Common Cents – Succession Planning for Small Businesses

by Heather Love, Portfolio Manager, Investment Advisor – Odlum Brown Limited

Small business owners and entrepreneurs have a lot of things in common, chief among them the desire to do things their own way. While business owners often benefit from greater flexibility to shape their future, owning a business also comes with greater risk. Long-term planning and financial guidance are of utmost importance.

Part of a successful long-term business plan includes succession planning. It is key to involve any stakeholders in your business plan, as you would be surprised how often goals or plans do not align. Are you planning to leave your family business to one of your children? Make sure they are on the same page.

There are many successful strategies for making a business transition, as well as many pitfalls. I reiterate that the primary error for small business transition strategies is keeping the succession plan a secret. Communication is key. Engage your trusted advisors to help develop an objective process for creating a succession plan, and ensure you address disappointment should your goals not align with others.

The most common ways of exiting your business are outright sale, takeover, buyout, and passing to another family member. There are many overlaps here. In particular, it is important to identify both the strategy that makes the most sense for you and who will ultimately be running the business, as well as what type of compensation you expect.

Every strategy requires establishing a value for your business. Many accountancy firms specialize in this type of work and can help apply the appropriate valuation processes and metrics for your category of business. Passing to a family member may require fewer rigorous valuations, but if compensation is expected, it is important to ensure your family member does not expect a “free lunch.” This can be a source of strife in a family unit, so clarity and communication up front are key.

There are many ways to find suggestions on where to start. The Business Development Bank of Canada often has good general resources for business owners, but planning your business transition requires professional help. General advice (even this article!) is no substitute for professional advice since rarely do two situations look alike. Your investment advisor or financial planner, accountant, and lawyer will need to work together to develop and execute the plan that fits your objectives.

Once you have crafted your succession plan, you can focus on the next big milestone – retirement!

The information contained herein is for general information purposes only and is not intended to provide financial, legal, accounting or tax advice to be relied on without an individual first consulting with their financial advisor to ensure the information is appropriate for their individual circumstances. Member-Canadian Investor Protection Fund.

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