Business Succession Planning - are you prepared?
Evan Davies - Oct 02, 2019
If you’re a business owner, you will eventually be faced with the question of what happens after you decide to leave the business.
As a business owner, you’ve invested a lot of time and effort into growing your business. With proper succession planning, we can help you accumulate, preserve and pass on wealth, while helping to minimize potential tax liabilities. Here are a few tips to help as you plan for a potential sale:
Plan ahead to ensure that the business is sold at the best time
By having a plan in place, a business owner may be more likely to sell at the optimal time. Often, the worst time to sell a business is during unanticipated circumstances or stress. It is not uncommon for a business owner to become ill and be forced to sell the business quickly at a lower than market price because a contingency plan not has been put in place. Market conditions can also impact the sale of a business. During the most recent financial crisis, some business owners postponed the sale of their businesses until the economic environment and business valuations improved. Planning ahead can allow for flexibility in the timing of a sale and potentially lead to a better price.
“Planning ahead can allow for flexibility in the timing of a sale and potentially lead to a better price.”
Determine what you are selling
Every business consists of different types of assets, including physical assets and also what are considered “intangible” assets. Goodwill is one type of intangible asset that includes the established reputation of the business, trademarks or client lists that increase the value of the company. Business owners will need to determine what assets will be sold and the valuation of these assets. If the business is incorporated, the owner will also need to decide to sell either the assets of the corporation or the shares of the company.
Get your books in order
Business owners should always ensure that the business’ books are in good order, but this is especially important during a sale. Buyers will require historical corporate financial statements to review the business’ performance over a period of at least five years. Tax payments should be up-to-date and any liabilities should be reduced as much as possible. The company’s financial statements will act as the basis for the business’ valuation and eventual sale price.
Understand what your business is worth
Understanding the business’ valuation well before a potential sale is important to set expectations. It may also be helpful in determining the optimal time at which to sell. Given that we are living longer and healthier lives, some business owners may wish to postpone their business succession and continue working in order to maintain a flow of income. Others may do the opposite if the sale of the business can lead to a comfortable and more immediate retirement.
There are various ways to value a business, including by using revenue/earnings multiples or discounting future cash flows, so the analysis of a professional can be beneficial to determine which approach best suits your company. A professional valuation may also add credibility when it comes to approaching potential buyers.
As a business owner, you have likely spent a great deal of time and effort in building your business over the years. That’s why a considerable amount of planning should also be put into preparing your business’ succession plan.
Contact us to learn more about how effective succession planning can help you with a potential sale of your business.