Is it time to create a succession plan? A recent survey by the Canadian Federation of Independent Business (“CFIB”) reported that 42% of small business owners now expect to retire later than planned because of COVID-19. This has significant implications for Canada’s economy, aging entrepreneurs and their families. We asked our own David Laycraft for his thoughts on this:
“First of all, considering all the challenges business owners have experienced since early 2020 – financial, operational and the relentless stress – I am surprised the percentage wasn’t higher! But, as we continue to inch closer to a world where COVID-19 is in the rear view mirror, 2021 might be a good time to start preparing your succession plan.
Also referred to as an exit plan, a succession plan is really just an entrepreneur’s strategy to transition out of his or her business, generally through a sale to family, a business partner, employees or a third party. While it can be a daunting task full of uncertainty and emotion, starting early and allowing for flexibility are two common traits of successful succession plans.
Start the process with some personal reflections on what a successful exit would look like by answering the following questions:
What do you want to achieve in the next stage of your life?
Do you have philanthropy, legacy, recreation or other business venture goals?
Maybe you would like to continue working with the new owners, or maybe you don’t sell 100% of the business?
Not having a post-sale plan is one of the biggest causes of remorse for entrepreneurs.
How much is your desired lifestyle going to cost? As a start, consider:
How much you need by determining your monthly expenses and working backwards.
All of your other non-business investments, assets and debt.
This personal financial plan should also factor in any expected purchases or gifts being considered post-sale.
What is your timing? Considerations should include:
It is best to have several years of stable or growing profitability leading into a sale – this is one area where you may need to consider the impact of COVID-19.
Are there other operational, economic or competitive factors impacting your business that need to get “sorted out”?
As a guideline, it can take 6 – 18 months to prepare and close the sale of a private business.
Now that you have established some objectives around which your succession plan will be developed, it is time to bring in a trusted advisor. This could be your accountant, lawyer, financial advisor or mentor – any external party whose opinion you value. Plans become more real when you tell someone, and generally get stronger when other insights and opinions are provided. Working with an advisor can also help instill focus, measurability and accountability into the process.
In the previously-cited CFIB survey, 57% of owners estimated that the value of their business had gone down due to COVID-19. Regardless of how your business has been impacted, working with a professional valuator early in the process is encouraged as it will:
Help you understand the components that comprise the value of your business, such as working capital and any intangible assets, including goodwill;
Identify areas of your business that could be improved – such as adding a CFO or upgrading your IT system – over time to increase the value of your business; and
Provide further insight on how the sale of your business might be structured while also starting to identify potential buyers.
These early steps should help strengthen both your plan and business. Maybe you will want to initiate a sales process immediately, or maybe you will pursue an aggressive growth strategy in advance of your exit in order to increase value and attract private equity buyers. Regardless, you will feel motivated knowing you now have a plan to work on.”
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