DEFINING YOUR LEGACY

THE 4 SUCCESSION QUESTIONS YOU NEED TO ANSWER TODAY

By Dave Zimmel, CA, CPA (IL, USA), CMC Vice President of Private Enterprise at MNP

Building a successful business takes more than just time, patience and a little hard work. If youre the owner of an established business, youve invested years of your life and potentially a significant portion of your personal finances into seeing that business flourish. If youre an entrepreneur starting a new business or transitioning an ongoing venture, you know the effort youve already put in and the continued investment required for the road ahead. And yet, for all of the business decisions you have made, the one that more than half of Canadian business owners neglect is the decision that is critical to the future success of the business: the decision to create, monitor and implement a succession plan. Whether youre in the early years of running your business and arent considering selling it for years, or already looking towards retirement or starting a new venture, you can increase your odds of success in the future by thinking about these succession questions today.

1) IF NOT NOW, WHEN?

Transition planning should be done over a four- or five-year period to ensure the most successful outcomeand the earlier its done, the better. For entrepreneurs and business owners, who typically put in long hours, it can be hard to find time to plan ahead. But consider this: demographic changes will push an increasing number of businesses onto the market in the coming years. The proper lead time will allow you to choose a transition strategy and identify and groom potential successors. (This is especially important if you are transitioning to a family member or have a key employee or employee group already involved in the business requiring an internal transition rather than an external sale.) It should also give you time to clean up the companys structure, ensuring it is stripped of any superfluous assets and work on the businesss profitability and ultimately its value. By engaging in the planning process now, youll have more time on your side to get it right.

DEFINING YOUR LEGACY: THE 4 SUCCESSION QUESTIONS YOU NEED TO ANSWER TODAY

2) D  O YOU KNOW WHAT YOU WANT? DO YOU KNOW IF YOU CAN GET IT?
The value of a business is not based on what you think it is worth, but on what the market will pay. Certain markets and industry sectors in Canada are somewhat depressed compared to only a few years ago. If you need a certain amount of cash out of the business, youll need to get at least a rough valuation as soon as possible. Then, if necessary, you can start to build value by identifying the true value drivers and implementing an enhancement process. You dont have to wait until you decide to sell or transition to build the value in your business. Strong internal systems, established procedures and a process-dependent (rather than people-dependent) structure will help ensure your business is as strong, and valuable, as possible when the time comes to exit. There are several key drivers of success and many of them are business or industry dependent, but it is possible to identify the kind of value markers potential purchasers will want to see. As an owner, you can foster value in the following ways: 1 Establish well-documented processes and procedures 2 C  reate and foster a strong management team 3  Develop a diversified client or customer base 4  Establish sustainable cash flows and proven profitability 5  Provide easily accessible, detailed and accurate financial records 6 A  ssure articles of incorporation and tax filings are kept up to date

Discover 6 ways to drive value in your business.

3) HOW MUCH WILL THE TAXMAN TAKE?

Without effective tax and estate planning, you run the risk of ending up with less than you anticipated. Working with a tax specialist, youll be able to ensure that your tax structure allows maximum flexibility for estate planning, income and capital gains consideration. The decision to sell to an outside party will have an impact on your tax situation as well, and should be discussed with an experienced advisor who can help you create a plan that minimizes immediate and future tax liabilities for all key parties.

4) IS THERE A ROADMAP TO FOLLOW?

Its important to realize the way you manage your business today has implications for tomorrow. By making your succession plan an integral part of your overall business plan, youll have something that is built and managed in a way that facilitates a change in management or ownership without major disruption. Getting into the habit of creating and updating your business plan ensures that you have a viable plan in place when you do start approaching outside parties or transitioning internally to family or those who might be interested in taking over. This way, everyone can see the potential in the business, aiding negotiations and ultimately achieving the full value for your business.

Your business is more than your livelihood. In many cases, it represents a lifetime of hard work, dedication and commitment. To ensure the longevity of everything that youve built and will buildand securing the personal future you want, it is important to begin thinking about succession planning today.

MNPS SUCCESSION SERVICES

Dave Zimmel, CA, CPA (IL, USA) CMC, is a Partner and the Vice President of Private Enterprise for MNP in the Calgary office. For more than 30 years, he has focused on providing a wide range of assurance, accounting and business consulting services to private enterprise clients in a variety of industries. He has also authored several articles on the topic of succession for publications including the Globe and Mail, National Post, Advisor and Profit Magazine. To find out how MNP can help you to develop or maintain a succession plan customized to your needs, contact Dave at dave.zimmel@mnp.ca.

DEFINING YOUR LEGACY: THE 4 SUCCESSION QUESTIONS YOU NEED TO ANSWER TODAY

Building the right succession plan starts by asking the right questions. Have you started thinking about what you want for your future and the future of your business? Weve given you the four succession questions to need to answer today. But once youve started thinking about your future, what are some other questions to start ruminating on? Working with a succession professional is one of the best ways to ensure you put together a thorough succession plan that protects the best interests of yourself and your business. By beginning to think about these questions, you will have a starting point to begin discussing your succession plan with your advisors.

