What does a "win-win" succession plan look like?

15 April 2024 by La Presse National Bank
Photography of two professionals for an article about business transfer

A company's valuation is often based on a multiple of profits. However, years of record sales combined with high interest rates means acquisition prices are quite intimidating right now. How can we recognize the efforts of current owners while giving the next generation the leeway they need to pursue their growth projects? Annie Clément, Director, Business Transfers at National Bank, highlights some best practices on the subject.

4 essential elements of a succession plan

Financial sustainability

Today's profits directly influence future valuation.

A business that is more structured and autonomous, without requiring the continuous presence of the owner, will be able to generate enough cash flow to make it sustainable.

"That's why a transfer is prepared from the moment of acquisition, by learning to delegate and dissociate oneself from day-to-day activities in order to adopt a leadership role instead," explains Annie Clément.

Stability and growth

On the cusp of retirement and after decades of working long hours, a business owner may find themselves comfortable with their current turnover.  "Investing in growth projects can make the company more attractive to sell at the best possible price," says Clément.

If you don't borrow or inject the funds you need to purchase new equipment, implement innovative technology or modernize infrastructure, such projects could then be entrusted to an internal or family succession.

Tax optimization

Allowing three to five years for a transfer gives enough time to target the next generation, pass on knowledge to others, develop a five-year plan, and optimize tax liability.

"In order for the sale of a small Canadian business to qualify for the lifetime capital gains exemption, the business in question must meet certain criteria for at least 24 months prior to the official transaction," emphasizes Clément.

However, there is a maximum amount. If a business owner is entitled to a capital gains exemption, it’s in their best interest to consult a tax professional to maximize it.

Smooth transition

This period also helps pass the torch to others as smoothly as possible to ensure the company’s sustainability. This is where family members or key members of the existing team can gradually become shareholders, or for an external successor to become familiar with the day-to-day operations.

"The transferor doesn't need to step back overnight ; it is even desirable for them to continue working on the growth of their activities," recommends Clément.

Pictogramme ampoule qui s’allume

4 key principles of a succession plan

Selling all the shares to one person is far from the only possible scenario; here are a few options that offer more flexibility.

Partial transfer

It’s prudent to check the interest and aspirations of a potential partner to ensure that they will be present until the end of the process.

A partial transfer allows you to acquire shareholding gradually, with a corresponding down payment. The transferor therefore entrusts an increasing percentage of their business to a specially chosen individual—usually a family member or a key person—to guarantee its sustainability.

Total transfer with balance of sale

Although 100% of the shares change hands, only a portion is paid immediately. The transferor agrees to receive the difference over a few years, from the company's income.

This strategy reduces the debt burden and provides more freedom to promote growth. However, it’s important that the former owner and the successor agree on their vision for the future.

Total transfer with financial partner

Teaming up with a family management office, a silent investor or an investment fund can ease the burden of taking over.

This partner acquires a significant portion of the shares, but entrusts the day-to-day management to a successor, whether or not they’re on site.

In exchangean assessment of the company’s current standing would be provided to demonstrate that the assets are continuing to appreciate in value, or a board of directors may be implemented.

Corporate merger or acquisition

A supplier or competitor, or partner or customer would be able to use its own valuation to acquire the business, thereby enhancing its activities.

Two companies with similar profiles could favour a merger and each become a shareholder in a new entity in proportion to their respective valuations.

The success of either of these transactions is dependent on communication as well as the compatibility of visions and cultures.

To learn more, find out how National Bank can help you with your business transfer

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