A successful business can take years of hard work and dedication to grow. As the golden years of retirement roll around, it can be tricky for business owners to figure out the next steps and an exit strategy that works for them.
Approximately 80 per cent of all businesses in Canada are family-owned, according to the Globe and Mail. But the majority of them do not have solid transition plans in place.
In fact, a recent survey released by the Business Development Bank of Canada found that 4 out of 10 small and mid-sized business owners in British Columbia are not prepared for a transition despite having plans to exit within five years.
Particularly as a family business owner, transitioning the company to the next generation has its own unique set of challenges. But it can also bring benefits.
One of the pros of a family business is that next generation family members are often already employed in the business. This means they will already have a background of experience, as well as the training necessary for a take-over.
But if they have been focused mainly on the operational side of the business, they may be lacking experience with leading the company—experience like coming up with the strategy, vision and key planning for the long-term success of the business.
That means, as the leader, there are still a few key elements that need to be addressed before settling into the comforts of retirement.
Two key elements
Rick Gendemann, a business succession leader with Manning Elliott, has some advice and suggestions on how to best approach and plan a successful family business transition.
Two of the most important elements are the actual mechanics of the business transition, and making sure the business transition will be successful in the long term.
The former concerns the transactional issues associated with a sale—things like how to structure the payout, and the valuation of the business tax implications of a sale.
As important as these considerations are, planning for the long-term success of the business is, in many ways, even more crucial than the shorter-term questions.
The main focus in a transition plan should be on the people involved in the business—ensuring that those who will take over have the skills and confidence to do so. Empowering the new owners is crucial.
“Don’t hesitate to spend your valuable time and resources on these key areas rather than the mechanics of the business transition,” advises Gendemann.
Future success matters now
The future success of a business matters to the current owners because of the way payouts are typically structured for smaller, family-run businesses.
The timing for the payouts are often longer, with a portion of the money paid at closing and the rest paid out over time from the future profits of the business.
This means that guaranteeing the long-term success of the business becomes a very important part of family business transition planning, says Gendemann.
The biggest risk during a transition isn’t about misjudging the structure or valuation, or missing out on a tax advantage. But rather whether the business will continue to succeed.
Even the best team of tax and legal advisors structuring the mechanics of the business transition will not save a floundering business.
That’s why a family business transition must consist of dedication, time, energy, money, and resources to empower the upcoming leaders, emphasizes Gendemann. Not just in the day-to-day operational management of the business, but also by encouraging the new leaders to plan for the coming decades in the industry.
Only once the next generation is able to confidently take over should the next stages of a transition begin to come together.