Between a pandemic, inflation, interest rates and potential recession, there’s not an entrepreneur on the planet who hasn’t had to tear up at least part of their business plan over the past three years. Now, with economic concerns continuing for the foreseeable future, many are wondering how this will impact their succession plans.
A recent Canadian Federation of Independent Business (CFIB) survey found that almost two in five owners have moved their exit dates. The report revealed that 17% of owners accelerated their timeline largely due to COVID-19-related stress, while another 22% are delaying their plans by at least one year because they’ve either taken on too much debt or the value of their company has declined.
John Paniccia, BMO Private Wealth’s Vice President and National Director of Business Advisory and Succession Planning isn’t surprised by these numbers given all the pandemic – and now economic – stress owners have been under. Many of the owners he’s spoken to are thinking carefully about their futures.
If you do want to plan an exit, there’s a lot to consider. Here are just a few things to think about.
Plan ahead
Transitioning out of a business is inevitable, says Paniccia, regardless of whether it is forced or planned or whether a business will be sold or transitioned to the next generation. You never want to address succession items in a crisis, yet that’s the situation many owners may find themselves in. The CFIB reports that only 9% of business owners have a formal succession plan in place. “Succession planning is a process not an event and you want to plan when you’re not forced to in order to ensure business continuity, preserve and enhance business value, and allow for flexibility in exit options and timelines.” says Paniccia.
Succession planning should start at least five years in advance of an exit, he explains, but the conversation could start much earlier, particularly if the owner has significant assets tied up in the business. “When you plan in advance and direct efforts towards working on the business versus working mainly in the business, you de-risk that business over time allowing for flexibility in exit options and more favourable outcomes.”
Even if you’re not sure on the timing of your exit, it’s important to identify potential risks in the business early and work to mitigate and/or reverse them, notes Paniccia. “Where we see risks associated with owner overreliance for example, it’s important to look for ways to make the business less reliant on you over time, such that non-owners or management become capable of managing the day-to-day operations, inclusive of well established documented processes and procedures to help create a smoother and more favourable handover whether a sale or family transition.”
Putting success into succession
While certain private businesses may struggle to ascertain their value, COVID-19 and the current mixed economic environment has made understanding a company’s worth more challenging, notes Paniccia. “Business value is based on the expectation of future cash flows, and we’ve seen some businesses that have regressed in their business model, or the cash flows and income have decreased,” he says. “The question is: Is that representative of future cash flows and is the company positioned to rebound from that?”
At the same time, Paniccia says he’s also seen companies enjoy significant growth during the pandemic, which then begs the question as to whether that growth is sustainable. “A lot of the conversations today with clients relate to the complexity in establishing valuation of the business because it is contingent on expected future cash flows from a deal perspective.”
While owners can’t control the economy, they can find ways to de-risk their business so that when the time comes to exit, they’re in the best possible position to sell. One way to do that is to make sure the business isn’t overly reliant on you in the day-to-day operations.
“Business owners often are the business and the business would falter in their absence. The key is to build an organization that can operate successfully in your absence,” Paniccia says. “According to individuals who have transitioned their businesses, this accounts for 80% of the planning, but is often initially overlooked.”
For smaller businesses especially, most of the work around succession planning is about separating the owner from the rest of the company. If an owner is too involved in its operations, a significant portion of the plan could be geared toward creating a second layer of management to help the business thrive on its own and enhance business value. A common cause for failure in succession relates to a failure to let go or refusal to delegate leaving the business exposed should an unforeseen event happen, Paniccia says.
Family involvement in the business can be another wrinkle in a succession plan. “For those that have children in the business, they’re very concerned with how they can maintain family unity during the transition,” Paniccia notes. “Ongoing, effective communication is one of the main keys in managing successors rivalry and divergence over expected roles.”
If these, and other, issues aren’t given proper consideration well ahead of time, exit options become limited given the risks in the business leading to unfavourable results from an economic as well as family perspective.
No avoiding the exit
It’s important to remember that a business transition is inevitable, whether it’s planned or not, so start thinking and planning well in advance. “Every business owner will leave their business and every business will be sold or transferred,” Paniccia says. “We want to know what our clients’ goals are with the business and their family well in advance so we can help them throughout the process, leading to a successful transition while maintaining family harmony. Leaving it too late poses several risks for business owners and their families.”
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