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Thoughtful Succession Planning Ensures Protection Against Unexpected Events
When you build a business from the ground up, it becomes your baby. The long hours, hard work and sacrifice are investments made worthwhile when you watch your enterprise grow.
I see business owners strive constantly to improve their products, bolster their services and increase their cash flow. When it comes to the day-to-day business, no effort is spared.
So it’s surprising that as few as nine per cent of small- and medium-sized businesses in Canada have formal, written succession plans for their planned exit from the business, let alone the unexpected hurdles that life can throw their way. Forty per cent have an informal plan and 51 per cent have no plan at all, according to a survey by the Canadian Federation of Independent Business.
Retirement, illness, death, the unexpected loss of key staff. These events can be a crisis or a catalyst and as a business owner, you do actually have some control over which it will be.
A succession plan is not a one-off event that you complete, put on the shelf and forget. It’s an ongoing process that needs to be reviewed regularly, like updating your will.
Too often I see people leave it too late and events happen that throw the business into crisis mode. When that happens the value in a business can erode quickly if key people are no longer in place and others are not ready to step into their shoes.
I’ve also seen huge value generated in businesses that have planned ahead so that ultimately, when they do sell or pass the enterprise on to the next generation, they’re very thankful a thoughtful plan was in place.
When a succession plan is done right, you increase the value of your business and you don’t miss a beat in the day-to-day.
A succession plan is part of your strategic plan for your business. It can help you identify key employees in the organization and where you might have talent gaps. It can help you focus training of staff and ensure they have the tools to fulfil their jobs and move your organization forward.
Business owners are great at running the everyday business, building their expertise and knowledge as they grow. But most clients will only ever go through one exit. It’s just not something they’re familiar with. My job is to help them expect the unexpected and be prepared.
Most of our clients are family-run enterprises, whose owners foresee their children taking over the business one day but there can be a lack of communication. Children may have other plans or they may not have the knowledge and skill set to take over.
A big part of succession planning is opening the discussion and getting everything on the table. What are everyone’s goals? Where do they fit in? Do they have the knowledge they will need? When all parties are prepared, the transition becomes seamless.
That can include some difficult conversations. Who has the skill set to take on key roles? Where do heirs fit in?
With an unexpected event such as illness or death, in particular, succession planning can ease the stress of an already difficult situation. If successors have been identified, the business doesn’t have to suffer.
Even the small details can be overlooked. Who has the key to the front door? Who is the accountant? What are the banking codes? What is the company lawyer’s number? How is payroll processed? Document those details and make sure your family knows.
I had a client who was still going into the office at 84 years old. The informal plan was to pass on the family business to three adult children but one of the children unexpectedly passed away. His children then felt they should inherit his share of the business, with very little of the knowledge or skills to do so. That situation became very ugly. Some family members ended up estranged and the business suffered, along with the family relationships.
Other firm clients have gone through similar tragedies but had a succession plan that addressed the unthinkable. Those plans helped them through a very difficult time.
TRANSFER OF WEALTH
Whether you plan on selling or handing the business over to heirs, you want to minimize taxes and that takes some advance planning. How do you maximize the capital gains exemption? Is a family trust the right answer for you? There are potentially changes coming to capital gains exemptions that business owners need to be aware of.
Done right, a succession plan is an invaluable safety net that will generate more value in your business and allow you a planned, confident exit. Be proactive, not reactive.
For more information, contact Shane King, CPA, CA at 604.536.7614 or [email protected]
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