Are you Ready to Pass the Torch?

from Joseph Pisani, National Manager of Franchising Services, Bank of Montreal.

All too often, succession planning is a step that principals put off because of the more immediate concern of running the business.

There is no argument that keeping up with operations, customer needs and markets is a full time job in itself, however it is important to find the time to develop and implement a succession plan. In not planning, you actually may increase your operational risk, reduce your sale options and ultimately limit the value you get for your life’s work.

Getting Started

There is little doubt that getting started with succession planning is the hardest part. While some see the task as overwhelming and time intensive, you can ignite the process by thinking through three key questions:

  1. What is important to me and the business?
  2. How much do I need to retire?
  3. When is a preferred time to leave?

With answers to these questions, your advisors can fill in the succession plan details with greater ease. One of the critical steps in this regards is getting advisors’ assistance in determining how much the business is worth and how this fits with your retirement needs and timing of. If the current business value is not enough, your advisors can explore strategies of building up personal assets in advance plus methods to enhance the business’ value prior to a future sale.

Realizing the value

Once you’ve determined a value, you can then develop a strategy for tapping into it. A successful succession plan is one that allows you to gradually make the transition out of a business management role while maximizing your personal financial security. Several routes are open to you. You can sell the business and invest the proceeds elsewhere, or sell a portion of your interest to achieve a greater diversification and better protect the value of your assets. If retirement is many years away, some wealth can be unlocked without having to sell at all. In any case it is important to really understand all the financial benefits that you may currently receive from being an owner operator. When adding up all the financial benefits you derive from the business (i.e. auto expenses, income splitting, medical benefits and salary) the actual total might surprise you.

Upon the full sale of a business, many of these benefits will likely go away and you will be reliant upon an investment income stream from the sale proceeds. Keeping in mind the current low interest rate environment, any investment income will likely be far less than your current financial benefits. While the risks of operating a business differ from holding an investment portfolio, carefully considering the potential for generating greater financial benefits through a graduated or delayed sale versus an immediate sale at what appears to be a high price, is a worthwhile exercise.

Who will take over?

Often the business is heavily reliant upon the principal(s) for its ongoing operation. Transferring appropriate duties and responsibilities to key employees at the right time can reduce this dependency and potentially create internal successors. At a minimum, this reduced dependency can make the business more attractive to buyers (and their lenders) who recognize the inherently lower ownership transition risk. Sufficiently transferring responsibilities also serves as a bit of an insurance policy as in the event of a principal’s incapacitation or demise, employees would be well suited to continue to run the business and preserve its value until a suitable buyer is found (or buy it themselves).

While doing nothing for succession planning is an option, developing a good succession plan puts you much more in control and creates stability. Knowing that you have a well-managed business that is not overly reliant upon any one individual for its success can give you greater latitude as to when and who you sell to. Employees and markets alike can take comfort (and likely value) knowing the direction the business is headed, family members know how they may fit into plans and ultimately it can provide principals and their families with greater financial security.


Jospeh PisaniJoseph Pisani has been in Commercial Banking for over 12 years. Joseph joined the Bank of Montreal’s Franchising Services Department in 2006. His past experiences include roles as Commercial Banking Account Manager, and operating a small business. Based out of Toronto, Joseph’s role as National Manager Franchising Services consists of identifying, developing and managing a portfolio of financial service programs aimed at facilitating financing and cash management products for selected franchise networks.

Phone: (416) 927-6025
Email: joseph.pisani@bmo.com

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