Why business owners need to start planning for succession now
Every business needs an exit strategy, but fewer than 10 per cent of Canadian business owners have one, according to research conducted by MNP, one of Canada’s largest chartered accounting and business consulting firms.
That’s largely because leaving isn’t always at the forefront of a business owner’s mind, says Wayne Lenihan, a regional succession leader for MNP.
“People may ignore it because they’re focusing on their day to day,” he says. “They think that they’ll wake up one day and put everything in place. Sometimes that works out OK but more often than not, it can lead to undesirable consequences.”
Often, a lack of transition planning can leave a business in crisis mode when an exit (be it death, sale or retirement) occurs.
Lenihan has worked with clients who swore they would never sell, but changed their minds when a persuasive offer landed at their feet. Others have realized that a family member wasn’t as fit for the CEO role as originally expected or sometimes a tragedy befalls a business.
“Ultimately every one of these situations results in an exit, either voluntarily or involuntarily,” says Lenihan.
“Effective succession planning helps business owners leave a legacy the way they intended.”
Whether you decide to sell the business to a third party, to an employee through an Employee Share Ownership Plan or transition to the next generation, here are some key tips for succession planning recommended by MNP.
Planning an exit strategy won’t just reduce anxiety and stress for everyone involved, it can provide some key advantages. You can assess your various financial objectives against market realties over time and with increased accuracy, Lenihan says.
Your goals involve everything from the personal to financial: When would you like to retire? How much money would you like for retirement?
Identifying objectives and starting early can help determine the appropriate timeline to meet your goals.
One of the reasons entrepreneurs avoid succession planning is because it can be a sensitive topic of conversation if family is involved.
“A lot of business owners are hesitant to have those discussions,” says Lenihan. “They don’t want to share or they don’t think their kids are ready, so they don’t discuss at all.”
Regardless of the exit strategy involved, whether it be transitioning to family or selling the business, succession planning should involve communication with key management and all those involved.
Understanding what your business is worth is an important part of the succession process. Sometimes business owners think they know the value of their company and are surprised to learn it’s actually worth much less, which would alter succession plans.
A good valuation will inform a plan for retirement or prepare for sale negotiations. “It’s a big unknown a lot of times and it really helps guide the plan,” says Lenihan.
Sometimes businesses need help maximizing their value, says Lenihan. “Maybe they’re not maximizing their value in the market; maybe they don’t have proper management in place yet. They might have production issues that they need to work through,” he explains.
Services like those provided by MNP can help identify ways in which a business can enhance its value before succession.
One of the key ways to enhance value and ensure future success is to retain good employees. It’s important to consider employee retention programs like career development and executive coaching, which ensure the key players are ready to step in when required.
It’s also important to consider the effects of succession on other employees, says Lenihan. If your employees won’t want to work for your successor, consider the effects on the business. “You need your employees to be on board to maximize your value,” says Lenihan.
Consider whether the governance structure of your business is fit for succession. For example, a family business sometimes needs to be reworked: “If dad is involved with making all the decisions and it’s a one-man show from a governance perspective, your success factor going forward could be limited when dad leaves,” says Lenihan. A new structure could mean forming a board of directors or a less formal advisory committee.
Keep it fluid
Lenihan stresses that a succession plan should remain “somewhat fluid.” This might mean forming a short-term plan that allows your business to build a foundation to go back to when circumstances change.
Implementation doesn’t need to be automatic and often isn’t. For example, some businesses will work through initial stages of planning and hold off for a period of time or decide to move in a different direction.
To serve you best, your succession plan needs to not only address the myriad of issues involved in exiting your business, but also maximize the value of your business in the short and long term. It’s never too early or too late to start planning. After all, dreams don’t retire.
To test your succession readiness, take our short assessment here. To learn more about MNP’s Succession Services, contact Wayne Lenihan, CPA, CA, Regional Succession Leader at email@example.com