PLANNING THE SUCCESSION OF YOUR BUSINESS – INSIGHT INTO SOME QUESTIONS YOU MAY HAVE

Planning the succession of your life’s work is probably one of the most important, thought encompassing and emotional decisions you will ever have to make, next to the decision of getting married or having children.  

I have spent time with many business owners over my career, those who started businesses from scratch and those who purchased their businesses and grew them to the next level.   Insights regarding some initial questions that these business owners had while contemplating their business transition are as follows:

Is this the right time to make the transition?

The main point as it related to this question, is whether the business owner should wait to improve their business’ earnings, in order to achieve a higher value for their business? 

Strength in business earnings may be achieved through improved economic conditions or growing the business further to the next level of its development.

As it relates to economic conditions, it may make sense to wait for strengthening economic conditions, in particular, those factors tied to the easing of interest rates.   Higher borrowing costs tend to impact negatively the multiple that a prospective purchaser may assign to earnings as it relates to a purchase price for the business.

Waiting to take the business to the next level of its development often involves a deep self assessment by the business owner of their own capabilities.  The business owner often reflects on whether they personally have the skill set and financial resources to accomplish the task of taking their business to that next operational level.  In addition, assessing their own drive and motivation to accomplish the task.  This is a very personal decision and often the purest form honesty by the business owner.

During the course of my career, I have also seen waiting for start up business lines or divisions of the existing operations to be fully developed has yielded significant value to the business owner in a sale.  Typically, these start up operations were already in motion at the time the business owner was contemplating the sale and required limited additional resources and expertise to see these business lines to their full potential.

The decision as to the timing of a business transition is a significant and personal one.   However, in my opinion and based on my experience with business owners, if the business owner is thinking about it, then it may be time to plan the next stage of their life. 

Once the decision has been made, developing a successfully transition plan and strategy is best done with trusted advisors.

Who do I transfer my business too?

After the decision is made to transition the business, the next question that typically comes to mind, is who do I transition my business too?  If it is a family business, the business owner usually assesses the following options for purchasers:

1.      Family Member

2.      Management and employees

3.      Arm’s length prospective purchaser

This stage of the decision making depends on the business owner’s objectives. 

Some of the main criteria in deciding the best option for the transition include:

Value Maximization:

The anticipated purchase price for a business, can be a significant issue for a business owner however not necessarily the main one.  A number of business owners over my career, have chosen to transfer their business to a family member or employee group.  This compared to transferring their business to a strategic arm’s length purchaser where the business owner may gain additional synergistic value and a better deal structure (cash up front).   

Motivations are only really known to the business owner, however, I surmise it is the business owner’s loyalty to the employee team who built the business and knowing that the business will continue with the principles that served as a foundation for the business. Premiums received above fair market value, may or may not be received by the business owner on a transition to the employee group.  

A familial transfer is primarily part of legacy planning by the business owner for their children.  Value received by the business owner is typically transacted at fair market value.

Business owners may decide to pursue a strategic purchaser in order to maximize value as the best option to meet their own retirement objectives as well as provide for their family’s legacy.  Further, a strategic purchaser would have the resources to take the business to the next level.   

It is important to note especially as an advisor, that value is one component in the decision making as to the likely purchasers.  Before a decision is made, there are non-monetary intangibles that need to be assessed in consultation with the business owner.

Capabilities of the Purchaser:

If the objective is to take the business to the next level of operation, the business owner will reflect and complete their own assessment of the skill sets of family members and/or key employees. At times in consultation with professional advisors.   

The business owner may come to the conclusion after their assessment and considering other factors such as changing industry conditions that the best option for the longevity of the business is a strategic purchaser.

Timing:

When it comes to timing, it has been my experience that the business owner considers, the length of time to complete the sale and the length of time the business owner will be required to participate in the business subsequent to the sale.

Transitioning to an active family member in the business and/or key employees will reduce the time substantially from both perspectives, time to complete the deal and time directly involving the business owner subsequent to the sale.

Though the process of identifying an ideal strategic purchaser, may take additional time to complete the deal, the business owner may achieve peace of mind, knowing that they have canvassed the marketplace and secured an ideal purchase price.   The purchase price alone may be incentive enough for the business owner to participate in the business for an extensive period of time subsequent to the sale to ensure an effective transition.  

The issue of length of time the business owner remains in the business subsequent to a sale, varies with each business owner and the requirements of a successful transition.

Impact to the existing operation:

In my experience business owners are concerned about a longer sale process and the impact to their operation in order to identify a strategic arm’s length purchaser. 

Their concerns primarily stem around how the due diligence process and the release of confidential information to potential competitors may impact their business?  The impact of these issues is typically mitigated by engaging qualified and experienced advisors in the sale process.

Another issue which business owners are concerned about are operational changes a strategic purchaser will implement and which may affect the overall founding principles and culture of the organization.  It is important to realize, that changes are not necessarily negative and are typically required in order to take the business to that next level.  

A sale to family members and/or key employees is typically less intrusive and can often be completed seamlessly. 

As a business owner you may be contemplating similar questions and issues as outlined above.  The best advice, I can give you is trusting your judgement, after all your judgement was the main catalyst behind your successful business.  The second piece of advice is to assemble a team of trusted business advisors with diverse backgrounds and expertise including, legal, accounting, tax, valuations, corporate finance, and investment advisory.

All the best with your business succession planning and remember “to be or not to be, that is the question….” Shakespeare.

Andrea Pontoni holds an Honours Bachelor of Commerce Degree, is a Chartered Professional Accountant (CPA), Chartered Accountant (CA), Chartered Business Valuator (CBV) with the Canadian Institute of Chartered Business Valuators (CBV Institute), Accredited Senior Appraiser (ASA) in business valuations with the American Society of Appraisers and Certified in Financial Forensics (CFF) with CPA Canada and the American Institute of Certified Public Accountants.  Andrea has also completed the three parts Chartered Professional Accountants of Canada’s in-depth tax specialty program.  Andrea has over 30 years of experience with 17 of those years at two National Firms where he held senior positions including that of a partner.  His practice includes providing advice on business valuation, succession and estate planning, personal and corporate taxation, economic loss quantifications, financial investigations, accounting advice, financial forecasts, business planning and corporate finance matters to clients varying in size and industry. For more information on his background visit his website at www.pontonifinancialsolutions.com.  He can be reached at 519-890-6288 or by email at apontonicacbv@pontoni.hush.com.