How Do I Start A Business Succession Plan?
Note from the Author: Alison Anderson
“Five years ago I was working as an Economic Development Officer with Community Futures, and I had a client that was looking to retire and sell their plumbing business. The problem with this industry is when you put up a for sale sign, your suppliers and your customers get nervous. Your suppliers start asking for cash on delivery which screws up your cash flow and your customers do not want to buy a water heater from someone who won’t be around to service the warranty in five years.
I looked into options for my client to list their business; online posting boards, brokers, and classified ads. None of these options gave them the privacy they needed to sell their business in a cost effective manner. That is when I started my company called SuccessionMatching.com.
Early on, we signed a partnership with the largest bank in Canada and many economic development organizations, and I have been fortunate to have had the opportunity to take part in a speaking tour with our partners in communities of all sizes. From this speaking tour, feedback from our members and one-on-ones with our clients I have documented trends in the process and pain points experienced by thousands of business owners who are going through the transition process.
There are three types of business transitions family transition, employee share ownership program and third party sale.
One thing I can not stress enough is, in a proper business transition plan is making sure you understand the timelines involved and getting industry experts involved with different aspects of your transition plan. Every business transition should include a wheelhouse of experts that can assist the business owner with accounting, legal, financial, and other elements of their transition plan. Depending on your type of industry, economic landscape and transition plans; having these experts involved can save you hundreds of thousands in tax or can increase your likelihood of a successful transition.
SuccessionMatching has a partnership with Community Futures Saskatchewan and we have put together an overview on selling your business which includes a step by step process. Additional resources can be found in the SuccessionMatching Resource Section and a “Due Diligence Checklist” is available to paid members of our site.
Community Futures Saskatchewan has sponsored business coupon codes which gives business owners free access to our site. SuccessionMatching is an online platform for buyers and sellers but if business owners have additional questions about their transition plans, they are encouraged to sign up, set their privacy setting to “Private” and fill out a profile. An economic development staff member at SuccessionMatching will review your profile and answer any questions that you may have. For more information on this partnership or to receive a coupon, please visit your local Community Futures office. http://cfsask.ca/contact/find-your-regional-office”
Alison Anderson- SuccessionMatching.com
In technical terms, a business transition is when the business is passed from one owner to another. This can be a family member, employee share ownership program or third party sale at market value. Every plan can be unique because of the human factors involved but all three types of business transitions have similar eliminates.
There are five phases to business transitions; Getting the Business Ready to Sell, Actively looking for a Buyer or engaging the Family or Staff Member, Due Diligence, Financing and Transition. In combination, the process can take any where between two and seven years depending on the sellers and buyers needs, market conditions, and type of industry.
Phase One- Getting the Business Ready to Sell
Process 12-24 months
Get the company books in order
Identify internal issues
Make a plan of action
The first step in phase one, is to ensure the books are in order and understand the transferable value of your business and why.
Not having the books in order can be the first delay in any succession plan which makes it extremely difficult to determine a value.
Determining a value and understanding this process is critical because it will give you an opportunity to identify areas that you can improve to maximize your ask price. Bookkeepers and accountants are beneficial to engage because of their background knowledge of the owner and business.
Certified Business Valuators (CBV) can also be engaged at this stage to understand their transferable value of their business and why. By reviewing the valuation, a company should be able to identify areas of improvement, build a go forward plan and take action to implement changes. By doing this exercise early on in the process, the business owner will also better ensure the business isn’t dependant on one person, which will increase the value and likelihood of the sale.
Phase Two- Engaging the Family or Staff Member or Actively looking for a Third Party Buyer
Process 6-12 months
Communicate with staff and family or look for a third party buyer.
There is a large emotional component to exiting a business and the vast majority owners feel it is important to their legacy to transfer their business to family members or employees. The problem with this exit strategy is almost all of them have not had this conversation with the staff member they have identified as qualified or their family member.
It may surprise some owners but many employees do not want their bosses job or at least do not want to run the operation themselves. More so, when the current business owner was the founder of the company, the staff members not only see how many hours a business owner puts in a week but also the financial risk they have taken on to be successful.
88% of current family business owners believe the same family or families will control their business in five years, but succession statistics undermine this belief. Only about 30% of family and businesses survive into the second generation, 12% are still viable into the third generation, and only about 3% of all family businesses operate into the fourth generation or beyond.1
This is not only from lack of succession planning, but gone are the days where a blacksmith’s son becomes a blacksmith. If a business owner operates a farm in Saskatchewan and the son has been an engineer in Calgary with his family for the past 20 years, it is unlikely that he will move his family back to take over the farm.
