Canadian small businesses are distressingly likely to fail in the second generation, usually just after the original owner dies or retires. While this can happen for any number of reasons, a family-owned business is far more likely to continue past the founder’s time if it changes hands with a firm, clear plan of succession in place years before the changeover. When is it right to start planning the handover of a small company, and how is it done? What do you need to look out for when you’re drafting your plan, and what professional help can you get to make the inevitable transfer go as smoothly as possible so your business beats the odds and lasts through the second, and even the third, generation?
When to Start Planning
It’s never too early to start planning for retirement, or to make contingency plans in case of death or disability. Preparing the business for transfer can take several years, so it’s best not to wait too long. While there’s no definite timetable that fits every business, experts recommend starting at least five years before the planned transfer.
Types of Succession
Canadian business owners have several options for how to transfer control over their companies. Some of the most popular are:
- Transfer to a family member who has been trained in various aspects of running the company. Assuming the relative is new to the business, it may be necessary to start this person off with an entry-level position and gradually increase responsibilities until the owner feels comfortable stepping away for extended periods.
- Sell within the company. This is common for limited partnerships where one of the owners wishes to buy out the other and assume full control. It has the advantage of ensuring the new owner knows the company intimately and can take over right away, which makes it appealing for co-owners who have to sell in a hurry or simply want to move on to other things.
- Find a third-party buyer. Selling to an outside investor transfers control and ownership of your company to any person or group that meets your price. The principal consideration in this kind of transfer is selling to the highest bidder, so the sale price may be higher with outside sales than with any other type of succession.
Even a sole proprietorship needs a solid plan of succession. Unless your business is a strictly one-person operation that can’t be done by anyone else, such as freelance writing or commercial design, it pays to consult with a few experts and formalize your plan well before you retire. Start with your accountant, who should know your assets and liabilities better than anyone. This professional can give you a clear picture of just what you’re passing along, as well as what it’s worth. Talk to an estate planner if you’re looking to transfer your business after death, if only to spot the potential tax pitfalls your heirs have to navigate. If succession within the family has the potential to cause strife, consider investing in an impartial business consultant who can draft a report everyone agrees to abide by in advance. Outside advice can make the hard decisions much easier to formalize and reduce tension between family members during what promises to be a time of great upheaval.