Posted on Tuesday February 26, 2019

Business succession: Recipe for a successful transition

Planning your business exit strategy

An entire generation of New Brunswick business owners is nearing retirement age. Although some have a succession plan in place (involving family members in many cases), many entrepreneurs have yet to start planning the transition of their business. Support in this regard is essential to ensure that businesses critical to the economy in various regions of our province are not left in the lurch. In this article we explore various transition scenarios.

A crucial economic challenge in New Brunswick

Successful business sales or transfers can save or even create jobs, keep local communities prosperous and continue to grow Canada's economy. With many baby boomers planning to retire in the coming years, business succession is a major concern. We need to do everything possible to ease the transition.

Canadian Federation of Independent Business

The outcomes of the most recent Canadian census highlight the importance of small and medium-sized enterprises (SMEs) to New Brunswick's economy. More than 200,000 jobs, or more than 90% of all private-sector jobs, are created by the approximately 25,000 SMEs operating in our province. Based on one recent study, more than 45% of business owners in New Brunswick may be planning to retire within the next five years. Additionally, according to an online survey conducted in 2018, nearly three-quarters of business owners interviewed have no succession plan. A very high number of transfers is therefore likely, and the success of these many transitions will be key to the vitality of our province's economy.

Should I transfer my business to a family member or a competitor? Defining a transition scenario is not always easy.

Many types of transitions are possible. You need to determine which type is best for your company, your employees, your customers and, above all, yourself. The three most common types are: 

• transition to an heir or other family member (whether through estate freeze, sale, will, discretionary trust or unanimous shareholder agreement)
• transfer to a senior employee or the existing management team
• third-party sale with or without support during the transition.

To determine the best scenario for you, you need to answer certain basic questions:

• Is the business viable without my presence? Should I offer support to my potential successor?
• How do I choose the right person to take over my business? Are my children interested?
• What is the actual market value of my business? Who can help me determine this?
• Are my employees ready and willing to support the transition? How can they be retained to maximize my company's value?
• Do I need to make any strategic or organizational changes to facilitate a successful transition?

Your answers to these questions will guide you in developing a realistic transition plan to support the effective marketing of your business or a smooth transition to a designated successor, whether a family member or another party.

Should I consult my lawyer before finalizing my plan?

Never hesitate to seek professional assistance in getting a clear picture of your situation. The following professionals may be able to provide valuable services:

• lawyer
• notary
• accountant
• account manager
• broker
• tax advisor
• transition coach

Professional input serves to validate the various components of your transition plan. The objective is to avoid common situations leading to loss of value, such as disagreement between heirs or discount sale to a third party.

Transitioning to a family member: good or bad idea?

Signing over or selling your company to a child or other family member is frequently the first scenario considered. The potential successor, who is often already involved in the business operation, may even already be running the company at the time of becoming a shareholder. If your successor is also an heir, then it is wise to make the financial parameters for the transition clear from the start to avoid any unpleasant misunderstandings with your other heirs. This means: 

• Having the company assessed by at least two independent experts to get as complete a picture as possible of its actual market value
• Taking the time to explain your decision to sell or transition the business to your heirs and provide supporting figures
• Defining a succession plan in phases for you to roll out to your employees.

By planning your company transition and arming yourself with a transition plan to be implemented over a period of months or even years, you can ensure a smooth, orderly process.

What if I sell my business to a third party?

Whether you opt to sell your company to an existing team member or on the open market, you need to position your offering effectively, particularly if one or more competitors arrive on the market at the same time (creating a more favourable situation for potential buyers). Follow these steps in order:

• Plan the sale: Drawing up a transition plan, showcasing your company's value, identifying potential purchasers and negotiating the sale can take a (very) long time. It's therefore wise to initiate this process promptly.
• Maximize operational performance: Growing sales and maintaining tight control over costs remain the best approaches to adding value to a company.
• Define a plan for your exit: A business that depends entirely on your presence has little value to potential successors.
• Clarify your growth strategy and plan: Your goal is to provide a clear vision of your company's future to your successor.
• Offer flexible financing options: Purchasing a company is rarely a simple transaction. Showing flexibility when it comes to payment terms may help you get more for your business.

Is converting my business into a co-operative a good option?

Many companies in New Brunswick have business models already compatible with the co‑operative model. To evaluate this option, consult the Coopérative de développement régional-Acadie. CDR-Acadie's mission is to promote and support collective entrepreneurship in Francophone New Brunswick. This support includes working with developers seeking to take over an existing company and turn it into a co-operative. The objective is to preserve existing jobs while also supporting regional economies. According to statistics on co‑operatives and mutual associations in Canada, companies have a 10-year survival rate of around 20%, while the corresponding rate for co-operatives is 46%. With their annual growth rate of 8.6% since 2010 versus 1.8% for the Canadian economy overall, co-ops also create a lot of jobs. Resilient and competitive, co-ops tend to withstand crisis and stand the test of time more effectively.

Transitioning your business is a key moment in your career that can also have impact on your comfort level after retirement as well as your perception concerning your professional legacy. Whichever model you choose, taking the time to develop an effective plan is critical to the success of your transition. 

¹ Source: Canadian Federation of Independent Business - www.cfib.ca