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Where Will Your Business Be Without You?

13/07/2012


This article was first posted on www.profitguide.com

Exit planning is a critical part of the life cycle of any business, but focusing on day-to-day operations can make it hard to sit down and go through the process. Developing a succession plan is often the biggest single financial and personal process an individual will go through.

A strong exit plan is really a continuity plan that outlines the process of transition, whether that transition is an outside sale or passing the business down to the next generation. Only about 30% of businesses survive a transition. This is alarming given that, statistically in Canada, well over 50% of the average owner/manager's personal wealth is invested in the family business.

It's important to realize the way you manage your business today has implications for tomorrow. By making a succession plan a 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.

It is best to start thinking about a succession plan several years before you think you anticipate needing one. A proper lead time will allow you to choose a transition strategy and identify and groom potential successors. It should also give you time to address any structural issues, ensuring the business is stripped of any redundant assets and establishing the best value possible for the business.

When putting together an exit plan, the key areas of focus are: succession (who, how and when); maximizing value; asset management; retirement needs; and tax planning. You need to understand where the business is now, where the business needs to be and what needs to be done to fill the gap.

An exit plan has a lot of components. For example, there is the retirement plan piece. You need to work with your wealth advisor to ensure that the exit strategy works with your expectations for retirement. The plan has to be legally effective, so lawyers have to be involved. A good succession planner will take a team approach and work with your advisors to deliver a catered plan.

Working with a succession planner, you'll analyze the current value of the business –including examining statements of net worth, analyzing cash flow, and conducting industry research and market analysis. You'll also look at how much is required to fund retirement and ways of building value in the business in order to meet those needs. Working with a tax specialist, you'll be able to ensure that your tax structure allows maximum flexibility for estate planning, income and capital gains consideration.

The basic steps in putting together a complete succession plan:

  1. Collect information
    The key to effective exit planning is a comprehensive understanding of the business owner's objectives. A series of checklists and interviews are used to help clarify objectives and develop timelines.

  2. Analyze data
    During this step, your advisor works with you to understand where the business is now, where the business needs to be and what needs to be done to fill the gap. Data analysis includes activities like examining statements of net worth, analyzing cash flow, industry research and market analysis. It also looks at how much is required to fund retirement and ways of building value in the business in order to meet retirement needs. Analysis is conducted during the comprehensive planning process, in which the pros and cons of various options are explored and a clear action plan is developed.

  3. Complete the plan
    Ultimately, a plan is developed with value-enhanced recommendations and the potential impact of those recommendations on value. A full report is put together and a recommended action plan is provided for each of the legal, tax, insurance and any other planning professionals on your team.

  4. Implement
    The actions taken in this step vary. Activities may include: personal and corporate tax structuring, a business valuation, revising shareholder and employee agreements, refinancing and the implementation of the value enhancement process.

Your business has been more than just your livelihood. In many cases, it represents a life's worth of hard work and commitment. Be smart and make sure that you get the most out of your succession by taking the time to plan ahead; you owe it to yourself. It is what is best for your future and the future of the company you built.