Therefore, the first step in phase two is communicating with a qualified employee, group of employees, or family member if there is any interest in taking over the business in the coming years.
If the employees or family members do not express interest, the business owner must then start looking for a third party buyer.
Depending on the needs, timelines, and expectations of the business owner; there are multiple ways to list the business or look for a buyer. Services can be compared based on price, privacy, type of service provided, and geographic range to find a buyer.
In the USA, it is an estimated that 10 percent of businesses looking to sell will find a buyer.2 A business owner can drastically increase their odds of finding a buyer if they engage one of the following services:
Commercial Real Estate Agents
Privacy is low; all staff, competition, customers, and suppliers
High level of service in a local market
Online posting board
Price, privacy, type of service provided varies greatly depending on the provider
International geographic reach
Important: Read the terms and conditions before signing up for any online posting board. Look for percentage of commission on the sale price, whom they share your information with, other services you are obligated to sign up for, and length of contract with the provider.
High commission on the sale of the business
High geographic range varies greatly with individual consultant in the service provider
Limited service and geographic range
Compatibility with the buyer is important. The hiring manager in a company should not hire everyone who is just like them, it is the exact opposite principle when a business owner finds a buyer. The business owner has successfully ran the company for the past few decades; by finding an individual or group with similar soft skills required to run the company, it will increase the chance of both parties having an increased level of trust in the due diligence process, higher level of corporate knowledge transfer, and long term sustainability of the company.
Phase three- Due Diligence
Process 1-12 months
Depending on the size of the company, timelines and expectations of the seller and buyer the due diligence period can vary greatly. To achieve efficacy, professional such as accountants, lawyers, business services should be engaged early on.
Confidentiality agreements or down payments can be used early on to establish trust. Often times both the sellers and buyers are entertaining multiple parties at once and in the interest of time and resources, both parties should individually establish a BATNAs (Best Alternative to a Negotiated Agreement).
Throughout this phase, good paper makes good friends, all timelines and expectations should be well documented. By the end of the due diligence stage, both parties should have a crystallized sell price and understand timelines and expectations.
Phase four- Financing
Process 1-6 months
Depending on the size of the company, tax implications, long term agreements, and ability to finance the acquisition financing the purchase can vary greatly. Community Futures offers a wide range of financing options for business transitions including bridge loans and flexible payment terms. The Community Futures offices also offer additional services such as assisting your buyer with writing their business plan. Business plans are requirements for financing from any lender. It is important to ensure your buyer understands this or it could hold up the transition by at least 3 months.
According to CIBC World Markets, 310,000 Canadian businesses are currently considering transitioning their business.3 Due to supply of businesses and the demand for buyers, business owners have an increasing need to become more flexible with the third parties buy out or payment terms. Many businesses, especially in the trades, actively look for a third party buyer then implement their own employee share ownership program.
Another popular trend in financing a business buy out is the use of full or part vendor financing or Venture Capital funding if traditional financing will not cover the full amount. It is important for both sides to engage legal advice for any type of contract or agreement. Most VC funding likes to be engaged in the Due Diligence process and that is why some companies that offer services to find a buyer also integrate introductions to VC funding into their systems.
Phase five- Transition
An individual buying a business has a high success rate than an individual starting a new business, this is primarily because of the mentorship competent that is often available to buyers. The majority of owners agree to stay on under a key employee contract for 6 to 12 months, this gives the opportunity for a corporate knowledge transfer. As mentioned in phase two, compatibility of the seller and buyer is important to improve the working conditions during the transition phase.
During phase three, it is important to outline the expectations not only for the period of time the seller will stay on for but also how it will internally affect operations. The human resources of a company are often most affected by a transition, the new owner may want to make changes to the staff, policy and procedures. Having agreements in place to outline, who has final say any hiring, changes or discipline can mitigate the escalation of any issues that arise.
Owners must also be cognizant that this is a major life event for them. Often times a lot of their identity is connected to owning the business and it is the largest asset sale they will make in their lifetime. Therefore it is important to reflect internally about what they would like to do to find purpose in the next phase of their life.
Educating business owners on timelines and expectations can greatly increase the success rate of a business succession plan. Similar to family, employee share ownership programs, and third party sales require time, foresight, planning and proper execution.
(2009). Retrieved March 9, 2015, from http://www.familybusinessinstitute.com/index.php/Succession-Planning/
What’s next for your future? (2014). Retrieved March 9, 2015, from whatsnextforbabyboomers.com
The Canadian Press. (2012). Baby boomers retirement glut poses risk, CIBC says. Retrieved March 9, 2015, from http://www.cbc.ca/m/touch/news/story/1.1298898
Did we pique your interest? There is more!