Seven considerations when planning for succession: TD Wealth

There are plenty of reasons business owners should start planning their exit, yet few make it official. In fact, only one in 10 Canadian business owners has a written succession plan, according to the Canadian Federation of Independent Business.

“It’s never too early to start planning,” says Jeff Halpern, a business succession advisor with TD Wealth. “If you don’t have a formal plan in place, and something were to happen that could prevent you from running your business, the outcome can be devastating to your family, employees and the business you worked so hard to develop.”

Halpern discusses some of the most common considerations to help ensure a successful business succession.

FAMILY TRANSFER

Keeping it in the family is a consideration for owners who hope to build a legacy. But it isn’t always financially feasible. “We find that a lot of the transitions to children are what we call benevolent,” says Halpern. A benevolent transaction is one where the owner acts as the banker for the buyer. “But you won’t get that nice big cheque and ride off into the sunset, as some may think.”

CO-OWNER TRANSFER

Transferring to a co-owner has a lot of advantages—chief among them being that you don’t have to pay anyone to sell it. “There’s no commission involved,” says Halpern. Plus, a co-owner can provide continuity and security for employees. “They can maintain the operations of the business in keeping with the style of the exiting owner,” says Halpern.

MANAGEMENT BUYOUT

In this scenario, one or more people from the management team come together to buy out the owner. In practice, this can be challenging, says Halpern. It can sometimes be another benevolent sale. “Very few employees are comfortable putting their personal assets at risk to become entrepreneurs, but it can work in the right circumstances” he says.

THIRD-PARTY SALE

There has never been a better time in Canada to sell a company to an outside party, says Halpern. “Currently, there are more buyers than there are sellers of quality businesses,” he says. Not only are there buyers looking to consolidate within an industry, but there are also financial investors looking to acquire companies—and many are offering attractive premiums for successful businesses, he says. Business owners may want to consider commissioning a professional firm to facilitate an auction.

PRIVATE-EQUITY FIRM

Private-equity firms are financial investors who invest money into growing a business with existing management in an attempt to generate a more fruitful exit. “They can be an interesting option for business owners who aren’t afraid to grow their businesses and still want to work a few more years, but would prefer to use someone else’s money,” says Halpern.

PROFESSIONAL MANAGEMENT

An overlooked but often successful transfer choice is hiring seasoned management from the competition and continuing to own the business. It’s an option that Halpern says many family businesses won’t have considered when there isn’t a clear blood successor.

PUBLIC COMPANY SHARE EXCHANGE

Another option to consider is a share-for-share exchange with another company that wants to acquire you, which can be done as a taxdeferred transfer under the Income Tax Act. “You take the shares of your company and sell them to a corporate buyer in exchange for shares of that public company,” says Halpern. “You take back shares that may give rise to a dividend, and ultimately liquidity when you sell the public company shares.”

Halpern stresses that every business is unique and there’s no one-size-fits-all approach to succession planning. “If you’re looking to develop a formal succession plan for your business, working with a professional business succession advisor to evaluate your specific needs and criteria can save a lot of time and avoid many headaches along the way, and may ultimately help you get the highest value for your business.”