The Entrepreneur’s Guide

BUSINESSTRANSITION

TABLE OF CONTENTS

The facts 3

1. Why plan ahead? 4

2. What are your options? 6

3. What does the transition plan involve? 8

4. How much is your business worth? 10

5. How to choose and prepare your successor? 12

6. How to finance a business transition? 14

7. Can we help? 16

Start planning today! 18

In this document the masculine form is used to lighten the text.

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THE FACTS

Over the next five years, more than one third of small-and mid-sized business owners in Canada will be leaving their businesses1. Although each entrepreneur’s situation is unique, this phenomenon is so widespread that it presents a very significant socioeconomic challenge for our country.

This guide is designed to provide Canadian entrepreneurs with concise, useful information on the business transition process. Each of the seven sections deals briefly with an important topic. It will be a helpful reference in assisting you to make the appropriate decisions for your future and the future of your business.

1 According to a study conducted by the Canadian Federation of Independent Businesses in October 2006.

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1Why plan ahead?

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Your business is most likely one of your primary assets. As you prepare for your retirement, it becomes important to maximize its value.You created it. You watched it grow. You invested your time and money in it. When you decide to exit, why wouldn’t you expect your business to give you something back?

Early succession planning enables you to:

> Maximize the value of the business and, consequently, its potential selling price

> Explore a broader range of transition options

> Take the time to choose the right successor and acquaint him with the business

> Set up the proper financing

> Have a positive impact on your business’ long-term viability

Good business transition planning increases your chances for success. It is the best way to secure your company’s continuity. It takes two to five years to implement this type of plan, so the need to start planning may come sooner than you think!

2What are your options?Planning your business succession sooner rather than later offers you greater latitude: it gives you the time you need to choose the best option and implement it with the assistance of experienced specialists, such as financial planners, accountants and legal advisors.

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There are many options for succession. The most common are:

> Family transition: Transfer or sale of your business to a family member

> Management or employee buy-out: Sale of your business to one or several members of your management team, employees, or both. This is an interesting option for business continuity as your successors are already familiar with your operations and share the company’s values, culture and mission.

> External sale to a third party: Sale of your business to your partners, investors or even competitors

Before making a final decision, ask yourself the following questions. Will this option:

> Be aligned with my retirement lifestyle choices and allow me to keep a role within the business if I so choose?

> Give me enough retirement income?

> Secure the business’ continuity?

If these considerations are important to you, they will necessarily have an impact on the business transition option you choose. Selecting the exit option that best meets your needs is critical and will determine the steps that will follow.

3What does the transition plan involve?

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Usually, a transition plan covers the details of the following two processes

Transfer of leadership: Who will be taking over the day-to-day operations?

> Assessment of exit options

> Development of an action plan to establish how, when and to whom to transfer the company

> Renewal of your management team’s and other stakeholders’ commitment

> Transfer of knowledge from the entrepreneur to the successor

> Coaching or mentoring for senior management

Transfer of ownership: How will the sale of shares be handled?

> Assessment of the business’ fair market value

> Identification of all tax options

> Validation of the legal and financial impacts

> Creation of a detailed financial structure

> Identification of available financing sources, especially the buyer’s investment, balance of the sale price or financing from the seller and external financing

When implementing a business transition plan, most stakeholders tend to focus on technical considerations (tax and legal implications, for instance), while overlooking the non-technical or intangible issues, such as the healthy management of emotions in a business context, the conflict resolution process, the business’ values and culture, or the selection of a successor. A good transition plan considers both of these aspects and reconciles the interests of both the seller and buyer.

4How much is your business worth?

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Determining what your business is worth is a key step in the transition process.According to the Canadian Institute of Chartered Business Valuators, the valuation of your business could be based on one or a combination of the following approaches.

Approach based on the business’ total assets Two methods are used in this approach:

> Adjusted net asset value: Obtained by reassessing assets and liabilities at their fair market value, then subtracting the adjusted liabilities from the adjusted assets.

> Liquidation value: Assumes that the company is selling all of its assets and paying off all debt and related taxes. The surplus represents the company’s value.

Approach based on the investor’s performance outlook A number of methods can be used, including:

> Discounted future cash flows

> Capitalization of earnings or cash flows

Market-based approach

This approach consists in determining a company’s worth by looking at similar transactions that have taken place in the past and using them as a benchmark.

The assistance of a business valuator can be very helpful, as the different approaches proposed are technical and complex. Any entrepreneur looking to sell his business wants to get the best possible price for it. Working with a consultant can help you maximize your company’s value before the sale goes through, by increasing sales and cutting costs, and having a reasonable debt-equity ratio, quality customers and a mobilized management team.

