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As part of being prepared, companies need strategies if the founder passes away, becomes disabled, or if the market shifts significantly.Piotrekswat/iStockPhoto / Getty Images

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Many entrepreneurs have spent their lives building up their businesses in the hopes that it will fund a comfortable retirement – either by selling it or continuing as an owner as their adult children take over.

But few entrepreneurs have mapped out a strategy for a successful sale or had the tough conversations with their family to ensure the business is being passed to willing and able hands, says Matt Langsford, senior portfolio manager and senior investment advisor with Langsford Wealth Counsel at Canaccord Genuity Wealth Management in Oakville, Ont.

“There have been some notable studies that have basically said that we’re in a really poor state as far as preparedness overall for this huge tsunami of business exits that’s going to happen over the next 10 years,” says Mr. Langsford, a family enterprise advisor (FEA) and a certified exit planning advisor (CEBA).

“And if we don’t get this right, there’s going to be a massive amount of wealth destruction,” which has a “huge ripple down effect” on the economy, he adds.

In Canada, it’s expected that more than $1.5-trillion in business assets will be in transition between 2018 and 2028 as almost three-quarters of entrepreneurs – many of them retiring baby boomers – plan on exiting their businesses, according to a 2018 Canadian Federation of Independent Business survey. More than half don’t have a plan.

“It’s a daunting task and you need a process,” Mr. Langford says.

The first step for any entrepreneur wanting to transfer their business to the next generation, pass it to a management buyout group, or sell it to a third party is to start thinking about a plan and get professional advice years before they’re forced to, he says.

Education is a key component and how he starts the process. That includes determining the owner’s understanding of the issues and the “gaps in their existing planning,” Mr. Langford says.

“We dig in a little bit more about understanding how prepared they are on a personal, financial, and business level to actually go to market and successfully sell – ideally for top dollar.”

That also requires the owner’s accountant, lawyer, and financial advisor to collaborate as part of an exit planning team, which may also need other professionals with specific skills such as negotiating transactions with private equity firms.

It’s “critical to make sure this planning is not being done in a vacuum,” he says.

Other key plans to consider

Surprisingly, many entrepreneurs are more likely to sell their business rather than pass it to the next generation or a management team, Mr. Langford adds.

But as more businesses are put up for sale, it’s turned into a buyer’s market, which is why being prepared is essential, he says.

It takes about three months to gather information, three to six months to formulate a plan, and up to two years to prepare the owner and business for a sale for the best price or an ownership transition, Mr. Langford says.

As part of being prepared, companies need strategies if the founder passes away, becomes disabled, or if the market shifts significantly, he says. On the personal side, the owner’s personal will, estate plan, and powers of attorney need to be current.

There are other key plans required as well. Some considerations include whether the proper shareholder agreements and buy and sell provisions are in place, or if there’s proper insurance to cover any funding requirements that might arise from an ownership transition.

Also, if they want to sell, do they have up-to-date data to present to potential buyers? Other things to consider are whether the company is diversified or does it have only a few main customers. Is the balance sheet strong or does it need to be shored up?

Passing the business to the family

Transitioning a company to the next generation can be more complex, and fraught with emotion, Mr. Langford says, particularly for a company that’s been in the family for generations.

The current chief executive officer – the matriarch or patriarch – may be reluctant to give up that power and may want to chair the board to keep a hand in the business. Also, it needs to be ensured the next generation wants and has the skills to take over the company or remain as owners with a professional management team.

“It’s not an all or none equation here,” he says. “If you don’t have proper communication systems and governance in place, you can run into some major issues that are more driven by emotion versus logical thinking.”

Judi Cunningham, founder of Trella Advisory Group Inc., who also has the CEBA and FEA designations, facilitates those difficult conversations between entrepreneurs and their families. Her firm has people with the technical skills to assist with a transition or sale, as well as expertise in counselling and conflict management.

“The goal, ultimately, is to help families get wherever they say they want to get to,” she says.

If a family hasn’t done the right relationship work to sell the company, a deal can often fail at the last minute because “they weren’t ready to sell the business,” Ms. Cunningham says. She facilitates that dialogue, so everyone is on the same page.

The first step is to get a valuation done of the business, she explains, as often, entrepreneurs “believe the business is worth more than what it’s actually worth on the market.”

If a sale is not the desired path, the next step is how a transfer affects the whole family. Many entrepreneurs assume they’ll transfer their business to their kids equally. But that rarely works as one adult child might not want to be involved. And it can be a challenge to split assets equally and fairly when an operating business is the biggest asset, she notes.

Getting the children involved

Before, most parents would make these decisions without conferring with their offspring, figuring “it won’t matter, I’ll be gone,” she says, even if it means their kids fight over assets. But then she asks: “Is that the legacy you want to leave?”

Now, most entrepreneurs realize that old-school way of thinking doesn’t work, and they collaborate with their kids, so they have the expertise to take over the business when the time comes.

“When the kids have made the decisions … they can live with some of the outcomes,” she says.

Ms. Cunningham adds she interviews everyone involved and reviews their estate plans, wills and other documents to determine the assets included and their value.

Some entrepreneurs and their families turn to her group after they’ve been trying to work out a transition or sale of their business for years and need help making decisions.

“They’re tired,” she says, and they “just can’t wait for this to be done.”

They’re also often dealing with three generations at once – the entrepreneur, their kids, and their grandchildren – which is complicated. Entrepreneurs also must factor in their cash needs in retirement, so they don’t just pass those funds on with the business or to the next generation, Ms. Cunningham adds.

Business owners also need to figure out what’s next in their life if they sell or transfer the business. A 2017 survey from The Exit Planning Institute in the U.S. found that 75 per cent of business owners “profoundly regretted” selling their business within 12 months of signing a deal.

More than just finances need to be considered when you’re planning an exit, Mr. Langford says.

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