Planning for the future

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by Tim Wilson

An exit strategy for all seasons


Many business owners think succession planning is something to think about in the months before retirement. They might also believe–if for some reason they want to sell their businesses early–that the logistics are similar to selling any other product or service. But they’re wrong: an exit strategy for a business takes time, and organizations that don’t make the effort to address the issue could be in for a rude surprise.

“Most owners are focused on running their business, and exit planning tends to get put off,” says Christopher Snider, chief executive officer and president at the Exit Planning Institute. “Typically, it takes three to seven years to do this.”

One of the problems is that an exit plan can include a range of professionals, including lawyers, accountants, real estate agents, and insurers. Getting them all lined up, and controlling the costs associated with a transition, is crucial for those owners who want to get the most value for their company.

Awareness first
“More awareness is needed to educate owners about what is included in a business succession plan, how they will benefit from a plan, and what steps should be taken to execute a succession,” says Doug Bruce, vice president of research at the Canadian Federation of Independent Business (CFIB). “For example, there are steps to minimize the tax bill at the time of selling, such as taking advantage of the Lifetime Capital Gains Exemption.”

There is also the crucial matter of obtaining a proper valuation to determine what the business’s selling price should be. This is an area where business owners frequently miscalculate–at their peril.

“The value gap is a real challenge,” says Snider. “Most owners think their businesses are worth a lot more than they are. They need education on valuations from both a buyer and a market perspective. Then, once they know how a valuation is determined, they can engineer a business strategy from that.”

Many buyers value their businesses based on the income it has generated, a reasonable but optimistic approach. They also make the dangerous assumption that they will have some control over the timing of a transition.

“Most owners don’t know that about half of all transitions are involuntary,” says Snider. “It’s usually one of the four ‘Ds’: death, disability, divorce, and distress. Many are also shocked to learn that the majority of businesses that go to market don’t sell–estimates average from 66 per cent to 80 per cent–and only 30 per cent of family transitions make it through to the second generation.”

The time is now
Not having an exit strategy in place could create real problems for many owners now in their 50s and 60s. Thankfully there is good news: at present there is a significant amount of capital on the sidelines, and with patience and proper advice owners should be able to find a way to secure their retirement, but they have to start planning now.

“Who will be the next generation of tool shop owners?” says Jason Grech, a partner with KPMG Enterprise in Windsor, ON. “I am seeing succession planning issues in areas that include–but are not limited to – operational, structural, financial, human resources and tax.”

Grech is more optimistic than Snider: he says shop owners need to plan two to five years prior to an actual exit. But that is still longer than most owners believe is needed, which might explain why CFIB research has found that the majority of small to mid-size businesses do not have an exit plan, and that among those that do, it is generally informal and unwritten. As it stands, companies that embark on a long-term plan based on quantifiable data will have the best chance of getting the full value out of their business–and the satisfaction of a job well done. SMT

Tim Wilson is a contributing editor. [email protected]

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