5How to choose and prepareyour successor?For a leadership and ownership transfer to go

smoothly, it is imperative that the business transition

plan provide for coaching to ensure the successor

is prepared to tackle his future role.

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The selection process comprises several steps, for example:

1 Establish what skills your successor needs in order to tackle the company’s upcoming challenges.

2 Identify candidates with the potential to become successors, pinpoint their weaknesses and create a plan to remedy them.

3 Create a training plan for the potential candidates to ensure they will be able to meet the company’s future needs. The plan should introduce these candidates to all of the company’s key sectors.

4 Assessing and identifying your successor is no easy task, so having a mentorship-based evaluation system could be helpful. Mentoring is a very useful tool for transmitting knowledge. It is also useful for assessing competencies, progress, understanding of the challenges—in other words, for selecting the right candidate.

5 Once the candidate is chosen, communicating the transition plan is beyond a doubt the most delicate step in the process. Any organizational change can have unforeseen consequences. It is also important not to communicate the changes until the candidate is fully ready to take on his new role.

Your company is a living and collective entity, the success of which depends primarily on those who work there. The transition from owner to successor is a time of great fragility, uncertainty and emotional turmoil for the company and its employees.

6How to financea business transition?From both the owner’s and the successor’s perspective, financing the change in ownership is often the largest obstacle.

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There are various sources of financing available to ensure a smooth business transition.To make sure the transition plan succeeds, the sources of financing must be diversified, and the transaction must be equally advantageous to both buyer and seller.

Usually, one or several of the following types of financing are used to handle a business transition:

> Buyer’s investment

> Seller financing (vendor take-back)

> Conventional financing in the form of a secured term loan

> Investment from a financial partner, in the form of equity or quasi-equity

The seller may have to finance part of the deal (vendor take-back) so as to make sure the business transition is a smooth one. Once the transaction is completed, the business should have enough cash flow to secure its growth and repay the debt from the purchase. It is therefore critical to get your main financial partners involved very early in the process. This will allow them to put together a financial package that is viable and takes everyone’s interests into account.

Establishing a balanced financial structure improves the chances for success while ensuring the successor is not left with an overly large debt burden that would adversely affect his ability to keep investing in the company’s growth.

7Can we help?We already offer financing and consulting solutions tailored to the needs of SMEs at every stage of growth. Given how important succession planning is to business owners, their successors and the Canadian economy as a whole, BDC has developed a transition program specifically designed to help its clients with their business succession projects.

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The BDC Transition program features a consulting component to assist you in clearly addressing your personal interests and those of your business.

Personal interests:

> Assessing exit options

> Preparing a transition plan

> Facilitating meetings with lawyers, tax experts and business valuators

> Planning a gradual transition to a new role, if applicable

Business interests:

> Maximizing the business’ value and long-term viability

> Selecting a successor in an objective manner

> Developing a human resources management plan to secure the company’s sustainability

> Coaching the chosen successor in his new duties

> Developing a strategic growth plan with the new successor

The Transition program also includes a financing component that can be used for:

> Acquiring a business through the purchase of assets or shares

> Refinancing the vendor take-back resulting from a previous change in ownership

> Optimizing the business’ tangible and intangible assets

Overall, the Transition program developed by BDC offers two components that will help you succeed with your exit strategy, while ensuring continuity for the business you created.

Start planning today!Preparing for a business transition is a complex process involving a variety of considerations, all of which require meticulous planning. These aspects form a whole, and each component is intricately linked.

The best chance for success comes from a transition plan that is realistic, well structured and flexible enough to be adjusted before the transfer date, if needed. Getting a head start on succession planning gives you the opportunity to involve seasoned professionals in the process.

For entrepreneurs, passing on their company is a major business decision. They need to carefully reconcile their personal interests and the future interests of their business. The decisions the seller makes will have repercussions that go well beyond the business and its new owner. In fact, the business transition phenomenon will have grown so much in Canada in the years to come that it will have an impact on local communities, regions and the Canadian economy as a whole.

These are all good reasons for Canadian entrepreneurs to take steps to make sure their business transition is successful.

For more informationwww.bdc.ca

An entrepreneur who wants to retire and hand over the reins to his business successor is faced with an important decision, one that presents a variety of major challenges.

This guide is designed to provide Canadian entrepreneurs with concise, useful information on the business transition process. It will assist them in creating a plan to improve their chances for success.

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