We’ve looked at the number of entrepreneurs who aren’t prepared for the day they can no longer run their business. We’ve looked at why it’s so important to be prepared. Now it’s time to help.
Business succession planning model
What can small business owners do to guarantee they have enough to retire? With years of experience as Toronto Chartered Accountants advising small business, here are the top five strategies we recommend you choose from:
- Maximize profits while running the business. For business succession planning in Canada, the goal is to have enough capital accumulated both inside and outside RRSPs to fund retirement, and then close the business.
- Retain ownership of the business throughout retirement. It’s a good idea to play an increasingly passive role in day-to-day operations, while living off the dividends generated.
- Transfer the business to the next generation.
- Sell to an insider, like a partner or key employee(s).
- Sell the business to a third party.
Each of these five retirement strategies has its own pros and cons. Let’s look at some of the issues that come with each succession planning model:
- Maximizing profits: In order to maximize profits for the long term, you usually need more time and a lot more personal discipline. It takes a lot to put aside enough capital as it comes in each year to have enough to retire. On the plus side, the end result is totally within the business owner’s control.
- Retaining ownership: If you still own your business in retirement, you need to foster enough management talent to allow you to phase out slowly, while maintaining enough profitability to fund your retirement. It’s a much riskier strategy as the profitability of the business can suffer without the owner’s involvement. There’s also a risk new managers decide to start their own business and leave.
- Transferring your business: If you transfer your business within the family, you obviously need children who not only want to work in the business, but are capable enough to keep it profitable. You also need an appropriate transition plan. Usually families want to treat children equally. If some work in the business while others don’t, estate tax planning becomes more complicated.
- Selling to an insider: If you sell to an insider, you also need well-trained people who can run the business after the owner is gone. On the positive side, those insiders already know the business well and are likely willing to pay a premium price because of their intimate knowledge of the opportunities.On the other hand, they often don’t have enough capital to fund the owner’s withdrawal. That means the owner funds the acquisition. Then you’re asking for retirement payments out of future profits…which involves a gamble because there’s a chance the business doesn’t succeed.
- Sell to a third-party: Selling to a third-party is the most common strategy. It requires the most planning and the longest time frame. You need the right team to help, including strong management, legal counsel, chartered accountants, a business valuator and a financial advisor. The biggest advantage is the owner usually gets a big chunk of cash when they close, which reduces risk.
There you have it, five succession planning models and lots to think about. While one will be most appropriate for your business, there are several crucial strategies that should be on your business succession planning checklist:
- You need to organize and manage your business to maximize profitability, both to accumulate personal capital and to maximize the ultimate sale price.
- You need an appropriate and effective management team that can operate effectively without your day-to-day involvement.
- You need to start planning for the eventual sale years before it happens.
- You need to perform regular valuations of your business to make sure you’re on the right track to achieve an appropriate amount of money to fund your desired retirement.