Business transfer: A seven-step guide

23 November 2020 by National Bank
Business Transfer

Transferring a business is an important step in an entrepreneur’s career. Such a transfer may have a major impact on your personal finances and retirements, so it’s important to prepare carefully. Whether to encourage the next generation or to ensure sustainability, our expert shares a seven-step business transfer plan.

How do you define a business transfer? 

Essentially, it’s when one management business passes on their power to another entity. A transfer can take many shapes, but regardless, it will affect the person at the core of this change because, according to Stéphane Bourgeois, Director, Business Transfer at National Bank, transferring a business isn’t just about laws, taxes and numbers. “Entrepreneurs have often devoted much of their life to building their business. The thought of handing over the reins to their successors can make them very emotional, so you also have to manage these emotions,” he adds. 

Many entrepreneurs also depend on the sale of their business to enjoy a comfortable retirement. That’s another reason why you should plan carefully for your business transfer. “The entrepreneur has to know how much they need to retire and ensure that their business’s value is in line with that amount.”

1. Plan your business transfer far in advance

“Selling or transferring your business can take several years. That’s why it’s important to prepare well, not just for your business, but for yourself too,” asserts Bourgeois.

Planning your business transfer of ownership far in advance is an integral part of sound management, and there are many advantages to this:

  • You’ll increase the chances of maximizing the value of your business in the eyes of those who are interested in acquiring it, because you’ll be sending the message that the future of your business is important to you. 
  • If you’re transferring your business ownership to a family member, this will allow you to maintain a peaceful relationship with your family. 
  • You will help your successor improve their ability to perform their job. By planning the transition period with them, you will help them get a handle on the culture and the way your business works, and it demonstrates your support to the new management group. 
  • You’ll minimize the tax impact on your personal wealth. 

2. Define the objectives of your business transfer

With the help of experts like a transfer manager and an account manager, start by determining the objectives of the transfer. That way, you’ll set the foundations for your transition plan or succession plan, which will make the ensuing steps easier. 

How do you determine your goals? Ask yourself the following questions, and be objective in your answers:

  • Do you wish to take a complete step back from managing the business? 
  • What will your income be in the next 10, 20, 30 years? Or how much do you need for your retirement? 
  • Who do you want to entrust your business to?
  • Is your business’s survival important to you? 

3. Identify your successor in your succession plan

Who will be taking over? This is undoubtedly one of the most delicate questions when it comes to business transfers. There are many possibilities. For example, you could consider selling your business to family members, to key employees, or to an external buyer. 

Once again, make the best choice for you, taking into account your values and your goals. “Did you build your business for your children? Do you want to make as much money as possible? Do you want to ensure the future of your business at all costs, going as far as to exclude your family from the process? These are obviously difficult questions. There are experts that can help you have these conversations and point out any blind spots.”

To help you figure things out, here are different kinds of transfers you could consider:

  • To an employee: You could decide to transfer your business to a manager, a member of the management team, etc.
  • To a family member: If you choose to transfer your business to family, the main challenges will be interpersonal, according to Bourgeois. “You’ll have to be careful about how you proceed with knowledge transfer and have a transfer plan. Not every member of your family will be right for the job. You might have to make some difficult decisions. If that’s the case, we often recommend having a family meeting alongside a specialist to help temper the discussion. 
  • A mixed transfer: This is when you transfer the business to family and to employees. “We’re seeing this trend more and more. When there’s a large age difference between the entrepreneur and the successors in their family, the entrepreneur can also appoint a more experienced employee, like a vice president of finance, to ensure the business’s survival.”
  • To another business: The operations will therefore be taken over by another business. This involves transferring one business to another. Here too, you have to prepare carefully.

Once you’ve identified potential successors, set up some meetings with them in order to evaluate whether they meet the criteria that you believe to be important. 

4. Determine the value of your business

Next, you’ll have to set the transaction price. To do so, you’ll have to evaluate your business objectively. “Entrepreneurs can sometimes be wrong about their business’s value. They may ask for too much, or sometimes even for not enough,” Bourgeois explains. 

Support from a business valuation professional is a precious asset. “Another important point is that if you’re evaluating your business now but plan on selling it in two years, it would be a good idea to do a second valuation when doing the transfer to confirm its accurate value, as many market conditions may have changed.”

5. Enact your business transfer plan

Now is the time to develop your succession plan, also called a transition plan. It must be built meticulously, and most of all, if should be relayed to everyone involved in the transfer, whether they’re part of your business or not. 

An excellent transition plan should address these questions:

  • Should you create a transfer committee, and if so, what will its role be?
  • What are your expectations? What are your successor’s expectations?
  • Do you want to remain involved with the business as a consultant or board member? 
  • Does your successor need training or assistance from a professional?
  • What’s the timeline leading to your successor taking over? 

Your succession plan may stretch over several months or even years, and it will have to be followed up on rigorously. It must be updated whenever changes occur within the business or the markets in which it operates. 

6. Transfer your property

Once you’ve reached this final step, you and your successor will choose the best way to finance the transfer, taking into account the implications with regards to tax, finances and regulations. To ensure success at this crucial stage, financing solutions offered by your bank may be helpful. Your transfer manager, alongside your account manager, can propose many solutions to you and the new owner. 

“Some people incorrectly believe that businesses are sold in a single payment. Increasingly, the trend is to proceed with a series of partial sales of the business’s shares spread over seven or eight years. For example, for family transfers, the children rarely have the required sum of money when the transfer takes place. That’s why they’ll often start with 30% of the business’s value; two years later, another portion will be sold; and so on.”

7. Surround yourself with qualified experts

Given the amount of planning and the information required at each step, Bourgeois insists on the importance of reaching out to labour law, tax and finance professionals to develop a transition plan. 

“Your account manager can guide you as you plan your business transfer agreement. We can even help you put together a support team thanks to our network of contacts and our experience, but also thanks to the human side of our abilities. Even though the first six steps are quite methodical, business transfers involve a fair share of emotions that also have to be managed.”

Want to learn more? Find out how the National Bank can help you transfer your business

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