Preparing to concede ownership of a business can be tough for owner-managers, but getting it right is crucial if the business is to remain successful - and early planning is key.
This guide highlights your succession options and aims to help you identify the best route for you and your business.
Succession planning involves transferring ownership and control of a business to new management. The three main options are: transferring ownership to a family member, transferring ownership to a non-family member or disposing of the business through a sale, management buy-out, management buy-in or voluntary liquidation.
Why succession planning is important
Some 80 per cent of private firms in Canada are family owned. However, a majority of first-generation family businesses have no succession plan.
Common reasons include resistance by the owner to let go of the reins, fear of retirement or inability to find or choose an effective successor.
Transferring ownership can be highly emotional and complicated, which is why often it is ignored until it becomes a pressing issue, for example, when the owner becomes ill or too old to carry on running the business.
Often, pressured business owners forced to consider a range of important daily issues take a short-term view and consequently end up failing to attach enough importance to succession.
What is at stake
Leaving succession planning until it is too late is likely to mean effective transferral of ownership is not possible within the necessary time frame. A forced, ill-informed or panic decision could mean the business is transferred into reluctant or incapable hands.
The business could be severely disrupted as arguments take place over who should own or run the business, while uncertainty and lack of leadership could have a disastrous effect of sales and morale within the business.
All of the above could ultimately result in the failure of the business. Setting aside enough time to do sufficient thinking in advance and then formulating an effective succession plan is the key to success.
The benefits of getting it right
An effective succession plan should form part of your overall business development strategy.
Knowing exactly how, when and to whom ownership will be transferred is the most likely way the current owner will maximise their returns.
Choosing the right successor and making sure the transferral happens at the right time is the best way to ensure the ongoing success of the business.
Assessing your options
You could decide to transfer ownership of the business to a family or non-family member. You might sell the business or dispose of it through a management buy-out or management buy-in. Indeed, you might decide the best course of action is to wind up the business altogether by means of voluntary liquidation.
Factors that should guide your decision
Begin by considering whether there is an obvious choice of successor within the business. This could be a family or non-family member who has worked for you for some time, someone who knows the business well and who has the necessary skills to take control.
Identifying the right person to take over the running of your business can be a difficult decision. Much is at stake and you need to be absolutely certain your chosen candidate is capable of taking your business forward.
If an internal appointment is not possible, you might have to opt for an external appointment. However, if you need to generate funds for your retirement, a sale might be your only course of action.
Keeping it in the family
Choosing a family member as a successor is a popular option for many owner-managers – especially when the person already works within the business. People from beyond might not have the necessary desire or aptitude to run the business.
Family succession provides a feeling that the business has been left in the hands of someone who is committed and who will do all they can to bring continued success.
Making your choice
When considering who is best equipped to take the business forward you must remain objective. Be guided by the needs of the business, not emotional considerations.
When considering potential successors look for evidence of commitment. Assess skills and experience carefully, because the person you choose needs to have what it takes. Consider also whether they have the necessary leadership skills and personality to motivate and manage others.
Preparing for succession
Once you have chosen the person most suited to succeed you, start preparing them through education (informal and formal if necessary), training and close mentoring.
Set a timetable for transference of power/ownership and use the time you have left to give them the benefit of your knowledge and experience. To test their readiness, you can begin to lessen your involvement and give your successor responsibility for making some important decisions.
Give them the necessary time to equip themselves with the skills and knowledge they need, otherwise you will be setting them up for a confidence-sapping fall.
Transferring ownership and control of your business to a family member might not be possible or feasible.
After careful consideration you might conclude that a non-family member – a current employee, someone who knows the business and is committed – is best placed to take the business forward.
If such a person does not exist, you might be forced to bring someone in from the outside. Be careful. Such an appointment can cause resentment. To minimise the risk of problems arising, communicate the reasons for their appointment to your staff and make it clear that it's in the best interests of the business.
Trust is the major issue if control of your business is given to an external person. You will need to be sure about their skills and experience because the person you choose should have what it takes. As well as knowledge of your firm and type of business, they will need the necessary leadership skills and personality to motivate and manage others within your business. You will also need to be sure of their commitment.
Disposal (selling the business) is the best option if there is a need to raise cash (perhaps to fund retirement), an absence of successor or the family has no desire to continue its involvement in the business.
Deciding to sell can be tough for owner-managers who can feel reluctant to let go of a business they have nurtured for years. Careful preparation will help to lessen any anxieties, until you are sure you have found the right buyer.
Preparing for sale of your business
It can take several years to get to the stage where a business is ready for sale. If you decide disposal is the most appropriate option, then you need to establish a plan and some objectives for preparing the business for sale.
To ensure your business is in the best shape to command a competitive offer, you should consider seeking guidance from an experienced corporate finance advisor.
Before being in a position to sell, you need to make sure your business is as lean, efficient and profitable as possible. Clear evidence of sales growth via creditable projections will maximise its appeal. There should be no major issues that could jeopardise the sale, such as legal action or a tax investigation.
The key options
Management buy-outs (MBO) are becoming increasingly popular with younger family businesses. Transferring control of the business to a management team from within that already has knowledge of the company provides numerous advantages. It also gives the owner-manager the chance to transfer ownership to people who are already committed possess knowledge and relevant experience and who already have a stake in the business' continued success.
Management buy-ins (MBI) occur when an external management team joins the business and takes a stake in its equity.
Voluntary liquidation involves dissolving all of a company's assets, paying off employees in accordance with the Act respecting labour standards and closing the business down.
It is usually only considered when all other options have failed (e.g. when no one is interested in buying the business or taking over its management).
There can be quite substantial expenses involved, and so voluntary liquidation is unlikely to provide the best returns for business owners who are looking to raise cash.
Have a formal succession plan
A succession plan is no use if it exists only in your mind.
Having to formalise your succession plan enables you to know exactly what course of action you plan to take, when and how. Setting it out in black and white often means shortcomings are exposed, which means more effective strategies need to be employed.
Once you have decided which course of action best enables you to relinquish control of your business in the manner you want, you should be able to work out a timetable of necessary actions. This needs to be meticulously planned and executed.
A succession plan can take several years to implement.
Your succession plan needs to be communicated effectively to other important people within your business. Letting staff, customers and suppliers know of your intention to cease involvement in the business is important – and timing is crucial. The last thing you need is people to lose faith in the business when they hear you will no longer be involved.
Throughout, it is important to seek expert advice on every aspect of relinquishing ownership of your business – not least of which is taxation. There will be implications for both your personal finances and those of the business.
One of the most difficult challenges that business owners face is learning to slowly but surely let go in advance of actually relinquishing control over their businesses. However difficult, it is a necessary part of the process.
Original document, Succession planning and business transfer, © Crown copyright 2009
Source: Business Link UK (now GOV.UK/Business)
Adapted for Québec by Info entrepreneurs