Who will take over? Three questions to ask before you start a transition plan

This article was originally published by Canadian Forest Industries on January 16, 2018.

According to a 2016 survey of logging contractors conducted by Canadian Forest Industries (CFI) and woodbusiness.ca, 56 percent of Canada’s contractor force is over 46 years old and 57 percent of contractors expect to be out of the industry within 10 years. Nearly a quarter of logging contractors plan to simply sell their gear at the auction, while 32 percent admit they have no plan at all on how they will exit their business.

These results are concerning, but not entirely surprising. Business owners live and breathe their business. No job is too big or too small when your company’s name and reputation are on the line. As a result, the amount of time dedicated to handling the day-to-day operations usually leaves little or no time for effectively structuring your business and planning for your transition into retirement.

Often, the biggest stumbling block is knowing where to start. Retirement is a huge topic and much can be written about each facet of the retirement planning process. My goal is to get you thinking about the three key questions you need to ask yourself as you contemplate retirement and develop your succession plan.

Even if you’ve already got a succession plan in place, it’s a good idea to ask yourself these same questions on a regular basis. Many factors can change during the succession process and it’s important to check in and make sure your plan is still on track.

1. What’s My Timeline?

How much longer do you want to work in the business before retiring or moving on? If you are 30 years old and want to work until you’re 65, your timeline for retirement is obviously a lot longer than someone who is 60 and wants to retire in five years. However, just because you have 35 years until retirement does not mean you shouldn’t start planning.

There are serious tax and legal issues in liquidating, selling or transitioning a business, so it’s important to start early and speak with professionals about the pros and cons of various possible exit strategies. The earlier you start planning, the more options you have available. For example, some tax planning strategies require two or more years to put in place. If you leave your planning too late, the strategy no longer works. Starting early also gives you the best chance to get top dollar for your business and pay the least amount of tax.

When considering your timeline, you need to also consider how you see yourself transitioning from the business. In other words, what does “retirement” look like to you? Do you see yourself making a clean break one day and never working again, or gradually reducing your hours and role in the business over a period of time? Everyone is going to have a different vision of retirement, the key is to determine what’s right for you.

1. How Much Money Do I Need to Retire?

More specifically, what is the annual after-tax income you need to support the lifestyle your want to maintain after you leave the business? Will you live in the same home? Drive the same truck? Do you plan to travel? As the saying goes, you need to “begin with the end in mind.” Then you can work backwards to where you are today and start making decisions that take you closer to where you want to go.

This is a particularly important question to ask if you are relying on the proceeds from the sale of your business to fund your retirement. If you’re always working head down in the business, you can quickly reach the point when you decide you want to retire – only to realize you’re not in a financial position to do so. In some cases, the business may not have enough value to meet your ongoing financial needs in retirement. In other cases, the business may not even be saleable.

By comparing your desired after-tax income in retirement to what your business is worth today, you can determine if your timeline is realistic and what steps you may need to take to increase the value of your business in preparation for sale.

1. How Do I Get Out?

Once you’ve decided what your desired timeline and how much money you need to fund your retirement, you need to ask yourself what is your ideal exit option?

There are generally three options that we consider when transitioning a business.

Liquidating Your Business

According to the 2016 survey conducted on behalf of CFI and woodbusincess.ca, 22 percent of contractors expect to simply sell at auction. If you have managed to pay down your debt over the years you will likely end up with cash left over; however, you will not get back the value of the business you have built. Employees and subcontractors will need to find new jobs. The impact of you closing your doors will impact more people that just you and your family.

Selling Your Business

Structuring a business for sale and finding a buyer both take time, which is why it is best to start planning early. Setting up your business so it is profitable, has experienced, well-trained staff in a good location with solid processes in place does not happen over night. Planning for your exit while you build your business will help ensure you have the things buyers are looking for when it is time to sell your business.

Potential buyers are most likely going to be a third party, such as a competitor or another company within the industry (12 percent per CFI survey), or key employees / managers looking to take over the business (9 percent per CFI survey). Generally, when selling to a third party there are two options: the sale of assets and the sale of shares. The purchasers normally want to buy assets to ensure they are not be acquiring any hidden liabilities and so the purchaser gets to increase the cost base of the assets purchased for tax purposes.

The seller, however, usually wants to sell shares to potentially utilize their Lifetime Capital Gains Exemption (LCGE), which was $835,714 in 2017. To qualify for the LCGE, the shares must qualify as a qualified small business corporation. Inactive assets such as real estate and investments may need to be removed from the company to ensure the company qualifies, which is one of the reasons it is important to have a corporate structure that allows for the ongoing removal of inactive assets and excess cash.

Transitioning Your Business to Family

According to the CFI survey, one quarter of respondents were looking at transitioning to family. This could be children, a sibling, or cousins working in the business. It’s important to understand transition planning is a process and not an event. Including family dynamics with the already complex issue of selling a business requires that you have a solid plan and ultimately arrive a common vision.

Successful transitions usually ensure that new owners and managers are clearly identified and trained and that there is an open dialogue with the free circulation of information. New owners and managers might not have all the skills required to do the job; therefore, it is important to identify them early so training can fill in those gaps. Bringing in the new owners and involving them in decision making and business management also grooms the new owners for a successful transition as they can learn from someone with proven business acumen. Lastly, the transferor’s acceptance of giving up control and ultimately leaving their place as the decision maker solidifies a successful transition.

A Final Word

Without question, there many steps you need to take to successfully exit your business, regardless of how you plan exit. Being well-prepared to leave your business will allow you to securely enjoy the lifestyle you have worked hard to achieve. By answering the three questions above and working with an advisor, you can ensure the value you have built for your business is protected. Remember, planning to retire is a process. Time is your ally, so use it.

To learn more about the right succession plan for your business, please contact Blair Traxler, CPA, CA, Business Advisor, Forestry & Forest Products Services, at 250.596.8313 or [email protected].