Succession Options for Small Business Owners

Your business structure will affect the steps you’ll need to take when creating your succession plan. Three of the most common business structures in Canada include sole proprietorships, partnerships, and corporations. While this blog is geared toward small business owners who fall within the first two categories, the advice can be applied to any business owner looking to begin succession planning.

There are two general options available to small business owners when they are ready to take a step back from their position. The first is transferring or selling, which may include payment along with the transfer of ownership for an amount agreed upon with the buyer (the person you are transferring the business to).

Your business could be transferred to a family member, business partner, or a purchaser outside of the business. Depending on your business structure and what is agreed upon during the transfer, you may remain a part-owner of the business.

For example, transferring partial ownership to your kin or a business partner would allow you to maintain some influence in the business. In comparison, selling the entire business to someone outside the organization usually results in no further involvement from the owner.

The second option is closing your business. This liquidates the assets of your business and alleviates the need for you to find a successor to take over. However, individuals who intend on liquidating their business still need to have a succession plan to have a smooth closing and exit from their career as a business owner.

Succession Planning Step One: Goal Setting

The first step is to determine the goals you have for yourself and your business, financially or otherwise. This step should be taken several years before your decision to retire or leave the business. Ideally, take this goal-setting step as soon as possible. These goals should include:

• The age you wish to retire at.

• What kind of growth you envision for your business. Examples could be warehouse expansion, new equipment, more employees, etc.

• What legacy and longevity do you hope to see in your business long-term? Do you want the business to live on after your time as the owner?

• Are there any large purchases or dreams you want to fulfil for you or your family once you leave the business? This could be things like vacations, paying your children’s tuition fees, new vehicles, or properties, etc.

Each of these items should be mapped out on a timeline so that you can see how many working years you have left, and the kind of funds you need to support your goals. This timeline can change as your goals adapt to your circumstances. It is just to provide you with an idea of what you are working towards.

Succession Planning Step Two: Finding a Successor

The next step is to take inventory of the daily work and tasks that come with running your business. You’ll also need to think about who is best suited to take these over one day. Ask yourself the following questions:

• What information and skills would need to be passed down to your successor? Are there any tasks that only you know how to perform currently?

• In accordance with your timeline, at what point should you begin training your successor, so they are ready to take over when you enter retirement?

• If you are operating a family business that is passed down through generations, has it been discussed amongst your kin who will be taking over? Is everyone on the same page?

• If you have no successor in mind, have you researched potential options? Chatting with other retired business owners about how they kept their business going can help.

When thinking about succession planning, especially on a corporate scale, you should also consider other important employees and have a plan in place for when valuable employees quit or retire, so that they can be adequately replaced.

Succession Planning Step Three: Connecting with Professionals

This last step is very important for every type of business, whether or not the owner wants to transfer or close the business. There are three professionals who you must reach out to in order to have a smooth exit that leaves you with maximum profits and a thriving business.

First, a financial advisor should be contacted so that you have help from an expert when evaluating your business and personal goals. Having this second opinion can help you consider the big picture, and the short and long-term consequences and benefits of any succession plan ideas you are considering. They can also help ensure that you receive a fair payout, catching any possible tax breaks to maximize your earnings.

Second, before a business can be transferred or closed it must be appraised. This involves hiring an expert to complete what is called a business valuation. The expert will consider several factors, such as revenue, assets, debts, current market value, etc. This will provide you and potential buyers with the information you need to make an informed decision on how to move forward with the succession plan.

Lastly, you may need to hire an accountant and an attorney. Your books need to be in proper order to demonstrate the financial state of your business to anyone who may be involved in the succession process. That is the job of your accountant or bookkeeper. Some accounting firms, especially large ones, will often offer “advisory” services to assist with business transitions, sales, and succession plans. Transferring ownership is a legal issue that is best approached with an attorney who can ensure nothing has been missed and who can help resolve any ownership disputes.

There is no way to guarantee how long even the most passionate business owner can remain committed to their work. Succession planning is the best way to stay ahead and in control. Being unprepared for the day when you can no longer operate your business can lead to a forced closure, which no business owner plans for. Having a clear plan empowers business owners to take a clear and dignified exit when the time comes, knowing that they have built a strong foundation for their business to continue to thrive.