A Blue Beetle Books Publication

Succession Planning 101

Growing Communities One Idea At A Time

Copyright © 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

204-900 Wollaston St., Victoria, BC V9A 5B2

Tel: 250-704-6686

E: [email protected]

www.bluebeetlebooks.com

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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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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).

Introduction

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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 long-

term 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 consulting an accountant and lawyer.

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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.

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.

Why Is a Succession Plan Necessary? Entrepreneurs give their lives to building their

businesses, it’s one of the crowning achievements

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.

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.

For larger companies it is critical to implement a

succession plan across a broad segment of the

company, from lower supervisory roles to high-

level 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.

Business Succession Planning – An Overview

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When Should Succession Planning Be Done? 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.

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.

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.

Key Components of a Succession Plan Before you start, take a time-out and think about

what the perfect scenario would be when it’s time

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.

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?).

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.

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.

Executive summary: This is written last and will

provide the reader with an overview of the key

elements of the plan. It will also provide basic

information on the business such as whether it is

a proprietorship, partnership or incorporation and

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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?

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.

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.

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.

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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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.

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.

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.

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.

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?

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.

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.

Any outstanding agreements or contracts will need

to be legally passed over, so these should be listed

in the plan.

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.

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.

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.

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 his, or her, new

management team.

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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.

Risk management: Whatever can go wrong,

will go wrong so you need to plan for the “what-

ifs” 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 the time comes to initiate the plan, outside

parties such as customers and suppliers should

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.

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.

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Business succession represents a key strategy for

the continuity of an organization, particularly its

leadership and executive management in critical

functions. Too often, especially with businesses

led by charismatic managers or owners,

succession planning takes a back seat until the

very last moment when a replacement absolutely

needs to be identified. By having a succession plan in place well in advance, a business can

avoid this panic and thus have a better chance of

choosing a prepared candidate for a leadership, or

ownership position. To make the plan successful

however, the right players need to be involved.

This includes a variety of stakeholders both inside

a business and in some cases outside, depending

on their own role and interaction. Each one plays a

critical role in helping a smooth succession.

Remember it’s often not just about new

ownership; it can also involve members of the

management team, who may be part of the

owner’s family, or who just consider the transition

of ownership a good time to retire. In other cases

the new owner may decide to bring in their own

executive management team. So in this chapter,

we’ll look at management succession as well as

ownership succession.

Family Succession planning always involves family

members in one way or another. If the plan is to see

the business ownership and management transition

to a son or daughter, or another family member,

they should be involved as early as possible in

the planning process. If they are young and the

planned transition is many years away, they can be

Critical Succession Planning: Roles and Players

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introduced to the business by way of part-time

work and thereby groomed to take over, potentially

over several decades. If they are already in the

business, then they should be an integral part of the

transition team.

Even when there is no plan to have a family member

take over a leadership role in the business, they

should still be an integral part of the transition plan.

As an owner exits a business that has been a major

part of their life for many years the impact will be felt

across their whole family.

Top Management A successful transition of ownership relies on

support from all levels of management. Executives

have worked long and hard to build up protocols

and systems that have improved the business

considerably. It is important to get them on side so

that they will support the new owner and train them,

and any new management staff to ensure that the

company continues to operate as efficiently as it has in the past.

Middle Management Middle management is the backbone of a company

and a new owner, or new executive team are going

to need the support of front-line employees. Any

resistance from middle management could easily

thwart efforts to transition a new management team

into the business.

Staff It is important for a new owner to take over a

motivated staff, so rank and file employees should not be forgotten when developing a succession

plan. They should be involved, when the time is

right, and their opinions sought wherever possible.

The last thing an owner wants when touring a

potential successor around his, or her, business

operations is for staff to be surly, or show any level

of discontent.

Business Partners Very few businesses and companies are able

to operate on their own without the help and

partnership of other businesses. This may be

in the form of supplies, services, outsourced

functions, shared markets and selling, etc. The

list can be extensive. Leaders of a business need

to be connected with critical business partners,

as shared agreements can represent significant lifelines for a company’s immediate future. As a

result, external business partners can have an

influence on succession planning in a company, especially if a potential successor does not work

well with such vendors and supporters. While at

best the external perception may end up being just

an opinion, it’s one that executive management

should be paying close attention to for continued

growth and cooperation.

Banking and Financing Partners Succession candidates need to be aware and

understand who the financial players are that help a business operate and thrive with regard to banking

and financing. While these players do not directly make decisions on a company’s direction, they can

have significant say on the funding needed to pay for such operations.

Look to your bank account manager for advice on

financing the succession planning and business transition itself. They will also be able to provide

information on financing options for family members, management, or others considering

buying the business. They can also be a source of

industry information and have a good handle on the

current economic situation.

Accountants will help with a whole range of

things including developing financial statements, advising on tax issues, assisting you if there is

any restructuring of the business to attend to, and

making you aware of any tax implications, or ways

to reduce taxation. They will also be an integral part

of assessing how much your business is worth.

Lawyers Your lawyer will play an important role in your

succession planning, and ultimate exit from the

business. They will draft any purchase, or sale,

agreements you might need, prepare wills, help with

powers of attorney, set up trusts, offer tax advice

and deal with anything to do with the restructuring

of your business.

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Business Valuators It is wise to get a professional valuation carried out

on your business to ensure you will get the maximum

amount possible for it. There are dozens of different

ways to value a business so trying to do it yourself is

unlikely to provide a valuation that is sound enough

for the majority of potential buyers. A professional

valuator has the skills to assess the value of the

shares in your company. Not only that, they are

able to offer an unbiased valuation, which will give

potential buyers, or investors, confidence that the valuation is credible.

Brokers Business brokers are like realtors, they will hopefully

find a buyer for you and help you prepare your business for sale, by giving you advice on making it

more attractive to potential buyers.

Counsellors or Mentors In every region in Canada, and in most communities

there are Community Futures Development

Corporations, Enterprise Centres, and Chambers

of Commerce that often have counsellors, or run

mentorship programs that can assist small business

owners with their succession planning. In addition the

Canada Business Network has an excellent website

offering advice, and regional offices throughout the country that are a good place to start when searching

for help www.canadabusiness.ca/eng.

Facilitators There are facilitators that specifically work with family businesses, not only to guide them through

succession planning, but also to act in a mediation

role when families find themselves unable to agree on matters. The Canadian Association of Family

Enterprises (CAFE) is a great organization to check

out, whether you are dealing with transition, or

other issues involving your family in business. The

home page of their website proclaims: Helping

Business Families Through Shared Experience,

which sums up their missi