Is There Life After Business?

Successful entrepreneurs know how to build their businesses through hard work, grit and dogged determination. They create success by “doing whatever needs to be done,” building something they are truly proud of, with the hopes of leaving a lasting business legacy. The thought of eventually exiting their business is always in the mind of any owner; however, the same attributes that make an entrepreneur successful are often the same ones that make it hard to step back and begin a life after business.

Being Too Valuable

How can you tell if your business is ready for sale? Ask yourself this one question (if you want a true answer, ask your spouse): “Am I so vital to the operations of my business that I can't step away?” If the answer is yes, then you have some planning to do.

In order to sell, your company needs to be able to operate in a way that allows a buyer to step in and successfully run it without you. In general, the more valuable an owner is to their business, the less valuable that business is to a potential buyer. This means the business needs to have less personal goodwill (value that is tied to your presence) and more business goodwill (value that is tied to the business itself).

Customers don't notice when the owner of your local franchise restaurant changes. The business continues to operate as usual and customers can expect the same product and service regardless of who is at the helm. For owner-managed companies, however, this effect can be more difficult to achieve. The philosophy of “doing whatever needs to be done” to make your business successful is now working against you. To prepare your business for sale we need to take you out of the business equation.

Four Pillars of Business Value

Building value in a business requires a look at all aspects of your operation to make sure they are working in concert. This may sound daunting, but in reality it boils down to four main areas:

Once these things are in place then you are well on your way to having a good plan.

Planning for a Smooth Exit

There are many things that must be done to prepare a business for transition of ownership – this takes time and planning. Because of this, it's a good practice to being planning for business succession at least three, preferably five, years before you want out.

Whether it's a sale to a third party, a transfer to a family member or a buy-in by an employee group, the same steps need to be taken. The good news is the time and energy you put into your exit plan will allow the business to be more successful, more valuable, and ultimately put more money in your pocket when it's time to walk away.

The rewarding part about succession planning is that it is all about you. You get to look into the future and say, “What do I want life to be like after I am finished with my business?” This often evolves into a family discussion to envision the kind of life your business's success could make possible.

Once you have a clear vision, planning lets your advisor assess the reality of the current situation and create a process to help you get from where you are to where you want to go. The plan will have many parts, some of which may have nothing to do with your business at all. But inevitably, the plan will include building and maintaining your business value and structuring the exit so that you get to keep the lion's share of the proceeds.

Keeping the Lion's Share

When we look at business succession, tax considerations are critical, especially if you want to maximize the proceeds of your sale. Depending on how your business is structured and exactly what you sell, the taxman could take upwards of 40% of the value that you have built. We would rather they take none, but that requires planning – and good tax planning usually requires time. Fitting into the Canada Revenue Agency's rules is key and there are some rules that require your company to be onside for a few years prior to exiting the business.

To get an idea of how tax plays a variable in business transition, here are a few questions to ask yourself:

• When you look at your company, are there assets in there that you do not want to sell with the business? Maybe it's a building that you plan to keep for future rental income or an investment portfolio that has been growing using low tax corporate dollars? If these are in your company, there is some tax planning to be done.
• Is your company able to sell its shares rather than its assets? Accessing the capital gains exemption on the sale of qualifying business shares can provide up to $866,912 of value for each shareholder tax free, if you meet the criteria.
• Do you need your money out all at once or will it be better to fund your retirement over time? If there is going to be some tax to pay there may be options to use multiple years of marginal personal tax rates to save taxes.

There are many tax considerations in a business transition, these are just a few. Any tax strategy will be unique to your situation, but make sure you plan based on the advantages they can give you.

There IS Life After Business

If you have done everything and have your business ready to sell, you don't have to sell it. If you have done a really good job and made yourself less central to the day-to-day operations, you may find you can take the time off your spouse really wants and still have a business that is building value and working for you. Then, when you decide you do want out (or something unexpected happens and you need out), you are ready; the work is done, and the transition can proceed as planned.

Preparing your business for succession is the second most important business decision you will make, right behind your decision to get into the business in the first place. For many this can be an emotional decision, but if it's done right it will be a good business decision – just like any other.

Are you ready to exit your business? Take our simple self-assessment and find out.

Take the Assessment

For more information, contact Wayne Lenihan, Regional Succession Leader, Lower Mainland at 604.536.7614 or [email protected].