Business succession planning is important for all business owners, not just those who are nearing retirement. Yet only 49% of Canadian business owners have a succession plan in place. And of those that do, only 8% have a formal written business succession plan.
The top 3 factors hindering business owners from putting a business succession plan in place include:
- Difficulty finding a buyer or suitable successor
- Uncertainty in valuing the business
- The business is too dependent on the owner’s active involvement
The strategies for effective business succession planning shared in this post can help you overcome those barriers so your business is ready for a smooth transition when it’s time to transfer ownership.
The Importance of Business Succession Planning
If you’re like most business owners, you spend most of your time focused on the present and working to build your business today. The day you leave your business is not on your radar at the moment. But there’s tremendous value for you and your business in taking the time to create and implement a business succession plan now.
We don’t like to think about death, but it’s a fact of life. What will happen to your business if you pass away unexpectedly?
Are you planning to run your business until you take your last breath? If not, how are you going to prepare your business for the transition to the new owner upon your retirement? How will you know who to hand things over to, how much to sell your business for, and what that process will look like?
A formal business succession plan ensures your business transitions to new ownership without hiccups or losses. Agreeing upon the valuation in advance simplifies the process and lets everybody win.
7 Strategies for Effective Business Succession Planning
For this post, we interviewed Charles Osuji of Osuji & Smith Lawyers in Calgary, Alberta. The law firm was established in 1980 by James Smith. When Mr. Smith was 74 years old, he began to think about retirement. That’s when Charles joined the firm.
In 2016, Mr. Smith and Charles put a business succession plan in place. The process took over a year and resulted in a seamless transition, with no lost clients or staff. In other words, their succession plan was successful.
Here are the 7 strategies Charles recommends for effective business succession planning.
1. Start Early & Make Changes Gradually
A smooth transition takes time. This is not something that works well at the last minute. Proper business succession planning can take years. Don’t rush it.
Osuji & Smith implemented the business succession plan gradually. This was intentional. They didn’t want their staff to be surprised or overwhelmed by sudden changes, and maintaining their client relationships was of utmost importance.
2. Choose Someone You Know & Trust
James Smith received multiple offers for his business before Charles joined the firm, but none seemed quite right. After working with Charles for a while, and eventually making Charles a partner at the firm, Mr. Smith was convinced that Charles was the right choice to take over the business. Charles had earned Mr. Smith’s trust.
Choose a business successor you know and trust. “You want someone with integrity, strong work ethics, and the capacity to carry on your legacy. You want someone who can carry the mantle of what you’ve built over the years,” says Charles Osuji.
3. Involve Independent Professional Services
You’re emotionally invested in your business. This can make it easy to lose objectivity. You might have blind spots. That’s why it’s important to use a fresh pair of eyes.
Involve the services of independent professionals to look into the paperwork and put documents together. Key advisors may include your banker, your accountant, other financial partners, or your lawyer. You may also want to hire a business succession consultant or a mergers and acquisitions specialist.
4. Collaborate on the Valuation
You must determine the dollar value of your business. It’s best to get an objective appraisal by a certified public accountant. Valuation is determined by various factors including inventory, revenue and cash flow, client base, etc. At the very least, there should be a high level of collaboration between the buyer and the seller.
5. Consider Share Purchasing
Osuji & Smith decided on share purchasing instead of asset purchasing. This allowed them to maintain the history and continuity of the business. Charles Osuji could keep the building, the employees, and the brand. The biggest change was simply the ownership. This is extremely important for businesses that rely on strong recurring customer relationships.
6. Preserve Business Relationships
Charles Osuji describes the value of preserving business relationships: “99% of our clients are because of the personal relationship. It’s not necessarily because of our name. We didn’t want to lose any of Mr. Smith’s clients. We wanted to preserve goodwill and provide a consistent, steady, seamless transition to maintain trust.”
7. Stick Around for the Transition
Even after Charles took over the ownership of the law firm, Mr. Smith stuck around. He was there throughout the transition and stayed on for a year. “His presence fostered confidence, goodwill, and continuity,” says Charles.
Create an Effective Business Succession Plan
An effective business succession plan means everyone wins.
- You win because you get a fair valuation for your business, enjoy a seamless transition, and ensure that your legacy is carried on.
- Your staff wins because the transition is smooth. They’re not caught off guard and they have plenty of time to prepare for any necessary changes.
- Your clientele wins because your plan preserves the service they expect from your business.
- The new owner wins because they receive the business at a fair valuation and they’re equipped and prepared to take over.
- Your business wins because the transition is strategically planned to benefit the business.
Don’t wait to create an effective business succession plan. Start now.
If you need help with this process or would like to be connected with an independent professional to consult with or advise you, contact us at Lease 1 Financial. We’re happy to help!