Delivering succession planning value.
Baby boomers are anticipated to retire in droves over the next few years, and a recent report suggests that many business owners are running the risk of leaving money on the table because of inadequate business succession planning.
According to the Business Development Bank of Canada’s 2017 study on business transitions, many small business owners are underestimating the time and effort required to successfully transition a business to new ownership. Of the entrepreneurs surveyed, 41 per cent expect to leave their business over the next five years, and just over half say they plan to sell or transfer their business outside of the family. However, 71 per cent admit to being reluctant to take risks to improve business performance, and 52 per cent have little interest in expanding their business, which may cause them to sell below market value.1
“I find most business people do more exit planning than succession planning,” says Bob Labrecque, National Director, Succession Planning, Manulife Securities. According to Labrecque, only a small percentage of business owners consider succession planning, with the majority of business owners becoming more focused on exit planning three to four years before retirement. “The 15 per cent or so that are focused on succession planning are building a team and infrastructure that will allow them to gradually transfer the responsibility and then exit the business,” says Labrecque.
So when should a business owner think about succession planning? According to Labrecque, the perfect time to begin planning is when the business moves beyond survival to a stable path of revenue generation and growth. “A good succession plan is a five- to 10-year strategy of building the business. You want to transfer a business while it’s in a growth phase, not in a maturity or a declining phase, and you want a team of experts in place to help make this happen. A financial advisor is a key member of this planning team.”
“A good succession plan is a five- to 10-year strategy of building the business. You want to transfer a business while it’s in a growth phase, not in a maturity or a declining phase, and you want a team of experts in place to help make this happen. A financial advisor is a key member of this planning team.”
Bob Labrecque, National Director, Succession Planning, Manulife Securities
A business succession plan considers the current financial status and leadership of an organization, but should also take into account the retiring business owner’s personal financial plan. Along with helping to determine the financial value of a company and opportunities for growth, an advisor can also help ensure that a business owner will have adequate retirement income to maintain their desired lifestyle, that a savings plan is in place to cover future expenses such as a child’s education, that life and disability insurance plans are set up so that loved ones are well cared for in the event of serious illness or death, and that tax planning opportunities are being maximized. For more on the tax aspect of business succession planning, please refer to the article "Moving on".
Managing emotional ties
Letting go is never easy, but it is one of the biggest factors in a successful succession. “Quite often for a first-generation business owner, this is their baby and there can be strong protective feelings that nobody else can do what they do,” says Labrecque. While leaving can be very difficult and emotional for many business owners, Labrecque adds that an advisor can offer valuable guidance to help begin the process. Steps to consider include:
All in the family
A parent may work hard to build their dream into a thriving business, with the assumption that the next generation will carry on the proud legacy, but certain measures can help ensure continued success. If the intent is to have a family transition, a specialist called a family facilitator may be helpful. “Family transfers are the most complicated because they involve not only the business but the family dynamics,” says Labrecque. “Families also need to have honest discussions about whether children even want to take over the family business. They may want the money and the lifestyle, but do they find the work interesting?”
The next chapter
As a business owner begins winding down for retirement, there may still be an opportunity to stay involved and active, but at a slower pace. Labrecque encourages business owners to plan to step back from their current role as business owner to the role of employee – transferring ownership of a business while still maintaining a foot in the door, in order to satisfy the need to be involved with purpose. This approach allows the business owner to gradually ease out of work life, rather than giving up everything all at once.
Advisors have an important opportunity to forge a unique partnership with small business clients. Succession planning can feel overwhelming, but it doesn’t have to be when a business owner knows a solid financial team is helping to guide the process. With a step-by-step approach, this important aspect of business development planning can be handled with confidence.