In 2004, Darcy Wiebe launched Focus Directional, a directional drilling company based in Calgary, and a few successful years later, he and his partners were millionaires – at least on paper.
But Mr. Wiebe and his four partners found themselves reinvesting the majority of their company's profits to keep up with demands from customers and the industry.
They began to look for ways to move equity out of the company, in order to “grow it with public money rather than our own personal money,” recalls the 38-year-old from his Houston home.
That's when the idea of selling became a serious discussion, and Mr. Wiebe and his team began negotiations with directional drilling supplier Enseco. The sale was completed in November 2009 and included $5-million cash and $45-million in common shares issued to the partners, moving Mr. Wiebe's status from “on paper” to a cash-in-hand millionaire.
A recent study from RBC showed less than 10 per cent of Canada's millionaire households inherit their fortunes. Instead, the majority earn their wealth, making Mr. Wiebe’s situation increasingly common among entrepreneurs.
Even though he reinvested his earnings into his new directional drilling venture, Focus Tools, Mr. Wiebe agrees there is an immense and often daunting amount of planning that must go into making this shift as smooth as possible and adjusting to life after business ownership.
Financially, the entrepreneur must look at the tax implications of the deal and whether or not he or she wishes to diversify an investment portfolio following the sale.
Many experts say that an owner’s exit strategy must also take into account the emotional aspects of no longer being at the helm of one’s business.
“We think about this from a really hard and fast financial point-of-view,” says Karen Adams, head of business banking for HSBC Canada. “But emotionally, I think it’s really tough for some entrepreneurs to say goodbye to businesses they’ve poured their wholes lives and hearts into.”
And these types of changes don’t often happen overnight, she explains. “Very rarely do you leave your business on a Friday evening and then Monday morning someone else takes it over.”
A transition period can prove a helpful solution for both the new purchaser and the seller, says Ms. Adams. “So you might want to negotiate that into any kind of sales agreement,” she adds.
Many entrepreneurs often end up with a lump sum of money after their sale, and this can be problematic too, explains Paul W. Lermitte, a family enterprise adviser with Assante Wealth Management.
“Most of these people haven’t had what we could call a ‘pot of gold’ before. They’ve been dealing with cash flow,” he says. “It’s not just about their RRSPs any more because they’re dealing with significant wealth.”
This is when a group of advisers can come in helpful.
“We try and have wealth education meetings with clients and a team of experts, and if we can, we create an advisory board of their accountant, a lawyer and a financial adviser or planner,” says Mr. Lermitte.
Giving up the information about the inner workings of a business can be hard for some entrepreneurs, who may have kept these matters private before, says Peter Stewart, business adviser with the Ottawa Centre for Regional Innovation.
“I always tell any of my clients to find someone you can trust, someone you’re comfortable with, somebody that you won't hesitate to pick up the phone and talk to,” says Mr. Stewart. “You want to be comfortable putting all that information forward, so I do encourage people to shop around a bit.”
In the end, experts say the hardest challenge for many business owners is to understand they are no longer in charge. But giving up control to the purchaser is necessary, even if the company takes an opposing route at the hands of the new owner.
“It's kind of like selling a house,” says Mr. Stewart. “If the new owner wants to paint it an ugly colour, you can't do anything about it.”
Some tips to make the transaction easier:
- Be prepared: Have company financials up-to-date and at the ready because potential purchasers want to have access to that information quickly. Also, start the planning process well in advance of the sale to avoid surprises.
- Everything is negotiable: From the length of time you stay on at the company after it’s sold to its assets, including employees, negotiate the terms you want into a contract that satisfies all parties.
- Communication: talk to the employees, the financial team, family, and other significant players in the company to make sure everyone is aware of the impending changes.