Leaving Your Business On Your Terms: Transition Options for Small Business Owners

Are you expecting to die with your boots on?

Or do you intend to kick off your shoes and seek other surroundings, near or far?

Some eight per cent of us who own small businesses in Canada do not plan to retire at all.*

Others would like to keep a guiding hand in their businesses but clear more time for themselves, shedding the day-to-day weight of operational concerns.

Have you thought about your options? Proper exit planning or business succession planning will help you sort out the implications each has for family, funding and taxes.

The starting point will be your retirement goals and the provisions you need to get there.

Transition options-cutting or loosening the ties

Will your leaving the business be abrupt or gradual? In a worst case scenario, you might be forced to liquidate—shut down and sell off your assets at market value. But let’s assume the worst isn’t happening and you’ve got time to choose other options for cutting or loosening the ties.

You can choose to:

  • sell your business outright and walk away, selling to 3rd party or to insiders;
  • sell and go back as an employee, with or without earnouts.

To make the most of either of these options, you need three and a half years: six months to analyze the business and determine what it needs, two years to build its value and one year to sell it.

You can choose to:

  • transfer ownership to family members.

Or if you still want to keep involved, you can choose to:

  • keep the company and draw out profit to fund your retirement.

These too will take time to prepare for, if the business is not already primed.

Whether you are selling, transferring or retaining the business, you need to work on converting your equity to income, not just for now but for the years you’ll be spending in retirement. Accountants and tax lawyers can advise you how best to take the money out, i.e. a trust or retirement compensation arrangement, and neutralize taxes.

Selling the business outright

You’ll want to work on increasing the value of your business prior to its sale. Get familiar with the top financial, operational and organizational drivers of business value. Focusing on these will make it easier for you to sell your business and get you more money-now as well as then.

Frankly, in my experience, selling to insiders doesn’t often work. People tend to undervalue the business especially when they’ve been contributing to building it. They don’t think they should pay for it.

And if the sale falls apart, it can destroy morale. Working through a third party avoids the confrontational, it won’t hurt their relationship or the business.

On the other hand,though, an Employee Share Ownership Plan (ESOP) can be lucrative for the seller and exciting for the employees who are involved. “When employees have real ownership of the company they work for, they are more inclined to make it more productive and profitable,” says Wayne Vanwyck, in ESOPS not a fable. But an ESOP doesn’t automatically transform your culture, he continues. “Philosophy and values must be aligned in a culture of transparency and trust.”

Selling the business and going back as an employee

Maybe you want to sell but the proceeds wouldn’t be enough to retire on now. Or what if you’re not ready to retire but you get an offer for the business that you just can’t refuse. Maybe you would be happy taking a different role in the company. That’s what happened with Sunbelt London client Clyde Walton, whose story was featured in an issue of our Sunbelt Canada newsletter. Approached with an offer, Clyde ended up selling his business, but stayed on as manager, in what is now Mastermind Toys.

I mentioned earnouts as a consideration. A seller and purchaser may disagree over projected earnings or other factors affecting the value of the business and put in place an earnout —where the buyer doesn’t pay the entire purchase price up front but agrees to pay a certain amount now and more later based on future performance. Usually, the seller also has to stay on as an employee during that period of time to maximize profit for the purchaser and for himself.

Transferring ownership of the business to family

Handing the business over to family members has become less of an option as more heirs-apparent are choosing a different career and life path. And do those members you have in mind have the interest, skills, knowledge and work ethic to be your successor? Will your decisions cause rifts within the family?

Keeping the business and drawing out profit to retire

Some of us plan to step back, not away, to fund our retirement. According to a survey of Canadian small business owners that AngusReid conducted for American Express in 2010, some 30% of us plan to obtain income by maintaining ownership of the business after retirement.

But generally, we plan to reduce our involvement so we can gain time to spend how we want. To get there, many of us have to learn to let go. Much like letting out the tension on a rope, bit by bit. It’s easier if we already have systems running our business and a great team running those systems. Only then will we have the flexibility to “retire on the job.”

Getting there can be tough. So much of whether we succeed or not in our transition options comes down to our mindset and degree of preparation.

I’ll have more to say on both topics later.

If you’d like more tips to prepare for selling your business, please register for our free download, Insider Tips on Selling a Business in Canada.

* Online survey of Canadian small business owners conducted in August 2010 by Angus Reid Public Opinion for American Express.

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Gregory Kells
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