Retiring or stepping down? Plan your succession

Domino effect – What happens to your business when you step down?

Face it. You’re not going to work forever. So what is going to happen to your company when you do step back or retire? Many business owners have no plan in place for the succession or sale of their business. I’m going to discuss some of the more important issues you should consider. Remember, it’s never too early to plan.

What are the owners’ objectives?

Many business owners find it difficult to prepare for their exit from the business because they do not have a plan for their time when they no longer have to work. Here are some questions to consider:

  • Have you decided when you want to leave your business? If yes, when?
  • Have you decided to whom (family, employees, outsiders) you want to sell/transfer your business? If yes, who?
  • Do you know the amount of annual cash flow you will need after you leave your business? If yes, how much? Here’s a great article by Liam Shorte on calculating your retirement needs.

How much is your business worth?

I often find that business owners have an inflated view of what their business is worth. It’s a worthwhile exercise to commission a valuation well ahead of the intended sale date so that you can determine if you need to take steps to increase the value of your business. Here are some thoughts to consider in regard to business valuation:

  • If you sold your business today, would the net proceeds and your other assets provide you with an income stream that would allow you to be financially independent?
  • What do you think you could do to increase the value of your business?
  • How concerned would you be if a valuation of your business showed that you may not be able to achieve your future financial goals?

To what extent does your business depend on you?

A business that relies on its systems rather than the owners, is inherently worth more. Systems can make a huge impact on the efficiency and hence profitability of a business. As well as improving day-to-day control, you will see a key benefit when you come to sell the business. Consider:

  • How confident are you that the business could survive the incapacity or death of a key owner or senior manager?
  • To what extent is your team constantly working on your internal systems and processes to make your business more effective?
  • How well documented are your business’ policies and procedures?
  • How confident are you that your team members carry out the systems and processes as well as you do?

Minimising tax

Tax is one of the certainties of life, but there is no point in paying more than you need. Proper tax planning can lower and defer the tax you pay, freeing up cash for investment, business or personal purposes. It’s important to consider the tax saving options in your business and financial transactions e of that.

Discuss these questions with your accountant to ensure you structure your business to minimize your tax liability in the event of a succession:

  • How sure are you that your business tax strategy is aligned with your personal goals?
  • How sure are you that your existing business structure is the most effective for minimising your tax bill?

Planning for the involuntary exit

Business contingency planning prepares for the issues surrounding what happens in the event you become incapacitated. Put in place appropriate mechanisms such as a buy-sell agreement to provide adequate funding for your business and to minimise the impact on performance.

Here’s a checklist of questions, should the worst happen:

  • Do you have a clear set of instructions as to what should be done with the business if you were to die or become permanently disabled?
  • If you have multiple owners, do you have a current buy-sell agreement in place?
  • When was the last time your buy-sell agreement was reviewed?
  • How confident are you that it covers all potential events?
  • How confident are you that any insurance purchased in connection with a buy-sell agreement is properly coordinated with that agreement?
  • Do you provide any incentives to your key employees to stay with the business if you (or another key person) were to suddenly pass away or become permanently disabled?

Other considerations

Discuss all of the above and the following checklist with your spouse/significant other/business partner(s).

  • Aligning personal goals
  • Asset protection
  • Insurances
  • How you will invest any funds received in a succession event
  • How to grow your business by increasing sales and/or profitability if there is a gap between current valuation and your required valuation

If you have a proactive accountant, they can facilitate the discussion and help you put together an action plan.