indicatorSuccession Planning

Three stages of a successful transition plan

Whether you’re a brand-new startup or an established leader in your industry, a transition plan is crucial to your business’s future. Our experts explain how to plan a successful transition.

By Christoff Boshoff and Myron Uhryn, MBA, CEPA, FEA, CIWM 15 November 2022 5 min read

When ATB advisors talk to owners of medium - and large -sized businesses, they often find these business owners lack any kind of transition plan—that is, a formal plan to eventually transfer the ownership and management of their business to their partners, employees or children.  

According to a 2015 poll, up to 89 per cent of Canadian business owners within 10 years of retirement have no formal transition plan.

Myron Uhryn and Christoff Boshoff, senior advisors with ATB Wealth and exit planning strategists, have witnessed the damaging effects of inadequately planned exits on owners’ business legacies.

Around 50 per cent of business owner exits are unexpected. They’re caused by one of the “Five Ds”: death, disability, divorce, disagreement, or distress. If an owner exits their business without a transition plan in place, the results can be devastating on both financial and personal levels.

Christoff Boshoff, Senior Advisor, ATB Wealth

Uhyrn recalls a widowed client whose husband had recently died. The husband’s company didn’t have a plan to enact in the event of the death of a founding partner. “The shareholders’ agreement was 20 years old, so there was no clear plan for valuing the business and fairly paying the surviving spouse,” Uhyrn says. While Uhryn worked with a lawyer to help the mourning woman get a fairer deal, it took two years before a settlement was made.

Transition plans are always necessary eventually, even in the absence of an unexpected event. 

The three stages of a successful transition plan

The three stages of a successful transition plan: Identify, Protect, Decide. 

According to Uhryn and Boshoff, the time to develop a transition plan is now. 

Business owners who already have a transition plan in place may want to revisit that plan every five or ten years, to ensure it reflects any changes that may have occurred within the business or the business owner’s family.

The “identify” stage

The first step is what Uhryn and Boshoff call the ‘identify’ stage. In this stage, a business owner considers their goals for the future and takes a realistic look at the current financial state of their business.

Understanding a business's value is a key part of this step, which typically takes one to two months. Uhryn and Boshoff work with Amanda Vella, head of ATB’s Business Consulting practice, to look at a business’s current value and its potential value using a pricing analysis. Most business owners overestimate how much their business is actually worth, Boshoff notes, which can lead to uninformed decisions. 

A business valuation isn’t simply based on the previous year’s net profit. A valuator will make adjustments to determine a typical cash flow that a third party could expect on taking over the business. Shareholders’ agreements, financial statements and governance roles are all considered as part of the pricing analysis process. The valuator will also take into account risk factors that might impact a company’s value, such as:

  • Are strong human resource policies in place?
  • How predictable is revenue from one year to the next?
  • Does the business have customer relationship management (CRM) software to capture client data?
  • What is the business’s customer concentration? Does the business have a stable customer base or are they dependent on a very small number of clients?
  • Is the business owner-dependent or does it run well without the owner’s expertise, thanks to written policies and practices?
  • Would key personnel stay on over a transition period to pass on training and informal knowledge?
  • How clear is the documentation outlining business sales and profits?

The “protect” phase 

Once a business owner has a clear idea of their business’s current value, as well the risks it is susceptible to, they can increase or protect the business’s value by “derisking” it. Derisking looks different depending on a business’s size, sector, and identified future owners.

For example, a farm owner who is passing on their farm to their children might prioritize management training and create a plan for the next generation to build up their expertise in a step-by-step way. 

A medium-sized business owner might want to ensure that sales processes and client data are well-documented to ensure a steady turnover of prospects into customers, no matter who is in charge.

“The protect phase brings in aspects of classical management consulting, such as putting in human resource policies and determining the vision for the company,” says Uhryn.

If the protect phase entails nothing more complicated than cleaning up the books, the process can take just weeks.

However, the protect phase can also entail formalizing decision making and developing clear written policies, so future leaders can take over without interrupting or compromising a business’s operations. In this case, the protect phase can take many months and even years—which is why it’s so important to begin transition planning early.

The “decide” phase

Once an owner has taken steps to close the gap between their business’s initial and potential value, they are empowered to make some key decisions. 

In this phase, says Uhryn, business owners need to answer the question “Are we going to continue to grow the value of the company or are we ready to exit some or all of the business?” If an owner is ready to make a full or partial exit, they’ll need to decide whether they want to pursue a succession plan, or an internal or external sale. 

The recently completed valuation of the business can drive these decisions. As Boshoff puts it, “You may want to sell to your family, but if there isn’t enough value in the business for you to fully step into the next act of your life and retire, you might need to sell it externally.” Conversely, the business could be valued so high that an external sale “might just be too good to refuse.” A business owner might prefer to sell their business and use the money from the sale to help their children start a new business of their own.  

In some cases, steps taken in the protect stage, such as training the next generation of management, can allow the owner to take a step back. This may lead the owner to delay their full exit longer than planned. “When the owner can enjoy more day-to-day freedom and balance, they may not necessarily feel the need to exit the firm all at once.” says Christoff.

The bottom line

Transition planning is about understanding the true value of the business and creating clear, documented guidelines for a successful transition. When it’s time to hand over the reins, owners should feel confident that the business they worked so hard on will continue to thrive.

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