Succession Planning

Everything you need to know about succession planning

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Video: Business transition planning

Are you looking for an in-depth look into succession planning, also known as transition planning, for your business? We have a free guide made for all kinds of businesses and their teams.

In a survey we conducted on retirement and savings, we found that almost one third (32%) of small and mid-sized business owners we surveyed are planning to retire within the next five years, yet only 27% had started succession planning, and 30% had found a successor for their business.

Whether you are part of that 32% who wants to retire soon, you’re planning on selling part of your business, or you want to get ahead of the game, we have collected information from industry experts and resources to get you started.

Putting your transition plan in place

What is transition planning?

Transition planning, also known as succession planning, structures the transfer of a privately-owned business to a new owner and/or management team. It is a roadmap for how you will transition yourself out of the business and transfer the business ownership to a successor. Succession planning is an essential component of effective financial planning and retirement planning.


Who needs transition planning?

Every business owner needs a transition plan.

The unexpected could happen at any time, whether that is an illness or an exit opportunity. If the unanticipated hits, you will be glad that you have taken the time to create a succession plan to map out your business transition. It will only benefit you, your family and your business.


When should you begin transition planning?

If you are looking at retirement or exiting your business in the next five years, having a formal transition in place is necessary. Your goal should be to start succession planning at least five years before you want to exit your business, and for the plan to be in place two to three years before the transition occurs.


What are the four components of a transition plan?

  1. Pre-Sale Phase
  2. Positioning for Sale
  3. Transaction Phase
  4. Wealth Management

How do you create a succession plan?

Keeping the above four components of a business transition in mind, use the following steps to guide you through your succession planning.

  1. Setting and managing transition objectives
  2. Select your preferred exit strategy
  3. Know the value of your business
  4. Enhance your business value
  5. Plan to minimize tax implications
  6. Plan to accomplish personal financial goals
  7. Build a team of trusted advisors

We explain each of these succession planning steps in detail in The ATB Business transition guide.

The importance of transition planning

Why is transition planning important? Here are five reasons succession planning is vital for your business.

  • Helping the company stay strong through a period of change: changing leadership is a huge shift, one that can rock the foundation of your business. Having a plan brings stability to the succession.

  • Minimize confusion, stress and anxiety: for you, your team, and your successor.

  • Maximize value from the transaction: effective planning gives you the opportunity to optimize the value of your business, and in turn, the power to choose who to sell to and when, on your terms.

  • Allow time to properly plan to minimize tax costs: if you are rushed to exit your business, you might end up paying taxes that you could have avoided if you had a plan.

  • Allow you to plan for and accomplish your personal financial goals: selling your business should help set you up for the life that you want to live outside of work. Taking the time to figure out your goals allows you to make plans to achieve them.

Transition planning vs. estate planning: understanding the difference

Transition planning is sometimes confused with estate planning, but the two aren’t the same.

Transition planning Estate planning
  • Focuses on the transfer of a business asset or entity from an existing owner to a successor
  • Relates to planning for your business
  • Considers transfers during the life of the business owner
  • Much broader in scope
  • Focuses on what will happen to your personal assets when you are no longer able to make decisions about them
  • Relates to planning for your personal wealth
  • Considers the transfer of assets beyond the life of the business owner
  • Includes a will, Enduring Power of Attorney, and Personal Directive

Many times, personal and work-related assets can overlap, so transition planning can involve estate planning. An estate plan should be a part of your transition planning process, but it does not replace a transition plan.

Why should you do estate planning?

You will need an estate plan to ensure your personal assets and loved ones are protected when you are no longer able to protect them. Estate planning determines who will inherit what of your possessions and assets, who would be your children’s guardian(s) in the event of your early death, reduces taxes on your possessions and assets, and minimizes the chances of legal battles and strained family relations. Estate planning is essential to responsible financial planning.

Your transition planning goals? Getting the most out of your plan

Defining what a successful transition looks like is the first step to creating your own succession plan.

