Here are six tips:
1. Start early
While bigger companies often have well-established succession planning procedures, small business owners and private practitioners (doctors, lawyers, accountants) might not know where to begin when it comes to transitioning control of their operation.
So it's best to leave ample time to manage this process properly. And consult a succession-planning professional for guidance.
"Many owners invest time in planning when setting up a business and growing it, but not typically when exiting," says Abby Kassar, RBC Wealth Management's vice-president of high net worth planning services, noting that only 17 per cent of business owners have a formal succession plan, according to industry research.
"This usually leads to an unsuccessful passing of the business to the next generation."
Start the process early, she advises, "ideally three to six years before you plan to exit."
2. Assess carefully
Will you pass control of the business to a family member, your management team, or will you sell to an outside third party? If the plan is to transfer ownership to family or management, first be certain they actually want the job.
"Some people will put together a succession plan and sit down with the person only to discover they have no interest in taking over," says Lisa Kay, president and lead consultant of Toronto-based Peak Performance Human Resources Corp. "So you want to be sure you're targeting the right people and that you have shared objectives."
And be sure they're up to the task. Kay recommends doing a gap analysis to explore a successor candidate's technical competencies, as well as their soft skills, which are arguably more important in a leadership role. "Then you can identify whether they may need coaching or extra training," or if it might be best to go in a different direction.
3. Have an exit strategy
Bear in mind how your retirement will be funded, and if the sale of your business will generate enough in after-tax proceeds to cover costs in your post-working years. It's another reason to start planning early.
"A business owner may conclude it's premature to sell," says Kassar. "They may need to spend a few more years building up the value of the business to make it more attractive for sale." Rushing a sale decision can hurt you, particularly if you're selling to a third party. "You need time to find the right purchaser," says Chris Munn, a tax partner with Hogg, Shain & Scheck Professional Corp., a Toronto-based accounting firm. "You want to maximize the value of the business by getting all your ducks in a row."
It's worth asking if the business can actually operate without you and your niche expertise, Munn says. In some cases it can't, "and then you're basically unable to sell the business."
4. Understand tax implications
A good succession plan should account for tax implications. If your plan is to sell shares of your corporation to a third party purchaser, and you want a capital gains exemption (the lifetime exemption is $835,000, according to Kassar) you need to ensure that your corporation's shares will qualify.
There are various tax strategies a business owner can implement to multiply the capital gains exemption, via a spouse or children.
"Yet another reason we say start early and plan ahead," says Kassar.
You may fetch big bucks for the sale of your business, "but what really matters is how much you're going to be left with after you've paid the tax bill."
5. Communicate changes
Once a decision has been made to sell, it's important to communicate this news to your company's employees and management, and to clients (or patients, in the case of a health-care practice).
"You want all stakeholders to be comfortable with the transition," says Kay.
"So messaging is important here, and it should be in full support of the new person as they take on the role."
Health-care professionals are able to incorporate their practices as corporations, says Kassar, but they must transfer ownership of the practice to a professional who's qualified to work in that particular area of health care. "You can't sell to just anyone."
Accounting or financial services firms can more easily pass a book of business on to a larger or competing firm through a merger or acquisition.
Regardless of the arrangement, it's key to keep clients and patients in the loop if ownership is changing.
6. Provide support
It's not uncommon for a business owner to stay on through the transition, providing ongoing support to a successor as a paid consultant. "And as they're doing so, the new owner or buyer can pick up what they need to learn," says Kassar.
This could also be done via regular phone calls or emails, with the former business owner available when questions arise.
"There should be a defined agreement as to what the departing business owner will commit to ensure a successful transition."
And the new owner shouldn't be too quick to show the old owner the door, Kay says.
"Their experience and the knowledge stored in their brain is valuable."
This article was written by Ryan Starr from The Toronto Star and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.
