Small business operators need to take steps now to prepare companies for their retirement

Over the next decade, tens of thousands of Canadian small business owners will sell their companies.

It promises to be an emotional and sobering experience – one most owners won’t be fully prepared for.

The reality is that many won’t receive the best price for a business they’ve nurtured like a child. Or they may have difficulty selling it at all.

Illustration by Malinda Jalbert


Equally painful, some owners will forfeit hundreds of thousands of dollars in tax savings because they didn’t take a long-term approach to preparing their business affairs.

“It’s the biggest issue facing a business owner, a huge issue, and it’s getting bigger,” says David Beavis, a managing partner in the Calgary office of Edmonton-based Sorrell Financial.

Beavis and Anthony Weisshaar, an associate with Sorrell, point to a succession study by Deloitte & Touche that raises red flags. The report reveals that only one-third of mid-market family businesses have established any process to select a business successor.

The 1999 study found that 27 per cent of owners of family businesses with sales of at least $1 million will retire within five years; another 29 per cent in six to 10 years; and a further 22 per cent in 11 to 15 years.

According to Deloitte & Touche, there are approximately 124,000 family-owned businesses with sales of $1 million or more in Canada.

“In my experience, most business owners until literally the day, month or year they decide they’ll get out, don’t think of succession planning,” says Weisshaar.

“They are so busy with daily affairs, and like most human beings tend to be procrastinators, putting off the tough decisions until tomorrow.”

Rob Curr, senior financial planner with Calgary’s Peer Financial Ltd., agrees. Planning a strategy is a long, drawn out process, says Curr. “It’s not first and foremost in an owner’s mind, though it should be.

“Tax implications can be pretty great and can kill people. That’s why they have to get advice ahead of time, through a financial planner and an accountant.”

Beavis, Weisshaar and Curr say a great number of business owners have never had a financial or retirement plan done and therefore have no idea where they stand in relation to retirement.

Many may be hanging on to a business thinking they have to, when they have more than enough to retire on and maintain their current lifestyle.

“If they can get out, why not?” Curr asks.

Today’s business owners deal with family stresses, a demanding economic and competitive environment and to a lesser degree, the threat of litigation.

“In reality, their net worth is on the line, day in and day out,” says Curr.

“These are the baby boomers, and they do have other interests. They aren’t going hang on to their business until they are 70.”

To prepare for an early – and successful – exit from their business operations all three consultants offer similar advice:

* Once a new company becomes successful, develop a strong management team, and define roles for key personnel so all the company’s knowledge doesn’t rest with the owner;

* If a family member isn’t going to take over the business, identify key personnel in your company or outside third parties who might be interested in buying;

* Don’t underestimate the chances that as an owner, you or your wife may suffer health problems that can have a major impact on your business;

* Determine how to maximize after-tax proceeds. This includes taking steps so that the owner, and spouse if possible, are able to claim the $500,000 capital gains exemption;

* Find out how much your company is worth;

* Set money aside outside the business, maximizing deductions for individual pension plans or RRSPS;

* And get good financial advice five, 10, 15 years in advance.

Weisshaar and Beavis suggest that far too many owners don’t consider the implications of health problems as they turn 50 and move towards age 65.

The fallout can be costly, especially if it forces the owner to hastily sell the business.

Financial planners and accountants say a strong management team, with defined roles for key personnel, will make the business more attractive to current customers and a potential third-party buyer.

U.S. studies show that businesses handed over to the next generation of family members are likely to succeed only 30 per cent of the time. When a business is sold to an outside buyer, the success rate is 50 per cent. Successions — including leveraged employee buyouts, supported by key managers — turn out well 80 per cent of the time.

At Peer Financial, Curr expects a large group of his clients to sell their businesses within 10 years.

Currently, Peer conducts financial planning, shows clients where they stand and determines what they require to leave the business.

It is a significant financial and important social change, says Curr.

“It’s very stressful giving up something they’ve nursed from the very beginning. It’s the biggest financial decision they’ll ever make, and it’s something they’ve likely never experienced before.”

The planning process, he says, offers peace of mind.