What is a transition goal?

Transition objectives can include anything from what age you want to retire at, to the sale price of your business, to what your transition plan will achieve.

Here are some questions to help you identify your succession plan goals:

  • Why do I want to sell my business?
  • Do I know what I will do post-sale?
  • Am I financially ready to sell?
  • What does a successful business transition look like for me?
  • Will I be able to let go of my business all at once?

We will expand on each of these questions, as well as a full seven step process to transition planning, in our ATB Business transition guide. Download it for free and reference it during your succession planning.

Smart exit strategies

Why is an exit strategy important?

Developing and implementing a robust exit strategy isn’t just vital for your business when you’re thinking about leaving—experts recommend incorporating your exit strategy into your business plan from the beginning. The unanticipated can happen anytime—having a thorough exit strategy in place before you need it helps protect your business and navigate uncertainty with confidence.

Here are four benefits of creating and enacting your exit strategy as soon as possible:

  1. It is your road map to success: your exit strategy helps you define what success is, and gives you a timeline to track your progress and keep you on course.
  2. It allows for strategic decision making: with the endgame in view, daily decision becomes more strategic.
  3. It makes your business more appealing to investors: venture capitalists want an exit strategy that is well thought out. Having an exit plan from the beginning shows investors that you are thinking about their interests and the long-game.
  4. It gives you a template you can tweak: your initial exit strategy will most likely need to be adjusted over time, but having it in place from the beginning gives you guidance and benchmarks along the way, or if the unexpected happens early on.


What are the five exit strategies?

While no two businesses will have the exact same exit strategies, there are five common business strategies that you can apply to your business and adapt to your specific needs.

  1. Management buyout (MBO): when an executive team combines its resources to acquire a portion or all of the business they manage. This can help business owners avoid the hard work of finding an outside buyer, performing due diligence, and seeing the transition through. Sticking with familiar leadership can give existing employees confidence and stability in the midst of transition. However, this strategy takes time to implement, as conducting a business valuation and securing financing can take months or years.

  2. Outside sale: when you sell to someone outside of your company. You can cash out immediately, negotiate your ideal sale terms and go with the buyer of your choice. On the other hand, you will have little input into what will happen to your employees, and the business’s overall direction. You will also need to invest years of time and energy making your business look appealing to prospective buyers.

  3. Employee stock ownership plan (ESOP): an employee benefit plan that gives staff ownership interest in your company. There are tax benefits to going this route, including the owner having capital gain taxes deferred and lower tax rates for the company. However, the transaction valuation is usually lower and there are ongoing administrative duties that will need to be considered.

  4. Initial public offering (IPO): in the right market, this exit strategy can lead to significant ROI as long-term capital. In general, the potential gains through an IPO are greater than other exit strategies, which makes them appealing to many business owners. The cost and complexity of going public are high, and IPO’s are dependent on market conditions.

  5. Transfer of ownership to family: transferring the ownership of your business to a family member is typically the most simple exit strategy option. It tends to disrupt business less than other strategies, and makes the transition easier for staff. It is a fulfilling way to see your legacy continued. However, family members may not be the best successors for your business. There is also the risk of significant estate tax consequences, so the business transfer will need to be carefully planned and reviewed under the direction of a financial professional.


What are the elements of an exit strategy?

Like we said, creating an effective exit strategy will look different depending on your business. While you will tailor your planning to meet your business’s needs, every exit strategy will contain a combination of the following elements:

  • Goals: what do you desire and need from the business when you leave? Is profit your primary motivator? Or is legacy a crucial component?
  • Time frame: how much time do you need to complete the sale? If your time frame is flexible, you are in a better negotiating position, whereas less time results in limited options.
  • Business intentions: how are you expecting the business to carry on once you leave? This will determine if the business is sold, merged, transitioned to a predetermined successor or liquidated.
  • Your next move: are you planning to take the profit from the sale of your business to fund another business venture? Or perhaps to retire? Maybe you are content with breaking even to get out of the business. 

