Your life’s work: 5 things to consider when passing on the family business
You’ve spent your life building a successful business. Now comes the hard part: creating a transition plan that allows you to pass it along so that you can comfortably enter the next chapter of your life.
As a business owner and entrepreneur, you’ve likely become adept at navigating through the challenges of owning your own business. But when it comes to selling that business, there are several factors you may want to consider, such as when to sell it, who to sell it to and, perhaps vitally, establishing what your business is worth. The task can be a daunting one.
In October, TD Wealth brought together two top thought leaders in this space to celebrate Small Business Month and discuss some of the more common issues business owners may face when preparing a strategy to exit their business.
You can watch an encore presentation of the event, Your life’s work: What entrepreneurs and business owners may consider when thinking about selling or passing on their business.
For those in a hurry, here are some lessons that stood out.
There is no time like the present
“Just start,” says Nicole Ewing, Director, Tax and Estate Planner at TD Wealth. “So often, we are waiting for the right moment and the opportunity for things to clear off our desk or the right time of year or the busy season to pass,” says Ewing. “If the last couple of years have shown us anything, we cannot predict when we will be impacted by life or world events.”
Tom Deans, author of Every Family’s Business: 12 Common Sense Questions to Protect Your Wealth, says the pandemic has highlighted the kind of unforeseen risks that can jeopardize your plans. He agreed that business owners shouldn’t wait to create a succession plan: “[The pandemic is] a great reminder why business owners should always run their business with the end in mind.”
Transition takes a village
“It is virtually impossible to exit a business on your own,” says Deans. “You need to build a team, you need professionals.” Because many business owners spend years focusing on operations, they can be unprepared when it’s time to take that business to market. “I think often entrepreneurs don’t know what they don’t know,” says Deans. For him, that highlights the importance of having a team of trusted professionals working to help you.
Ewing says business owners should also be thinking about their legal, tax and wealth needs, adding that it’s essential to seek out the help of an advisor very early in the process. “They understand your cash flow needs, your time horizon and hopefully your family dynamic,” says Ewing. “They may also have access to an incredible team of experts internally and externally in their networks.”
Silence can be dangerous
Deans describes silence as the great destroyer of Canadian family businesses. Moreover, he says it’s usually business owners who avoid key conversations about how they plan to transition out the business. Why? “They are full of fear,” says Deans. “It is a terrifying place to be in your 60s or 70s with 85% of your wealth wrapped up in one illiquid stock, with no exit plan.”
Part of that conversation, says Deans, means having the right frame of mind when you are ready to exit. Selling your business doesn’t mean failure or giving up the good fight. He says people tend to assume that just because an entrepreneur is successful, they’ve got it all figured out. “In reality it is terrifying because they know in their heart that getting out is going to require a lot of work, and they don’t have a lot of experience,” says Dean.
Be aware of family dynamics when establishing goals
Family members can add a layer of complexity when selling any business. The owner may have the option to give the business to the next generation, sell it to them at a market-value price, or sell the business to a third party altogether. Owners must explore which option works best for them, but Deans says it is important to have conversations with family members early to help set expectations. It must be made clear, he says, that working at the family business may not lead to owning it. “This is the problem with family businesses, where they tend to conflate the two,” says Deans.
Likewise, Ewing says there can be a perceived implication of failure if the business isn’t passed on. That is a mistake, she says. “It’s important to understand what the family is looking to achieve. Is it a collective or individual success? There are so many opportunities created if you monetize the business and pass that wealth on, as opposed to thinking of it as a failure if we are not bringing the family along with us.”
Be prepared for your next chapter
Ultimately, Ewing and Deans both suggest that proper succession planning takes time. “It’s having that conversation about what you plan to do and how much money you are going to need in order to achieve that,” says Ewing. She suggests having a team of advisors look at your holistic picture can help you plan the next stage of your life.
“Having a financial plan where we do the projections, you look at this year and you look at inflation. We want to be able to run some scenarios to look at what may happen in a variety of different events and take nothing for granted and get your level of security in place.”