Transition planning: what you need to know

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June 13, 2010

Transition planning: what you need to know

Everyone who operates a company will eventually reach a point when they will have to leave the business because of age or health concerns. This could mean retirement, sale or simply winding up the firm and closing it down.

Collectively these are known as exit strategies, and every business owner should have one. Yet many will exit their companies without a clear plan. This may be largely due to the fact that entrepreneurs are more focused on starting and building their businesses than on leaving them.

The result? When business owners are ready to pass the torch, they may not get the full value of their company if they're selling to outside interests. Or if it's a family transfer, they could end up leaving family members with unmanageable problems instead of the inheritance they had hoped to bestow.

You can always make better business decisions by planning ahead. If you start to think about succession planning early, you can take a more objective look at your future needs and avoid last-minute decisions. Although unique to every business, a succession plan consists of a series of basic steps, such as setting your financial goals, determining legal requirements and establishing your objectives with your family or successor. It is often a complex and sometimes emotional process for a business owner.

"One of the most important steps is first knowing all the options available to you for exiting," says Calvin Hughes, a BDC consultant. "It's important that you feel active and engaged in the process. But at the same time, you have to accept that you're letting go of your business."

Here are some of the most common exit strategies used today.

Family transfer

If transferring your business to a family member is a possibility, it's key to ensure that your family is fully aware that you're planning a succession and to give them clear time parameters. A part of this, says Hughes, is ensuring that family members get a chance to voice their concerns and interest in the business. One of the most obvious advantages of opting for a family transfer as an exit strategy is that your family will benefit from your business legacy. As well, family members who are already involved in your business may require less coaching or involvement.

Management buyout (MBO)

The purchase of a company by its management team has several advantages for entrepreneurs. It can ensure uninterrupted continuity because the new owners already have invaluable experience with the company. For this reason, your company is more likely to keep its existing clients and business partners.

Selling to outside interests

Selling a business to outside interests is the most popular exit strategy because it's typically "more definitive and involves fewer variables than a family succession," says Hughes. Entrepreneurs should appreciate that the price they receive for their company might be more or less than the appraised market value. "While many business owners tend to overestimate the pricing of their businesses, a surprising number may underestimate it. For example, if your company becomes part of a much larger venture, then the value may go up accordingly," he says. A large corporation that is buying out a business, for instance, may be able to do more than you have with your business and therefore willing to pay a higher price.

Getting the full value for your business

Whether you're passing the company to a family member or selling it to outside interests, keep in mind that you will need a business valuation that establishes a realistic and fair dollar figure for your business. "Putting that dollar value on a business takes time, and you need to have a specialist who can look at your assets, liabilities and goodwill with an objective viewpoint," says Hughes, adding that he has seen too many cases of entrepreneurs who got caught at the last minute and weren't able to get the full value they had envisioned.

For entrepreneurs who choose selling as an exit strategy, Hughes feels they should also be aware that buyers are increasingly more sophisticated and demonstrate more business savvy. "Smart buyers will certainly delve more into your business history. So in turn, you have to anticipate this and be sure that you're armed with the right figures and backup material to get the value that you're looking for. You don't want to find yourself in a vulnerable position," he stresses. Company owners should keep in mind that the value of a business is not just based on financial statements. "The number of customers you have, for example, could also be a determining factor," he says.

Planning ahead

"Planning ahead, at least 18 months to 2 years, helps entrepreneurs make better business decisions," he adds. The earlier you start, he believes, the more time you can take an objective look at your company and where it will be down the road. Succession planning takes time, Hughes stresses, because of many complex issues such as business valuations, tax implications, family matters and coaching successors.

One of the first steps in good planning is to get a lawyer involved at least 12 months in advance. Getting legal help as early as possible in the process can help you avoid frustrations down the road such as delays, extra expenses and ultimately a deal that doesn't meet your expectations.

BDC Consulting can also help to appraise a business by evaluating the personal needs of entrepreneurs and drafting their succession plan. "Objectivity is one very important issue here. You want to be counseled by somebody with no conflict of interest," Hughes concludes.


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