’t commit to something you’re not ready for. To ensure all stakeholders are on the same page, outline a clear communication strategy for when the plan gets underway.
6. Stick to the Plan!
Follow the timeline for hiring and training decisions and be diligent in ensuring a smooth transition as you pass the reigns to your successor. If your business sees a big shift, then by all means update and review the plan. But unsurprisingly, the only way to realize all the great benefits of your succession plan is by sticking to it.
Small businesses are so important for our economy. Succession planning is worth investing in now so that you can confidently live out your retirement dreams in the future, while your company thrives on.
Ready to get started on your succession plan?
Contact our team today for your free 30 minute consultation: