How to Succeed in Succession Planning

Transcription

1 How to Succeed in Succession Planning

2 With the right operational strategy in place, a successful real estate or construction company can have a long and prosperous run. However, eventually your business will need to be transferred to new ownership whether a family member, an employee or an outside party. Securing your future means planning for succession well in advance of when you re actually planning to exit the business or retire. Effective planning is a process that will enable you to maximize the value of your business by singling out improvements ahead of a possible sale, develop the appropriate tax strategy and enable a paced transition of roles and responsibilities. What s Important to You Determine what you want the future to look like. If you are headed towards retirement, consider what kind of lifestyle you want and how you are going to afford it. For succession, you ll want to keep or increase the value of the business while retaining key employees and determining who will be the best successor. And if legacy is important to you, protecting the value of your business for family, clients or community is a consideration. The Succession Process Insurance Philanthropy MNP s ExitSMART TM program was created to help owner-managers develop a comprehensive succession plan that contemplates all aspects of the transition process. Your plan should include your accountant, asset and wealth management advisors, insurance brokers, financial partners and investors in the process during the development of your plan. Legal Accounting Family Preferred Service Providers and Trusted Advisors Wealth Management Family Governance Management Shareholder Tax ERS Divestiture/ Merger Valuation Accounting / Tax Advisor Legal / Other Financial Partners / FI

3 Think Like a Buyer To maximize the value of your business, approach it as if you were a buyer. Take a critical assessment of your business operations and identify the value drivers and impediments. This process includes: Reviewing shareholder agreements as well as financing agreements. Consider removing guarantees and make sure there are no cross guarantees. Divest non-essential assets, such as land and buildings into separate holding companies. Assess your business structure and systems for effectiveness and value Document agreements with key parties such as employees, suppliers and customers Protect intellectual property Update corporate documents Exit Options Once you ve determined what needs to be completed to get the returns on your investment, sit down with your advisors and have a candid discussion about what you see as your options. Their unbiased opinion and depth of experience may present a different picture than your original plan. Close down and liquidate assets Sell to family Sell to an arm s length third party Sell to management/employees

4 What Do You Believe To Be The Key Value Drivers In Your Business? Cash Flow Other Product & Service Offering Diverse Customer Base Value Drivers in Your Business Efficient Systems Retention of Key Employees Strong Management Motivated Employees Reduce Risk Transition to Family Depending on the market and your personal circumstances, closing the business down and liquidating the assets might offer the most returns. However, one of the most common considerations is to transition to a family member or member. About one-third of family owned businesses opt to leave the business in the hands of someone they know, trust and whom they believe will continue to run the company as it has been run for years. PROS Transfers the business to a known entity Increases likelihood of culture being retained Secures your legacy Perpetuates family vision Allows owner to remain involved with the company Provides opportunity to family CONS Possibly less cash at closing Increased financial risk if owner financed Required owner involvement in company post-closing Risk associated with children s ability to assume the ownership role Challenge of fair vs. equal considerations Family dynamics

5 Sale to Management A sale to management is a common and effective strategy for many construction companies because the goodwill rests with the people on staff. And, in terms of advantages and disadvantages, the transfer to key employees is remarkable similar to the transfer to family members. The owner who considers this type of transfer hopes to achieve the same objectives as the owner transferring to a family member. Transfers the business to a known entity Retention and motivation of key personnel Allows owner to remain involved in company Provides opportunity for the next group of owners Attracts financing who can continue to run the business better than the existing team? Just remember there is always risk when the purchase price comes from the future cash flows of the business you are taking a chance on the success of the business for your future. As well, there is always a risk of selecting the wrong employees to be owners. Proper planning that puts strategies in place some years in advance can reduce the risk. Employee Share Ownership Plan In the right circumstances, a company can enjoy a highly-motivated workforce and a succession plan for the current owners under an employee share ownership plan (ESOP). For high-growth companies, share-based compensation can also help preserve critical cash by converting a portion of employee compensation to shares. Set up correctly, such plans help build engagement and culture, can boost productivity and customer relations building value before a sale - and provide opportunity to identify and develop the next leaders. Conversely, ESOPs carry specific risks, starting with the owner. The relationship between you and your employees should be honestly assessed prior to setting up an ESOP. Are you willing to share information, including financial information? Also, if the business already is in a precarious financial situation, an ESOP might not be the best option.

6 Arm s Length Sale When there is an external market, the purchase price is typically maximized over the above options, but you lose control over succession and legacy. Which might be a good thing if family dynamics are challenging. Things to consider before deciding on an arm s-length sale include what kind of buyer you ll attract: a strategic buyer looking to enhance their existing operations through yours, or a financial buyer focused on the business cash flow. The deal structure cash, earn-outs, vendor take-back - should be determined ahead of time as well. However, you can t assume that there is an external market or that the demand will be high when you are ready to sell. Always be working on growing the health and value of your business and be prepared and actively consider selling on a regular basis. Always be thinking of the End Game. Critical Tax Impacts As a component of a sound succession plan, it is necessary to be concerned with the tax effects and the after-tax cash flow. But be careful not to let the tax tail wag the business dog. A successful succession plan weighs and works with many aspects to meet your unique requirements, from family to lifestyle. That noted, tax reorganizations are an integral part of succession planning to maximize after-tax value and minimize your tax burden. Structure Use of holding companies and family trusts Implementation of estate freeze Spousal trusts Lifetime capital gains exemption Planned transfer of ownership Planned giving Benefit Tax deferral on savings, income sprinkling, asset protection Transferring the maximum value to future generations Tax deferral on spousal transfers Utilize family members capital gains exemption Managing the tax burden Donate to minimize tax arising on transfer

7 Top Pitfalls to Avoid Business owners are generally responsible, organized and forward-looking people; planning for the succession of their business should be high on their list of things to do. However, according to a 2016 BMO survey, only about eight percent of small- to medium-sized enterprise owners have a formalized business succession plan. It is important to plan the succession process a year to five years ahead of a transition of ownership and updated the plan regularly. It is too late to capture value or appropriately plan when a significant health issue or significant business issue occurs. It also puts you in the beneficial position of being ready to jump on an opportunity. Make the process smoother and check out the top errors people make when starting on the succession path Assuming people (family members, employees) are interested - or not Eliminating management from the pool because they can t afford it Picking the wrong successors - not defining eligibility, selecting too quickly, making a blanket offering Assuming fair is the same as equal Assuming everyone sees the future of the business the same way Starting too late - losing key people, tax advantages Establishing a price without a clear basis for value Putting all eggs in one basket (Plan B) Not involving professional advisors Each transaction and business valuation is unique. Having good advisors can simplify the process and help ensure your future looks like what you plan.

8 ABOUT MNP MNP is a leading national accounting, tax and business consulting firm in Canada. We proudly serve and respond to the needs of our clients in the public, private and not-for-profit sectors. Through partner-led engagements, we provide a collaborative, cost-effective approach to doing business and personalized strategies to help organizations succeed across the country and around the world. For more information, please contact: Shane King National Leader, Succession Services T: E: shane.king@mnp.ca Visit us at MNP.ca Praxity AISBL is a global alliance of independent firms. Organised as an international not-for-profit entity under Belgium law, Praxity has its executive office in Epsom. Praxity Global Alliance Limited is a not-for-profit company registered in England and Wales, limited by guarantee, and has its registered office in England. As an Alliance, Praxity does not practice the profession of public accountancy or provide audit, tax, consulting or other professional services of any type to third parties. The Alliance does not constitute a joint venture, partnership or network between participating firms. Because the Alliance firms are independent, Praxity does not guarantee the services or the quality of services provided by participating firms. 0159M