Succession Planning 101
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Copyright Š 2012 Blue Beetle Books Succession Planning 101 Published as an eBook original by Blue Beetle Books.
No part of this eBook may be reproduced in any manner whatsoever without the written permission of Blue Beetle Books. Blue Beetle Books 3552 Promenade Crescent, Victoria, BC V9C 4L2 Tel: 250-704-6686 E: info@bluebeetlebooks.com www.bluebeetlebooks.com
Succession Planning 101
Table of Contents Introduction.............................................................................................................................4 Business Succession Planning - An Overview.....................................................................6 Critical Succession Planning: Roles and Players..............................................................11 What Are Your Succession Options?..................................................................................14 Keeping the Business in the Family....................................................................................16 Business Succession: Management Buy-Outs..................................................................18 Valuing Your Business..........................................................................................................20 Selling your Business...........................................................................................................23 How Much Does Succession Planning Cost?....................................................................25 The Editor’s 10 Succession Planning Mistakes People Make..........................................27 Business Succession Planning Checklist...........................................................................29
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Introduction The aim of this eBook is to provide a basic overview of some of the key points you should consider when developing a succession plan, and to encourage you to think seriously about starting to plan your exit strategy, whether that will be five years or twenty years away. A Canadian Federation of Independent Business (CFIB) survey, carried out in 2006, found that 66 per cent of small to medium enterprise business owners surveyed planned to exit their business within ten years. When one considers that one-third of the population of Canada are baby boomers (some 11 million) there will be a lot of business owners looking toward retirement in the coming years. Another interesting finding in the survey was that only 10 per cent of people planning to sell had a formal succession plan, with 38 per cent saying they had an informal, unwritten plan and over half had no plan at all. If you have a family business, have you thought about the future? Do you plan to work until they carry you out in a pine box, or would you like to have an exit strategy which will see your business continue, and provide some much needed income for your retirement? Perhaps you are looking for a new adventure? CFIB found that one in ten of those surveyed were selling up to start another business. In either case you have a number of decisions to make when deciding your exit strategy. Are you going to pass the business on to a family member? Or will you simply find someone else to run the business for a period of time until you finally decide to sell it (sort of semi-retirement)? Will you sell it to one of your management staff, or even an employee cooperative? Or, are you selling the business to an outsider who may, or may not need you to hang around and provide training, coaching or other support? Will you retain an interest in the business, perhaps in terms of transitional profit sharing, or as a shareholder? How will the transition be financed, especially if you are handing over to a family member or employees? Of course, you could simply close the business completely and sell the assets. Of course, before any of the questions above can be considered you need to get your advisors and stakeholders involved. Creating an advisory team is a good idea; bring together your accountant and lawyer, your bank manager and financial advisor, add a tax advisor (oh, yes there will be significant tax issues), family members, your company’s management team, a business valuator, possibly a business broker and anyone else whose opinion you trust (a mentor perhaps).
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But, we’re jumping the gun a little here; before you do anything you need to sit down and clearly think through what your long-term goals and objectives are, both in business and personal terms. Once you’ve gone through this process, discuss your thoughts and conclusions with everyone involved (all stakeholders) and see whether they share your vision. This short list of considerations should show you that a succession plan is vital if you are to be successful in transitioning out of your business. Selling your business, or simply exiting it and letting someone else run it, can be traumatic, after all we get emotionally attached to our businesses, especially if we have been in business for many years, but it will be a great deal more stressful if you put your head in the sand and expect succession to just happen. Even if you don’t plan to retire anytime soon, start succession planning now, remember, it’s a longterm process, not a one-time event. Treat the challenge of exiting your business as just another great opportunity and you may end up with one of the best business experiences of your life. Mike Wicks (Publisher: Blue Beetle Books Inc.)
Warning: This book provides a basic overview to the subject of succession planning only and the authors make no warranties as to the accuracy of information as it relates to the reader’s specific business, or circumstance. Do not act on any information contained in this publication without first Smallbus consulting an accountant and lawyer.
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Business Succession Planning - An Overview
of their lives, so they often have a deep-seated desire to see them continue after they retire. They feel a commitment to their customers, or clients, to their community and even their suppliers.
When it comes time for a business owner to hand over the reins to someone else, it’s important that there is already a plan in place outlining the logistics of the transition in order to ensure a smooth hand over. This plan is a business succession plan.
Without a clear succession plan many businesses fail after the original owner retires, sells the business, or passes away. This is a great pity, a waste of resources and usually affects the livelihood of many people.
