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This article originally appeared in Construction in Vancouver and appears with permission.
Entrepreneurs invest huge amounts of time, money and patience into building a successful business and not only want to see their legacy continue, they want to be able to exit on their own terms. As a company grows, you need different skills and different personnel to meet them, and likely a more sophisticated, governance structure as it grows. But to do so requires long-term planning that aligns with the business’ strategic plans.
Robert Lashin has been planning for succession for the past 37 years. He was one of a dozen employees that bought Houle Electric in 1979 when the original owner Lionel Houle wanted to retire but couldn’t find a buyer. Lashin knows all about succession – and implementing it.
A recent poll by Hays Canada indicates half of construction business owners don’t have a succession plan. And of those, only a third plan to launch one in the next year. “That’s a step toward extinction”, says Lashin, president of Houle Electric since 1997.
“If you look at all companies, great companies will not necessarily stay great companies. The sustainability of every company is its lifeblood, thinking about succession and how things will continue to grow,” he says.
“Planning for the proper lead time will allow you to choose a transition strategy and identify and groom potential successors,” says Doug Tyce, CPA, CA, Business Advisor and B.C. Leader, Real Estate & Construction Services with national accounting firm MNP. “This is especially important if transitioning to a family member or have a key employee or employee group already involved in the business requiring an internal transition rather than an external sale.”
Lashin and his partners made succession an integral part of their business plan, not just for their retirement but to support people’s growth into leadership positions and ensure the sustainability of the company. But it hasn’t always been easy. Once on the table, the biggest challenge in executing a succession plan is getting the initial buy-in and ongoing commitment from employees. “Strategic planning is about change and people resist change”, Lashin notes.
“Proper strategic development is hard work, it’s very difficult to do. And of course, it’s also a long-term process and people don’t see the immediate benefit,” he says. “It takes real discipline and real communication with your employees to understand the importance of strategic planning for the long-term health of the company. So, you require the proper change management strategy in your company to continue.
Lashin continues “Hiring a good consultant to help with that process is imperative.”
One of the key elements of a successful exit strategy is to ensure the corporate structure allows the owner to exit the business in the most tax efficient manner, adds Tyce. If the structure does not align properly, it will either inhibit the intended exit strategy, or result in excessive income taxes.
For example, the decision to sell the business to a third party could impact your immediate and future tax liability, and should be addressed when creating a plan. Also, capital gains exemptions may not be available for successful mature businesses unless appropriate tax planning steps, potentially involving a holding company and a family trust, are started well in advance. Another common tax plan is implementing an estate freeze to reduce the tax liability of a growing business away from the main shareholder(s). This usually entails creating a family trust to shift future value on the common shares to other family members.
Transition planning should be done over a four- or five-year period to ensure the most successful outcome — and the earlier, the better. Consider this: demographic changes will push an increasing number of businesses onto the market in the coming years – all competing with yours.
Commit to Implement
Make sure you recognize the importance of strategic planning and once you recognize it, ensure you allow the time and resources to follow through with it. Allocate the time and resources to the process and implement it, don’t just shelve it.
The value of a business is not based on what you think it is worth, but on what the market will pay. If you need a certain amount of cash out of the business, you’ll need to get at least a rough valuation as soon as possible.
Without effective tax and estate planning, you run the risk of ending up with less than you anticipated. Working with a tax specialist, you’ll be able to ensure your tax structure allows maximum flexibility for estate planning, income splitting and capital gains consideration.
By making your succession plan an integral part of your overall business plan, you’ll have something that is built and managed in a way that facilitates a change in management or ownership without major disruption.
For more information, contact Kelly Taylor, CPA, CA, CGA, Business Advisor, Real Estate and Construction Services at 604.536.7614, [email protected]
Related Topics:Change Management; Capital Gains
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