Dollars & Sense
Planning a Business Exit Strategy
By Angela Altass
Over $2 trillion in business assets could change hands within the next decade as over three-quarters, or 76 per cent, of small business owners are planning to exit their business, according to Succession Tsunami, a new report by the Canadian Federation of Independent Business (CFIB).
The most common obstacle for success planning for half, or 54 per cent, of small business owners is finding a suitable buyer or a successor, states the CFIB report, noting that nearly half, or 43 per cent, of owners are struggling to measure the value of their business, while 39 per cent say the business is too reliant on them for day-to-day operations.
The report also indicates that the pandemic affected owners’ exit timelines with nearly four in 10 owners having changed their business exit dates as 17 per cent accelerated their timeline, often as a result of stress, and 22 per cent delayed it by at least one year, often because they have incurred too much debt or the value of their business had gone down too much during the pandemic.
“Planning an exit strategy or succession plan is crucial for securing both your future and that of your legacy and it is advisable to begin this process as early as possible,” says CFIB Economist Laure-Anna Bomal, who is one of the authors of the report. “Having a well thought out plan in place helps to ensure a smooth transition when the time comes to sell or transfer ownership.”
The process of developing a succession plan typically takes several years to complete, states Bomal, adding that several phases are involved, such as:
Business sale readiness: This phase takes 12-24 months and involves formalizing the business to be ready for sale, including activities such as business valuation, bookkeeping, and developing a seller plan.
Engaging the buyer: This phase takes six to 12 months and involves engaging potential buyers to assess their interest in the business. Activities during this phase may include negotiating with potential buyers and tax planning for the seller.
Due diligence: This phase takes one to 12 months and involves drawing up an agreement and timelines for the sale.
Financing: This phase takes one to 12 months and involves locking down buyer financing. This may include activities such as developing a buyer’s business plan, securing financing partners, and finalizing arrangements.
Transition: This phase takes zero to 60 months and involves managing the transition of ownership and leadership, including mentorship and transition planning for corporate knowledge and authority relationships.
“It involves evaluating the company’s vision and growth plans, identifying and grooming potential successors, developing a plan for transferring ownership and leadership, and addressing any potential issues or challenges that may arise,” says Bomal. “CFIB has a partnership with Succession Matching that offers assistance with succession planning. The recommended timeline for this process is typically between two and seven years, according to Succession Matching.”
With a CFIB membership, business owners get 50 per cent off a formal succession planning program and a free one-year membership with Succession Matching. As an online community of business buyers, sellers, and succession planning professionals, SuccessionMatching.com provides access to resources and connection with members and partners to assist in transitioning a business. Succession Matching is a two-sided marketplace that uses a unique algorithm to match business owners looking to sell with entrepreneurs looking to buy.
“Throughout the several years required for the succession planning process, business owners will require bookkeeping, accounting, legal support, and valuating at different stages,” says Bomal. “To assist businesses with succession planning, CFIB has developed a range of free tools, including a website (www.cfib-fcei.ca/succession), webinars, and checklists. While some owners may feel capable of managing the process themselves, seeking the help of an advisor can be an option for a smooth exit and transition to the next stage of their life.”
Succession plans can either be informal or formal, with formal plans providing more benefits than informal ones, says Bomal.
“Formal plans outline the process and schedule for the owner’s withdrawal, including legal and supporting documents,” says Bomal. “They involve input from various advisors, such as accountants and legal professionals, to address financial, tax, and legal considerations, including the mechanics for the transfer, a process for resolving disputes, and a timetable. On the other hand, not having a structured plan can be a source of anxiety and uncertainty.”
Based on the CFIB report, which is available at www.cfib-fcei.ca, business owners with formal written plans feel more confident about a successful exit process, with 91 per cent feeling confident compared to 82 per cent for informal unwritten plans and 59 per cent for those without a plan.
“If time allows, business owners should seek recommendations for advisors from trusted associates, interview three or four, and choose the most comfortable and trustworthy person to handle their finances,” states Bomal.
In the CFIB report, retirement, at 75 per cent, is cited as the top reason business owners are leaving their business, while 22 per cent are burned out and 21 per cent want to step back from their responsibilities as owners. However, only one in 10 business owners, or nine per cent, have a formal business plan in place.
“It’s essential for business owners to have a well-planned exit strategy,” says Corinne Pohlmann, senior vice-president of national affairs at CFIB. “Planning for business succession is a key factor in ensuring that Canada continues to have a healthy small business community.”
A majority of owners rely on the sale of their businesses to fund their retirement, notes Bomal. The CFIB report indicates that 49 per cent of owners will sell their business to an unrelated buyer, while 24 per cent will sell to a family member and 23 per cent to their employees.
“If they can’t sell their business, they’ll have to delay their retirement,” says Bomal. “That adds another stress to the owner, their family and employees.”
The CFIB report shows that 43 per cent of business owners reach out to accountants to help them develop a succession plan, while 24 per cent work with lawyers and about two in five owners, or 39 per cent, rely solely on themselves to develop a plan.
“It doesn’t matter whether you are planning to transition in the next year, two years, or 20 years, a succession plan is the foundation for that transition,” says Alison Anderson, founder and CEO of Succession Matching. “Most deals break down during the negotiation because business owners are not actually ready on paper to transition their business.”