Succession planning can be a complex process, although breaking it down into its component parts makes developing one a whole lot easier. Many factors need to be considered including: determining the value of the business; settling tax and debt obligations; choosing and working with successor(s); and communicating the plan to all interested parties.
For larger companies it is critical to implement a succession plan across a broad segment of the company, from lower supervisory roles to highlevel managerial positions. This approach is more conducive to identifying, developing, and keeping key leadership personnel, and avoiding the a shortage of skilled and knowledgeable staff during and after the transition period.
Why Is a Succession Plan Necessary?
Entrepreneurs give their lives to building their businesses, it’s one of the crowning achievements
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When Should Succession Planning Be Done?
for you to exit your business. That will give you a good starting point. Your plan should have a cover page, a table of contents and an executive summary, much like your business plan.
It is never too early to begin succession planning. In fact, it should be done even when it seems things are going well and the current owner has no plans to step down from a leadership role, or retire. Sometimes, a sudden and drastic change to the physical or mental health of the owner, or their untimely death may make it necessary for a business to be either sold or transferred to the ownership of someone else. These unforeseen circumstances are not so disruptive if there is a comprehensive succession plan already in place long before they occur.
What follows is a brief overview of the key elements of a succession plan, but we advise you to pick up a template from your local bank, or Canada Business Network office. Community Futures Development Corporations also often have templates. Establishment of goals: It’s always a good idea to think about what outcome you want to see before you start planning. You need to ask yourself many questions before you even begin to consider the actual process of transition, such as whether you will play any active role in the company’s future operations, how the sale will affect your employees, customers, suppliers, and other stakeholders in the company, whether the company itself will change locations, and whether the name of the company will change or remain the same (e.g. if the company bears your name, are you happy for a new owner to continue using it?).
Planning well ahead makes sense. The owner can supervise the development of the succession plan and build into it all the necessary steps to ensure an efficient transition from current ownership to the next, regardless of whether they are available to handle it themselves. There is a strong case for a succession plan to be built into the start-up business plan. Building a company from the ground up with systems in place for every department makes sense and these systems form the basis of your succession plan. Think of a Pizza franchise, everything is systemized to the point that a new franchise owner can step in and start a new store quickly and easily. At any time, but the earlier the better, carry out this exercise - pretend that you are going to franchise your business and consider what would go into the Franchisee’s manual.
Also consider what you want to get out of the deal and what your successors are, or might be, looking for. This is particularly relevant if members of your family will be taking over the business. Are you the sole owner? Is it just you who are leaving the business, or do you have a partner, or partners to take into consideration? Be clear about who the plan is referring to and who it isn’t.
Once you have a plan it should be reviewed every six months or so to ensure that everything it contains is still valid. All businesses are dynamic and six months is a long time, so update your plan to reflect current situations and requirements of the company as well as to take changing laws and regulations into account.
Are you leaving the business entirely, or planning to work part-time? Are you considering bringing in someone else to run the business, while you still own, or part-own it, or are you looking to sell out completely? Outline the type of succession you envisage.
Key Components of a Succession Plan
Executive summary: This is written last and will provide the reader with an overview of the key Smallbubasic elements of the plan. It will also provide sines suc cess.ca information on the business such as whether itsis To order yand a proprietorship, partnership or incorporation our o
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It is very important that you make it clear as to whom ownership of the business will go to, exactly when that will occur, and under what conditions.
details of what the company’s primary products and services include. Expectations: What are your goals and expectations, both for the business and personally? What will a successor be looking for? You may already know this if a family member is a potential successor; if not you might want to put yourself in the shoes of a prospective purchaser - what will they be looking for?
The business and it how works: Describe the current business in more detail including its products, services, customers, competitors, strengths, weaknesses, opportunities and threats. Be honest and provide the reader with an understanding of the businesses and its current standing.
Identification of successors: Sometimes, owners decide to simply sell the business outright, whereas others wish to appoint a family member, close friend, business partner, or even a current employee as their successor. List each potential candidate being considered and individually note their qualifications, training, dedication, and overall suitability to run your business in the future. This should be an unbiased look at potential successors.
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Outline the future of the business, is it growing, or contracting? Is it opening new markets, developing new customers bases? Is it re-tooling, or developing new products or services? Add sales projections and other financial statements that will provide a clear picture of the company’s prospects. Provide an overview of how the business runs on a day-to-day basis and describe the systems in place that keep things on track, and who has what
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The legal stuff: You will need to detail all the administrative and legal paperwork that will be required. This will include share transfers, new partnership agreements, name changes, GST/ PST/HST, domain names, memberships, business licences, permits and many more things that are currently in your name.
responsibilities. Then outline how these will work after succession. Outline all those who will need to be involved in the planning process. This can include spouses, children, other family members and key employees, especially departmental, or divisional managers.
