Every once in a while I receive rushed phone calls from business owners sitting in an airport lounge privately contemplating the possibility – remote as it may be – of not arriving safely at their destinations. I assume that, as the potential impact of their absence on family, business and employees washes over them, they realize that even last-minute legal advice on critical business succession measures is better than none.
Dying in a plane crash is a highly unlikely occurrence. On the other hand, retirement is inevitable. In fact, January 2011 marks the official beginning of the huge wave of baby boomers retiring, many of whom are owners of small to medium-sized businesses. As a result, this will also mark the beginning of an unprecedented turnover rate in business ownership.
This rate of business transition is bound to have far-reaching impacts on many fronts. In British Columbia, 98% of all businesses are small businesses generating approximately 34% of the province’s GDP – the highest rate of contribution of any province and well above the national rate of 29%.
In Canada, between 2005 and 2015, it is estimated that more than 500,000 businesses will have changed hands (CIBC World Markets Report – 2005) representing approximately $1.2 trillion in assets.
In business succession, the most predictable path to peace of mind whether in flight or in bed is to have a plan in place.
Never will that be more the case than in the next five to 15 years during this enormous wave of change. Yet, according to a 2006 survey of business owners by the Canadian Federation of Independent Business (most recent survey available), only 10% of owners have a formal succession plan in place.
It seems to be human nature to procrastinate longest when it comes to planning our “farewells” – whether it be end-of-life arrangements or the retirement of our day-to-day role in a successful business we’ve poured our lifeblood into for years if not decades.
Make no mistake however, even the most successful business and owner is vulnerable to failure without an effective succession plan. In my practice of more than 10 years in this field, I have seen cases where during the process of finding a buyer owners have unintentionally compromised the viability of their business by revealing too much during the negotiations or where they have sold businesses but never got paid.
Asking yourself some tough questions when considering various options for your exit strategy will help set you on the right path whether you decide on a family transfer, selling to an independent third party, selling to employees or winding down. Here are some good ones to start with.
1. What are your expectations in terms of value and time frame? Do you want one cheque upon departure? Do you want ongoing income from the business as you retire to the golf course?
2. Do you really understand what you are signing? (If not, do not succumb to pressure. Put down the pen immediately and make absolutely sure you do understand the full implications of your signature in every case.)
3. Do you have a Plan B? Rarely do things go exactly according to plan. What if you fall ill or some other circumstance requires you to effectively exit the business sooner than expected? What failsafes have you built in to protect your asset and your family?
4. Are the advisers who helped you build the business successfully the right ones to help you transition the business to new ownership? Do they have the right expertise, track record? Will they ask you the tough questions – challenge your assumptions?
Having a well-defined business succession plan will allow you to retire on the wealth you have built into your business and to fly carefree. As the big retirement wave begins, you will benefit significantly by taking the time now to start planning.