A thorough exit strategy must address these four elements in order to be effective. Otherwise, it will lack direction and be a hindrance instead of an asset in your business plan.


Business exit strategies: pros and cons


Strategy 1: Keeping it in the family

Pros Cons
  • Extending your legacy
  • A greater sense of loyalty
  • Smoother transition
  • Finding a capable and willing family member
  • Potential for family disputes
  • Over ⅔ of transitions to family fail

Strategy 2: Selling your business to management and employees

Pros Cons
  • Existing team remains in place
  • Little disruption to operations
  • Confidential information stays confidential
  • Lower valuations compared to external sales
  • Potential need for external equity
  • Possible need for a vendor take-back

Strategy 3: Selling your business to an outside interest

Pros Cons
  • Ability to sell the whole business or part of it
  • Options to structure sale for greater tax benefits
  • Ability to leverage your company’s expertise
  • Longer time frame to finalize sale
  • Distractions caused to management and staff
  • Confidentiality may be jeopardized

Want to dive deeper into each of these exit strategies? Or maybe learn about your other exit strategy options? In the ATB Business transition guide, we cover the basics of succession planning in one resource.


Business valuation: understanding your company’s worth

How is a business valued?

Performing a valuation will allow you to calculate the value of your business. You will need to determine whether your business needs a formal valuation or an assessment. Both methods involve bringing in expert third parties to review key aspects of your business and provide an impartial assessment of its value.

A formal valuation is more technical and complicated. Your advisor team can help you determine whether a formal valuation makes sense for you.

For most business owners, assessments are the preferred method. An assessment is simpler than a formal valuation, but can still provide practical information about a realistic target price for the sale of your business.


What are the three methods of business valuation?

When it comes to valuing a company using a formal business valuation, there are three methods you can use:

  • Asset-based valuation: total up all of the investments in the company. It can be implemented using a going concern asset-based approach, which looks at the company’s balance sheets, lists the business’s total assets and subtracts the liabilities. A liquidation asset-based approach can also be used—it determines the liquidation value of the business.

  • Earning-based valuation: sees the business’s value in its ability to generate wealth in the future. It can be implemented by capitalizing past earnings, which determines the anticipated cash flow using the business’s record of past earnings, normalizes them and multiples the expected normalized cash flows by a capitalization factor. It reflects a reasonable ROI a purchaser could expect. A discounted future earnings approach uses an average of the trend of projected future earnings, divided by the capitalization factor.

  • Market value valuation: determine the value of your business by comparing your company to similar ones that have recently sold. It is effective if there are a sufficient amount of similar businesses to compare.

The earning-base valuations tend to be the most popular business valuation methods. Usually a combination of business valuation methods will ultimately be the fairest way of setting a selling price. These valuations must be conducted by an objective professional to set a fair price.

Read more about business valuation and the six other steps to business succession in our ATB business transition guide

Tax and succession planning

Minimizing tax implications when selling your business

Taxes can have a significant impact on the net proceeds realized when you sell your business. To maximize the after-tax results, it is important to create a detailed tax strategy—an experienced tax advisor can be an incredible help. Here are some important considerations for the tax aspects of your succession strategy.

  • Structuring the sale: will your sale be considered an asset sale or share sale?
  • Capital gains exemption: when you dispose of qualified small business corporation (QSBC) shares, you may qualify for the lifetime capital gains exemption.
  • Capital gains reserve: this is a relevant consideration if you agree to receive the proceeds of the sale over several years.
  • Transferring the business to the next generation: you could consider an estate freeze. 

We explain each of these tax considerations in greater detail, along with six other steps to create a business succession plan in the ATB business transition guide.

Building a team of trusted advisors: who do I need on my team to create a succession plan?

Succession planning is high stakes and requires diverse, deep knowledge. Anyone looking to create a robust transition plan will need advice from experts.

