After years of working long hours and taking on personal financial risks and responsibilities, a well-deserved retirement becomes more attractive. When should you start thinking about it? Who should take the reins of your business? Here is some advice.
When should you retire as an entrepreneur?
Much more goes into a business transfer than the deal itself, such as choosing a successor, getting prepared, passing on knowledge, due diligence, a financial plan and the transition period.
"It takes on average 3 years to transfer a business, especially to assemble a succession team, so this question should be answered early in the process."
- Richard Quinn, Business Transfer Support Team, Desjardins
Elements of a successful business transfer
Four success factors of a business transfer:
- A healthy business: Any change in management comes with a period of uncertainty. A business must be financially healthy and strategically well positioned to withstand it.
- An experienced succession team: Candidates must know how to manage people and projects, already know the market and have complementary skills.
- A fair sale price: The company must be able to support financing for the future without compromising its growth plans.
- An appropriate transition period: Ensure knowledge transfer is documented and monitored as part of an established plan based on the buyer’s profile.
Who should take over your business?
Be transparent about your retirement plans with your employees, financial partners as well as your customers and suppliers. A successor could come from anywhere:
Employees
Your employees already know your company, its culture and its values inside out. They can make excellent candidates to safeguard its future. Tensions can sometimes arise during negotiations, since switching from speaking as manager and employee during the day to speaking as equals while making a deal can be tricky.
"Involving a neutral chartered business valuator provides objectivity on the price."
- Richard Quinn, Business Transfer Support Team, Desjardins
Family
For a family business succession, many entrepreneurs are willing to finance a larger portion of the deal themselves, which then reduces the company’s debt. An entrepreneur’s family member must also demonstrate strong management skills and earn employees’ respect, regardless of their last name.
Note: In Quebec, current provincial tax rules for business transfers between family members are currently more stringent than elsewhere in the country.
A third party
An external buyer must have extensive experience and knowledge of the market to successfully take over a business. They must be ready to invest time, money and effort.
"A succession of this kind often requires the transferring business owner to stay on longer to share their knowledge and leadership, but since they usually aim to step down faster, a balance must be struck."
- Richard Quinn, Business Transfer Support Team, Desjardins
We also see private equity firms made up of seasoned managers that mimic the institutional investor model on a smaller scale. They acquire companies, often within the same industry, set up a team, carry out a strategic plan and maximize the value of their business.
Merger/Acquisition by another company
A growing number of businesses are pursuing mergers and acquisitions to increase their market share—or even consolidate it—and to add to their company’s value. This strategy also helps them build a diverse and skilled management team in anticipation of a transfer. These businesses generally have excellent borrowing capacity that allows them to choose this option.
Experienced experts lead to better decisions
Which option is best for you? Which one best reflects the values and expectations for your company long-term? Discuss your plans with your account manager. You’ll get personalized support based on many successful transfers. They can also refer you to lawyers, tax specialists, accountants and other experts who can address your needs.
Your business is an important asset and transferring it must be part of your retirement plan. “Think about the retirement you want for yourself, put a cost on it, and then take that into account when making a deal that reflects your financial goals,” advises Richard Quinn. Because life goes on after the business.