Succession Planning: Don’t put it off any longer

Canadians are aging. According to the Canadian Venture Capital and Private Equity Association, over the next 15 years, more than half of the country’s medium sized independent business owners are expected to retire. In southern Ontario alone it is expected that more than 56 per cent will need to retire in less than 11 years.

An estimated $1.0 trillion in business assets are expected to change hands over the next decade, representing the largest turnover of economic control in generations.

Most owner-operators feel it is too early to plan for business succession. Many rental companies are family owned businesses, but have they taken the time to understand the challenging issues they will have to address and the emotional decisions they might have to make when family members pass on? The majority of business owners have not even started to discuss their exit plans with their family members or business partners.

“Those statistics are unfortunate and the apparent lack of preparation could backfire on some business owners,” says Larry Klar, managing partner of The Succession Fund in Toronto, Ont., which provides private equity financing for succession transactions, partner buyouts and shareholder liquidity. Klar adds, “Succession planning should be a deliberate process and not a one-time event. Business owners should realize that the best time to plan is when you can afford the time to properly evaluate alternatives and seek input from professional advisors. Owners ideally never want to be forced to accelerate their succession planning.”

Business succession planning is an investment in the future of the company for the owners, employees and customers. Planning is the key to future success for everyone whose efforts have helped the business to grow. The existence of a succession plan emphasizes commitment to a company’s long-term growth and creates confidence among shareholders, lenders, employees and suppliers.

So, have you been putting off succession planning for your rental company? There is no time like the present to explore your options. This process will involve asking some tough questions and exploring scenarios that may not please all family members, shareholders, managers or employees.

Do you want to sell the entire company in due course? Do you want to sell some now and complete the rest of your liquidity later? Is it important to you that ownership remain with family members or managers? Do you want them to have control or just minority equity participation alongside a new owner?

Owners have various alternative options. The first step should be to have a professional business valuation firm prepare an assessment of the value of your company. It is important for the business owner to be realistic with respect to valuation expectations, or a lot of time will be wasted. Accountants and lawyers should be involved in estate planning and tax matters.

Answering these questions can be time consuming and should not be rushed. Most rental companies, and in fact, most businesses are not ready for the sale process to begin immediately. The valuation conclusion and business review process often indicates that some issues of management depth, capital structure and profitability should be addressed before proceeding, not only to support valuation expectations but also to have a more saleable business.

That is why many owners find a gradual exit less alarming than an immediate one, says Klar. “If you can prudently diversify the family net worth by taking some chips off the table now, you can better plan for the sale of the rest of the company, and probably at an improved valuation. This also generally leads to a smoother transition and gives the owner a better chance to evaluate next generation managers, to transfer business relationships and responsibilities and to identify and manage risks that a strategic buyer will consider down the road.”

Most family business owners do not build their businesses with selling them as a top priority, but more should. This involves drafting a written strategic plan for the future priorities and direction of their business and putting in place next generation management so the business can grow and prosper without them.

Following these steps and starting succession planning early will ensure an effective process, with due consideration given to the range of issues and emotions that family owned and small independent business owners usually face.