At a minimum, crafting a detailed succession plan should involve these four people:

  • a lawyer
  • a banker
  • a tax advisor
  • a financial advisor

Depending on your circumstances, you may also find a dedicated M&A expert, business valuator and insurance advisor helpful.

Building a relationship with a trusted advisor takes time. Look out for how they treat you: beyond being competent and professional, do they show concern and empathy towards you? Are they honest about what they can and cannot do? Do they consider the long-term perspective, so you are taken care of long after the sale of your business? These are the marks of an advisor you can trust and who you would want to work with.

With so many advisors to consult with, we recommend that you connect with a business transition consultant. They will serve as your project manager, ensuring everyone on your advisor team is on the same page. Email to start building a relationship with a consultant and get the advice you need.

The opportunity behind an estate freeze

What is an estate freeze? What are the tax benefits of an estate freeze?

An estate freeze is a tax strategy that a business owner can use to transfer their assets (in this case, their business) to their beneficiaries while reducing or eliminating tax consequences. You would typically use an estate freeze to proactively reduce the tax you would owe on the shares of your business when you pass away. 

When you make an estate freeze transaction, you “freeze” the value of your ownership in the business, and any future increase of business value goes towards the new shareholder(s).


What is a wasting freeze?

A wasting freeze, also known as a serial redemption strategy, involves the company redeeming a certain amount of frozen shares periodically. In a typical estate freeze, the shareholder of the frozen shares earns income through dividends. 

However, in the case of a wasting freeze, cash flow to the shareholder is generated when the shares are redeemed. One of the key benefits of using a wasting freeze is that it reduces, or “wastes away”, the ultimate value of the shareholder’s frozen shares. Each time a share is redeemed, the shareholder owns fewer preference shares, which results in lower taxes payable.

If you would like to learn more about transition planning, the ATB business transition guide is full of expert advice and helpful resources to guide you as you build your own succession plan.

The importance of succession plans for shareholders

What is the difference between a shareholder and a stakeholder?

The terms “shareholder” and “stakeholder” can often be used interchangeably in business, yet they are distinct from each other and are not necessarily synonymous. While shareholders are always stakeholders in a company, stakeholders are not necessarily shareholders. A shareholder owns stock shares in a company, while a stakeholder has a financial interest in a company for reasons outside of stock performance.


Do shareholders own the company?

Legally speaking, shareholders do not own the corporation they own shares in. In law and practice, they do not have final say over most big corporate decisions. Shareholders get referred to as owners because that is close to what they are. They own common stock in the business, which means that they have a claim on the corporation’s earnings. 

The board of directors hold the real power of a company, as their legal responsibility is defined as looking out for the best interests of the company and its shareholders. If shareholders were the true owners of the company, then only their interests would hold weight.


What do I do if there are other shareholders in the business and either of us want to sell?

You will want to ensure you have a process in place in the event that you or another shareholder does not want to (or cannot) participate in the business, and wants to sell. A unanimous shareholder agreement is that process. 


What is a unanimous shareholder agreement?

A unanimous shareholder agreement (USA) outlines the obligations, privileges and protection of your company’s shareholders. It is distinct from your company bylaws and usually addresses things that are not included in the bylaws. It is meant to ensure that shareholders are treated fairly.

Why have a unanimous shareholder agreement?

Here are seven reasons to have a unanimous shareholder agreement:

  • It will save you time, money and headaches.
  • It is part of building a comprehensive plan for your business.
  • It outlines expectations of inter-shareholder relationships.
  • It can bring guidance for unexpected events.
  • It sets the expectations and rules for when a shareholder cannot be part of the business.
  • It can specify who outside of the business could become a shareholder in the future.
  • It provides safeguards for minority positions.


If you are looking for more information on business succession planning, we cover seven steps to help you navigate the process in the ATB business transition guide. Download it for free and keep it on hand as you go through the transition planning process.

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