It’s one of the biggest, most complex, delicate, often emotional and personal facts of business owner life: the exit strategy!
Consultants, financial planners and some business owners explain that a contemporary exit strategy, particularly for a small to mid-sized business tricky, complicated and excruciatingly complicated with several new options an effective exit strategy.
According to recent Canadian Federation of Independent Business (CFIB) stats and trending, more than 78 per cent of business owners plan to exit their businesses within the next decade. While this suggests that succession planning is increasingly on the radar, many owners still find it difficult to prioritize, as their focus remains on the day-to-day demands of running the business.
Stats and trends underscore that many small and mid size businesses overlook the indicators and warning signs, or they just procrastinate thoughts, and especially discussions, about an effective exit strategy and succession plan.
“Indicators that a business should consider a succession plan include unpredictable life events such as death, disability, incapacity and medical emergencies,” says Samuel Chinniah, senior vice president at CWB Wealth Management. “These events can lead to business disruption and cashflow interruption, which can erode the value of the business if there is no succession plan in place.
“Some common reasons why small business owners procrastinate, or avoid making a succession plan, include being less organized, impulsive and secretive. These traits add to the complexity of succession planning and can lead to delays in creating a plan.
“Some key considerations of a sound succession plan should include developing clear goals and objectives, maximizing opportunities, minimizing taxes and ensuring that all affairs are orderly wound up with assets going to intended beneficiaries or charities,” he notes. “Additionally, it is important to have strategies for asset protection, retirement and estate planning.”
Succession planning has become an increasingly popular business art and science. Whether it is a traditional succession process of passing down the business to heirs or existing business partners or senior managers, there is also growing trend to selling to an employee group or outright forfeiting conventional legacy and seeking out a good-fit buyer.
In fact, for various economy, pace of life and business strategy reasons, the trend of needing a formal succession plan, or an ETA or an ESOP to sell-off the business to employees, or selling to an outside entrepreneur, is catching on.
“Succession planning is becoming increasingly critical for small and medium-sized businesses due to Canada’s aging population and the continued retirement of Baby Boomers,” says Emily Peden, Alberta policy analyst with CFIB. With 75 per cent of business owners citing retirement as the primary reason for exiting their business, the need for a smooth and secure transfer of assets is crucial. Many owners rely on the sale of their business as a key source of retirement income, so any challenges in the sale process can have serious implications for them and their family’s financial security.”
For Philip Davidson, associate professor and director of the Executive MBA Program at Calgary’s Haskayne School of Business, the exit plan personal factors may even outweigh the business strategy factors.
“When you are passionate about your business, it is hard to see a time when you won’t want to be the one driving the bus. The date always feels far in the future, so there is no need to be proactive in the moment. Giving up a business to someone else is like losing part of yourself. Often, the owner’s identity has been bound up in the venture and it is difficult to separate the person from the venture. “Transitioning to a family member allows a certain sense of retention,” he says. “After all, they will have to face you at family weddings, funerals and holidays. Considering moving control of your firm to someone outside of family or your inside trusted group of employees or friends is kind of like giving up a child.”
He also emphasizes that a lot of time, effort and passion goes into building successful ventures and many do this to create a life for themselves and their family, rather than a stand-alone asset.
Although the conventional succession strategy of legacy, handing the business down to heirs, planning for and grooming the next generation of leadership is still a vital business basic, two other increasingly popular alternative succession options, particularly for owners who have no heirs but are partial to legacy, are ETAs and ESOPs.
“The Entrepreneurship Through Acquisition (ETA) concept isn’t new, but it’s relatively new in Canada,” the upbeat Davidson says. “It is the business process of purchasing an existing business and running it as the CEO. It is a fast track path to owning and operating a business and an attractive alternative for entrepreneurs who want to own and operate a company, but do not want to pursue a startup. “
An ESOP, an Employee Share Ownership Plan is a company offering employees a stake in the business. ESOPs are commonly used across Canada in a wide variety of industries and ranging small and medium-sized privately owned businesses to large publicly traded firms and can range from sales to key management teams to larger employee groups, with key managers often acquiring a more substantial ownership stake.
“Sometimes, when there is no family legacy and no heirs,” Chinniah says, “the owners tend to be a bit more secretive as they feel vulnerable to share their personal goals and wishes and strategies. They are so integrally tied to their business that they cannot see beyond and don’t want to take any risk of negatively impacting the value of their business.
“As the overall value of the business continues to increase, we encourage them to have some kind of an effective plan in place for succession. After all, many people’s livelihoods are dependent on the business, and they owe it to themselves, their employees and everyone associated with the business.”
He says that, with a bit of coaching and planning they are open to the idea and see the benefits of a well-earned retirement with financial security, tax minimization by leaving a legacy to support their favourite causes and bringing everything to a properly organized finish as opposed to a mess.
“If the right buyer can be found who is a perfect fit, then they are more open to flexible arrangements to accommodate the deal even if it might not be the highest bidder.”
According to business trending, more and more, non-family, non-employee but gung-ho and driven entrepreneurs are changing the landscape and offering an irresistible alternative to succession. Contrary to the preaching of conventional succession planning, entrepreneurs are becoming dynamic and key players in the business of business owner exit strategy options.
And savvy consultants are not surprised. Entrepreneurs have always been natural problem-solvers, and the trend of connecting buyers and sellers in the business world is nothing new. The generational reality is that, as Baby Boomers age, there is growing urgency around business transitions, family or no family, legacy or no legacy. It’s just business.
A recent CFIB report estimates that 76 per cent of Canadian business owners plan to exit their businesses within the next decade, with over $2 trillion worth of business assets set to change hands. That could be a lot of entrepreneurial opportunity!
