Making a smooth exit: Steps every business owner should take to plan for their succession

Making a smooth exit: Steps every business owner should take to plan for their succession

As a franchisee and small business owner, you probably dedicate most of your life to your business. You put all your savings and energy into it for years on end so it can thrive and truly succeed.

You experience more than your fair share of ups and downs, but press ahead because you believe in the business and want it to grow.

But what happens when it comes time to hand over your business and let someone else take care of what you have built with sweat and tears? You may be nearing retirement and counting on the sale of your business for your nest egg. You might be passing the reins to a family member you’ve been grooming for leadership. Or you might be considering your next business venture and need to finance the start-up costs. Whatever the case, you need a formal succession plan to ensure a smooth transition and
that your investment in your franchise business pays off.

The Canadian Federation of Independent Business (CFIB) has developed tips and resources to help small business owners prepare for the future:

First step: Create a formal plan
Many business owners have a general idea of how they would like to exit
their business, but just eight per cent have a formal plan in place. When done properly, a formal plan allows you to come up with the best option for your business’ continuance. It also helps you think through the logistics of exiting your business with the best return on your investment.

Think about how you want your business to grow and develop: do any aspects of the operation, such as management, need to change or evolve before you make your exit? Think about whether you will pass your business down to a successor, have management buy you out (or an employee buy in), or sell the business to a third party. Answering these questions will help you identify the steps you need to take to make your transition a success. CFIB members have the opportunity to discuss their options with one of our business counsellors.

Find the right person to take over Selecting a successor can be a very difficult decision, and not just because of the emotions involved. You may want to leave the business to a trusted family member, for example, but the Lifetime Capital Gains Exemption (LCGE) only applies on sales to unrelated parties, putting you at a disadvantage. After successfully fighting to get a LCGE and increase it over the years, CFIB has been advocating with government to extend the exemption to sales to family members, to give you more options when planning your business exit. In the meantime, you should be aware of all the tax implications.

On the other hand, if you decide to sell to someone outside your business, you might have a hard time finding the right buyer. CFIB has recently partnered with SuccessionMatching.com, an online community of business buyers, sellers, and succession planning professionals, and BizON, an online marketplace for buying or selling a business. Both services offer discounted rates to CFIB members and help small business owners find the right buyer for their business. Make sure to also consult your franchisor and review your franchise contract for any rules around selecting a successor and selling the contract.

Value and sell your business
It’s important to get an objective and accurate valuation of your business
before you sell it. This includes both tangible assets, like property and
inventory, and intangible assets, such as customer goodwill. Measuring your franchise’s value is not so much about its performance in the past, but about how well it will perform in the future.

Once you’re ready to sell, you will need to look at your personal income tax
and estate planning to ensure the sale is tax-efficient – especially if the sale of your business is your retirement plan. You will also need to consider if you want to be paid in a lump sum or through installments.

Finally, because you’re dealing with a legal contract with your franchisor on top of the tax implications of selling a business, you should consult your
own lawyer and accountant and have them review your franchise contract
and oversee the sale. Getting the best representation possible is the number one step in protecting your investment and ensuring a smooth transition for your business.

Start planning today
Proper succession planning is not a onetime exercise, but an ongoing process that you regularly update as circumstances change. Whether you’re thinking of exiting your business in 10 months or 10 years, you can start planning for the future now. Visit cfib.ca/succession for tools, resources and CFIB memberexclusive savings on succession services to get you started.

Dan Kelly is President and Chief Executive Officer of the Canadian
Federation of Independent Business, Canada’s largest association of small and medium-sized businesses with 110,000 members across every industry and region.