After toiling for years to build a business, you've had some success. You have a stable of satisfied customers, maybe a group of core employees, and your life's work provides income for you and your family. Congratulations — you've built a small business. Then, one day, it comes time to hand over the keys, and you discover you have no idea how to proceed. Now what?
Experts say it's a common problem, and it's one not enough Canadian small business owners are paying enough attention to.
Here are a few tips that can make the process as painless as possible.
Remember, you are not alone. You're likely the best person to handle operational issues at your business, but you know when and if it's the right time to bring in outside expertise. Planning for issues of what comes next is no different. Jeff Halpern, a business succession advisor with Toronto-Dominion bank says there are many resources at your disposal to help stickhandle the issues.
"Accountants, lawyers, and other experts are all great at handling things from one direction," he says. "But we like to come in for what I call the helicopter view. When you look at everything the client has in place, invariably we find more than one way to help."
Others agree. Kim Thompson is senior vice-president of advisory services with Credential Financial Inc., a national wealth management services company that works with credit unions across Canada.
"To the extent that a business owner sits down to make a plan for these things, there's a lot of things we can help with at the succession planning stage," Thompson says.
That means not just dealing with the dollars and cents, but also helping clients with other issues.
No matter the issues, it always helps to plan ahead. "There's a lot of noise about succession planning but most people still aren't taking the time to do it properly," Thompson says. "In the first five years, maybe succession planning isn't where you are going to focus your energy, but it's really about secure your business for the long run."
"The truth is," Halpern adds, "every business owner has to hand over the keys at some point." Getting sound advice before well in advance can make all the difference in the world.
That means calling on the services of a tax professional, business valuator, insurance expert or legal counsel long before they're actually needed.
There's no magic number, Thompson says, but the earlier the better. "If you've been in business for 10 years, it's time," she says.
Consider a will
It's a fairly basic tool for estate planning, but most people don't have one prepared. The law varies from province to province, but everywhere in Canada, a short document that sets out your wishes for who should get what part of your possessions is essential.
Fewer still know that in some cases, you can have two wills. Depending on the type of property or asset being left, a primary and a secondary will can be a useful tool — especially when probate fees sit at 1.5 per cent in the province.
Halpern says he's constantly surprised by the number of wealthy, successful entrepreneurs who don't have any sort of will. He recalls a client he worked with once who was Russian. "This man was a millionaire but had no will at all. He told me it was because in Russia it is civil law so everything goes to the wife automatically. He had no idea how the system worked here."
Insurance can be helpful
Insurance is a valuable tool when your business is growing and you have to protect your most valuable investment — yourself. But it also has its place during succession planning. Even when there's a plan in place, when a business owner dies that's often a "deemed disposition" in the eyes of the law — meaning tax has to be paid on that transfer of wealth, even if no actual cash changes hands.
Suddenly getting a million-dollar business only to be hit with a tax bill in the thousands and no way to pay for it is not the kind of inheritance most people look forward to. "If they own an illiquid asset like a business the heirs are not going to be able to pay that tax bill," Halpern says.
Halpern says something like a joint-survivor life insurance policy can be helpful in that case, to provide funds for that eventuality.
Handling the transition process within families can be tricky. It's not uncommon for there to one offspring involved in the business who's the natural successor. But other children can feel left out. Indeed, the founder could find the nasty surprise that it fact none of the children are interested in taking over the family business.
"A lot of times the child is looking at the business for money, but it's not really their passion," Halpern says. Credential's Thompson says if there's one child who's capable and interested, the succession plan can be fairly straightforward. "But more often than not you have more than one that's interested and that's when problems arise."
TD's Halpern suggests creating a fund to equalize inheritances to guard against that. If one child is involved operationally, perhaps they can take over the business, while the company's real estate is carved out into a second holding company for the other child.
"If that business is a valuable asset, it is possible to buy a life insurance policy against the founder's life to be able to give something of value to the other one," he says.
Perhaps the greatest pitfall is the question of valuation. Many business founders come to the end of their careers, and are justifiably proud of the businesses they have created. That can lead to unrealistic expectations of what an outsider might pay for it in the real world.
"There's usually a disconnect between how much they think the business is worth and how much someone is actually willing to pay," Halpern says.
Thompson agrees, and says the process often creates stress. "You've put your heart and soul into this business and then some third party comes in and values it. There's a gap between what it's worth and what the founder thinks it's worth," she says.
Both agree that the use of a business valuator can be helpful. A valuator can help you look at your business's finances, the prospects, and what other similar companies sold for to come up with a realistic figure of what it might fetch.