WHEN AND WHERE DO I BEGIN?

Transition planning should be done over a four- or five-year period. It may sound like a lot of time, but the various stages each of the transition process can take up to several months. For example:  4 to 8 months to develop a comprehensive plan and consult the necessary advisors  12 to 24 months to implement recommendations and maximize value of the business  8 to 18 months to run a divestiture process  6 to 24 months post-closing to train a successor or help with transition to new ownership

1 to 2 Years

15+ Years

When do you plan to exit your business?

5 to 10 Years

10 to 15 Years

Sell it to a competitor or supplier

Sell it to another partner

Working through a succession plan will not only clarify what you want, but let you know which option is most favourable on both a financial and personal level.

How do you think you will exit your business?

Sell to management or key employees

Transition to a family member

Close the business and liquidate the assets

Does the family member already work in the business?

DEFINING YOUR LEGACY: THE 4 SUCCESSION QUESTIONS YOU NEED TO ANSWER TODAY

WHAT IS MY BUSINESS WORTH?

Senior employees have the same information and contacts that I do I thought sharing that information was part of the groomingmy-successor process Senior employees have the same information and contacts that I do

Youve been the face of your company for a long time and while that has had many benefits for your companystrong client relationships, consistent leadershipit does little for the value of your business once youre gone. Having well-established and documented processes, as well as an empowered management team, are two of the most effective ways to drive the value of your business.

You know the ins-and-outs of your business. But where would your business be without you?

No need. I know our net worth and the general worth of assets

My brand and reputation lie with me

Everything is clearly laid out in working documents

I set my worth when I set my asking price

Have you had a recent professional valuation of your business done?

Not in the last 5 years

Is there a way to transmit this information to other employees? What do you think will happen to the value of your business once you are no longer associated with it?

My accountant has a good sense of the business value

Under $500,000

Not sure

$500,000 to $1 million

The value of your business is dependent on many factors and it is best assessed through a proper valuation performed by a Chartered Business Valuator. Dont let the real worth of your business be a surprise to you. A valuation now will also give you the time to increase market value before you transition or sell.

What do you estimate the value of your business to be?

$1 million to $1.5 million

Over $3 million

$1.5 million to $3 million

DEFINING YOUR LEGACY: THE 4 SUCCESSION QUESTIONS YOU NEED TO ANSWER TODAY

WHAT DO I WANT FOR MY FUTURE AND THE FUTURE OF MY BUSINESS?

Very important or critical

How important are the exit proceeds from your business to the financing of your retirement?
Not important or inconsequential Somewhat important

Roughly one-third of private client wealth comes from the sale of a business. Knowing where your succession plan fits into your overall retirement plan will be fundamental to guiding many of your decisions.

Dont know

Outside advisor

None

Even for those owners who have little or no interest in staying on in any kind of official role after a sale, their willingness to assist at least through the transition process will be seen as valuable and could result in an increased selling price.

What role do you intend to have in the business after your exit?

Operating management role

Other

How long would you intend to stay on in this role? How does it fit with your retirement plans and do you consider it a financial position?

DEFINING YOUR LEGACY: THE 4 SUCCESSION QUESTIONS YOU NEED TO ANSWER TODAY

WHAT DO I WANT FOR MY FUTURE AND THE FUTURE OF MY BUSINESS? (CONTINUED)

Not yet

Even if a business is sold outright to a large company or investor, they may still want someone within your companywhether that be you or your successorto keep a leadership role. Having a groomed successor in place can increase value and make it easier for you to extricate yourself from the business when the time comes.
Are you only looking within your business or family, or are you considering outside buyers as well?

I am actively looking for one now

Do you currently have a successor for your business?

I have a successor and weve agreed to a formalized plan

I have several in mind that I am currently considering

I have a successor but weve yet to work through the details

Having control over when and how I exit

Do your potential successors know they are being considered? Have you discussed their goals with them?

Knowing my business is in the right hands

When the time comes to exit your business, what is most important to you?

Knowing that employees and family members have had their input considered

While there are many components to consider when putting together your succession plan, it helps to know what your priorities are. A good plan should be able to reduce your stress and simplify both your personal affairs and those of the business.

Minimizing taxes

Meeting my personal goals

DEFINING YOUR LEGACY: THE 4 SUCCESSION QUESTIONS YOU NEED TO ANSWER TODAY

ABOUT MNP
MNP is one of the largest chartered accountancy and business consulting firms in Canada. For more than 65 years, we have proudly served and responded to the needs of our clients in the public, private and not-for-profit sectors. Through partner-led engagements, we provide a cost-effective approach to doing business and personalized strategies to help you succeed.

Visit us at ExitSMART.ca

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