Any outstanding agreements or contracts will need to be legally passed over, so these should be listed in the plan.
Provide details of how family, or management are involved with the succession plan and eventual transition of the business to a new owner, or family member. Also consider what role family members that are not part of the business will have in the decision-making process.
If your business is a partnership, and you have a shareholder’s agreement, then you may want to discuss with your lawyer what the terms are surrounding any buy/sell agreement and what effect this will have on your plans to sell your share of the business.
Personnel after succession: Create a table that lists the names and job titles of all your key employees (include any partners, or co-owners remaining the business). Now add two more columns; one that lists the relevant skills required to do that job and another that details the training they will need to move into that position.
You will have to make note of, and take into consideration the tax implications of exiting your business. This is where your accountant can be extremely valuable.
Identification of company structure and method of transfer: The structural components and levels of management, roles and responsibilities of employees, and policies and procedures of the company’s operations should be clearly explained. It should be clearly stated how the transfer of ownership will affect each manager and employee and what roles will change. You should create an organization chart that shows what the company will look like when you have left.
Business valuation: It is necessary to know how much the business is worth before a selling price can be determined. This can be done by hiring a certified public accountant (CPA) a broker, or a realtor, or by mutual agreement between all partners involved in the transaction. Your plan should have a business valuation and also list all assets and liabilities. Timetable: Although this may change as things progress, create a timetable of all the activities the plan requires. This will allow you to monitor progress and let all stakeholders know how things are progressing, on a regular basis.
Consider and make note of how control of the business will actually be transferred, and how the assets will be handled. How will payment be made and over what timeline? Are you assisting with financing, is the successor, or purchaser handling that themselves?
Communications strategy: Outline the method by which you will keep all stakeholders informed as to developments; this should include regular meetings with all involved. Remember, you will also need to communicate with employees, especially with regard to the transition of authority from you to your successor and Shis, maor llbher, usinnew esssucce management team. ss.ca
Training for successor: What training do you intend to provide for your successor? A lot will depend on whether your successor already works in your business in a key managerial role, and the level of skill and knowledge they possess. If you are selling to a complete outsider then you will have to include a full orientation of all systems, policies, and procedures.
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Personal: A succession plan does not have to limit itself to just the business activities - it’s your plan, include details of how your retirement will look, how much money you will need to do the things you want to do and decide whether you will bow out of the business entirely, or keep your hand in by sitting on the board, acting as an advisor, or even doing some consulting work.
be made aware of how the change in ownership will affect their relationship with the company.
Professional Services In all but the simplest family owned business successions, it’s highly advisable to retain the services of a business lawyer and a certified public accountant. These professionals will help ensure all legal ramifications have been thought out and that all required documentation, taxes, and regulations have been given proper attention. It is also important to make sure that there are no misunderstandings between the parties involved in the transaction.
Risk management: Whatever can go wrong, will go wrong so you need to plan for the “whatifs” of life. For instance, you should consider the possibility that you could die before being able to sell your business, or hand it over to a successor. You should ensure that you make it clear what your wishes are if this should happen, and make sure that you have a will that details what should happen to the business, or your shares if the worst happens. Make sure you note down in the plan, what insurance you have, where your will is and who will handle the succession if you are not around to do it yourself.
Communicating the Plan The importance of communicating the succession plan to all parties involved cannot be stressed enough. A plan that only the owner and upper management personnel are aware of is not going to be very helpful if an unexpected transfer of ownership has to be made. In a smaller company, all employees should be part of the entire planning process. That way, they feel they contributed to it and are much more likely to ensure that the plan is effectively implemented when the need occurs. In larger companies, it is a good idea to create committees representing all levels of employment, from non-management workers through to top level management so that input from all departments can be considered during the planning stages. When all parties who will be affected by the succession plan feel they took part in its development, they are more likely to want to see its successful implementation.
When seeking out the help of these professionals it is important to choose carefully to ensure that you can work well with the personalities involved, and that they can also work well together. Ask each professional what services they can provide, along with any limitations. Make sure you fully understand the rates being charged and in the case of professionals charging hourly rates, ask for estimates as to how long each part of the process will take.
When the time comes to initiate the plan, outside parties such as customers and suppliers should
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