CIBC recently estimated that $1.5 trillion in business assets will be transferred from the current business owners during the next five years.
These businesses employ almost two million people and account for at least 50 per cent of Canadian GDP (gross domestic product).
This column is the first of a two-part series on business transition planning, specifically for family businesses.
The aging demographic of the baby boomer business owners has created a huge demand for professional transition planners.
Transition is unavoidable but, unfortunately, proper transition planning is merely optional.
A transition can be forced on a business owner through illness, death, divorce, or a collapse of an industry sector.
More commonly, it is the simple fact of age and inclination that drives the desire to transition out of one’s business. The mature business owner could be seeking more down time, an opportunity to enjoy spending some of the decades of retained earnings, to sell the business in a seller’s market or to transition the business to the next generation.
One of the first steps in transition planning is to have the business assessed.
This involves evaluating the business for its viability as an ongoing enterprise and valuating the assets or the shares of the owning corporation.
Simply put, you want to show your business has long-term potential as a viable business and indicate its value with a sale price.
If the plan is to sell, then the business owner must speak to their lawyer, accountant, and other professional advisors.
Many businesses have been constructed around the personal needs of the individual business owners.
In most cases these personal arrangements need to be modified to maximize the value of the business. For example shareholders’ loans need to be paid back, personal assets carried on the company (i.e. boats and other toys) need to be removed, and key employees – who would remain with the business after the sale – need to be secured through long-term employment contracts and appropriate incentives.
On the personal side, it is very important that the business owners have their planning documents current and consistent.
These include wills, power of attorney, and health-care directives. The incapacity of a business decision-maker can create enormous problems for the day-to-day operations if proper substitute authority documentation is not in place.
If the desire is to sell, then commonly a business broker is retained to properly manage and market the business. In many cases the business owner will have connections within the industry and a merger or friendly takeover can be arranged directly between the two business owners.
In this case, the brokerage commission is avoided.
If the decision is to transfer the business to the next generation of family, a very different process is required.
Family business succession is a minefield for the untrained advisor.
More than 90 per cent of businesses in North America are family-owned or controlled.
Unfortunately, family business succession has a striking failure rate.
Only approximately 30 per cent of family businesses survive into the second generation and only 12 per cent endure into the third generation.
As a certified family enterprise advisor, I’ll share successful transition tips and tricks in part two of this series that will significantly improve your probability for success.
– John Becker is the senior lawyer at Becker & Company in Pitt Meadows. John has been a lawyer for more than 30 years, and now focuses his practice on corporate and commercial law, real estate and business succession planning. Send questions to: email@example.com.