If your retirement plan includes selling your business, then make sure you have a structured succession plan in place

Laura Johnston: Succession plan needed when selling your businessCanada’s small to medium enterprises (SMEs) are unprepared for the coming wave of business ownership transfers, which will be driven by the retirement of baby boomer business owners.

Within 10 years, Canada’s SME sector will undergo a transfer of wealth estimated at $1 trillion to $4 trillion. Yet, as of this year, as many as three-quarters of Canadian SMEs have failed to find buyers.

This highlights the need for public education in succession planning. Typically, small to medium enterprises have been passed to family members or sold to outsiders on an informal basis.

These practices are no longer sustainable. Successful succession requires a structured plan to pass a business from generation to generation. A formal plan maximizes the value of the business, ensures the continuity of jobs and adequately trains successors. It minimizes risk to future employment and economic prosperity.

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Caroline Van Hasselt, while director of media relations at CIBC, put it this way:

“Canadian small and medium-sized business owners are putting their companies at risk by not having a succession plan in place, with nearly three-quarters of family-owned businesses failing after just one generation. … Small and medium-sized businesses are the backbone of Canada’s economy. Yet, the vast majority of business owners (80 percent) who say they have a succession plan admitted in a CIBC poll earlier this year that their plans were, at best, informal, back-of-the-cocktail napkin ideas even though they are counting on selling the business to fund their retirement.”

Statistics Canada defines a small business enterprise by the number of employees it has, as opposed to the revenues it generates. Of the 1,167,978 employer businesses active in Canada in 2015, micro-enterprises (firms with one to four employees) constituted 54.1 percent, making them the largest SME group.

When businesses with five to nine and 10 to 19 employees are included, they account for 86.2 percent of employer businesses.

Medium-sized businesses – those with 101 to 499 employees – make up 13.8 percent of total SMEs.

The SME sector is vital to the Canadian economy, providing more than 90 percent of Canadian private employment and creating 70 percent of new jobs.

Consequently, governments, industry leaders and others are being urged to address succession issues.

And a proliferation of consulting and financial services have stepped in to assist in succession planning. Many law, accounting, insurance and investment firms offer specialized succession services that weren’t available five years ago. Universities now include succession studies in their human resources programs. And a broad selection of do-it-yourself succession software packages are on the market.

The size and complexity of the business and the owner’s needs will determine the type of succession services required. Some businesses require little more than valuation and tax services. Others require a broad scope of professional services, such as wealth management and estate planning, and legal and brokerage planning. Consulting services can also search for prospective buyers and facilitate the transfer of ownership.

When most current SME owners inherited or purchased their businesses, there likely weren’t formal succession plans in place. Those owners are unlikely to see the merit in creating one for themselves.

Many Canadian SME owners started their businesses from scratch, reflecting the desire to build their own ventures. This poses a challenge to sellers, particularly when so many businesses will be put up for sale at the same time over the next decade. It will be a buyers’ market.

While retirement is cited as the biggest reason for exiting the business, the Canadian Federation of Independent Business (CFIB) reports that 11 percent of respondents to a survey stated that they want to move to another venture. Six percent gave personal reasons (health concerns, family issues, a desire to cut back on working hours). Only one percent were exiting for full-time work elsewhere, consistent with the entrepreneurial profile of preferred self-employment.

While 70 percent of SMEs in Canada are family owned and/or operated, just 20 percent of survey respondents said they intended to sell to family members, partners or employees. Fifty-three percent said they intended to sell to outsiders.

Succession planning allows owners to exit their businesses under the best possible conditions. It creates a plan of action that maximizes business value and marketability, minimizes legal and tax issues, reduces costly financial mistakes, and provides a framework for a buyer-seller agreement.

In many instances, the process also finds the right investors or buyers for the business, creating a win for everyone.

A structured approach to SME ownership transfer will help ensure business continuity in communities nationwide. To do otherwise is to risk employment stability and economic prosperity as baby boomers retire.

Laura Johnston is a business planning and marketing consultant specializing in business writing, business analysis and development, and strategic planning.

For interview requests, click here.

The opinions expressed by our columnists and contributors are theirs alone and do not inherently or expressly reflect the views of our publication.

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