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It’s estimated that 25 per cent of business owners in the Cowichan Valley plan to exit their businesses within the next five years. If you are in the same position, you need to start planning your exit strategy now. It often takes five years or more to identify and groom potential successors, clean up the company’s structure to ensure it is stripped of any redundant assets without incurring tax, and work towards maximizing the business’s income and its value.
Identifying potential successors is often the most challenging part, particularly if there are next-generation family members working in the business. As a business owner you have to carefully consider whether family members working in the business are interested in or capable of running the business, as well as other family who may not be involved in the business. It can be difficult to divide the owners’ estate equitably amongst the family when a large portion of your net worth is tied up in the business.
Key employees or employee groups are other potential successors. However, you may need to look at providing partial financing. This should be explored well in advance, as you may need professional assistance to help structure a financing deal that works for all parties.
Whether your goal is to transfer ownership and management to family or to maximize the value of your business in an arm’s length sale, planning for the effective succession of the business itself is a key consideration.
Many businesses are too dependent on key people because their knowledge and expertise have not been documented. When they move on, their knowledge goes with them. To avoid this, it’s important to document the strategies, tactics, processes and procedures that have made your business successful. This will also enhance the value of your business in the eyes of a potential purchaser. Remember, the more valuable you are to your business, the less value your business has.
Once a successor is identified, it’s time to focus on maximizing value and “cleaning up” the company. Knowing what your business is worth in advance can assist you in developing a negotiating plan and help you address those issues that may detract from its value.
Demonstrating good cash flow and profitability is important, but potential purchasers will also want to see:
The amount and timing of tax paid on a business sale can significantly impact your retirement. Many tax restructuring transactions must be completed long before the sale process begins. Talk to a taxation specialist well in advance to ensure that your tax structure allows maximum flexibility for estate planning, income and capitals gains considerations.
Remember, if you are in business, it is your job to determine how you are going to get out of business. Otherwise, you may be faced with limited succession options – and less cash in your pocket. Having a plan allows you to proactively build value in your business so you’re able to exit on your terms.
Cindy Wilson, CA and Christina Tipton, CA are Business Advisors with Meyers Norris Penny LLP. For more information, contact Cindy or Christina at 250.748.3761
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