Like all good things, sooner or later running your own business will end. Instead of leaving the decision to your executors—something that they might be unwilling or unqualified to do—it is usually better for everyone if you plan who will succeed you in running your business.
There are three basic options in choosing your successor: family, employees, and third parties. Each option has advantages and disadvantages. If you cannot locate a successor, your only option will be to wind up the business and sell or otherwise dispose of assets individually.
Planning an Exit?
By now you will have noticed the important role that planning plays in running your own business. Planning is critical, whether you are starting your business, growing it, expanding it, or keeping it going. Not surprisingly, planning is also crucial when the time comes for you to get out of your business, or when someone else has to run it due to your bad health or even death.
In your will, you do two main things. First, you appoint one or more executors to look after your assets after your death. And second, you tell these executors what to do with your assets when the time comes.
Hot Tip
If you die while running your business, the business is treated as an asset, for which your executors will have responsibility. In most cases, the will gives them the requisite authority to continue to operate, sell as a going concern, or wind up and sell the assets. If you do not already have a will, have your lawyer prepare one as soon as possible. Make sure that your new will, or your existing will if there is one, includes authority for your executors to deal with your business.
Through your will, your executors have the authority to look after your business. This does not necessarily mean that they know what to do with it. If you wish, your will can include instructions on how your business or specific assets should be handled after your death. A better approach would be to prepare a detailed succession plan, which your executors would be instructed to implement.
A properly prepared succession plan benefits everyone who has an interest in your business. If the business is to be sold as a going concern, actual or potential purchasers are identified. This reassures employees and customers that there is some likelihood that the business will continue. It also guides the executors in their duties and increases the likelihood of beneficiaries enjoying a maximum return on the sale of the business.
Although your will and your succession plan may be similar, there is one important difference between the two. When you make a will, you are not physically present to see how effectively or ineffectively your wishes are honoured and your instructions followed. On the other hand, unless your succession plan is triggered by your death or mental incapacity, you will observe its implementation.
If your plan was well prepared and is well executed, this could be a source of joy. We all like to see our plans successfully achieve the goals that we had anticipated. There is a real sense of pride in seeing someone carry on something that we have started.
However, if your plan was not well prepared or is not well executed, it could be difficult for you to stand by and watch things unfold. Few of us can idly stand by and watch others do poorly what we have loved doing well. This is especially true if they are now running our businesses, in which we have made such an emotional investment, differently than we would have.
Preparing a succession plan is a double-edged sword. If a succession plan is well prepared, it facilitates an orderly transfer of the operation of your business for the benefit of you and your customers. However, if it is not well prepared, it can cause potential difficulties for you, the new owner, and your former customers. Obviously, succession planning must be undertaken with extreme care and caution.
Choosing Your Successors
You, and your executors, have three options in choosing who will succeed you in running your business: family, employees, or third parties.
The advantages and disadvantages of each of these choices are set out below. A fourth option is to wind up your business by liquidating or otherwise disposing of your assets and discharging outstanding obligations. The relative advantages and disadvantages of this option are also set out below.
If you choose to sell your business to pursue other activities, such as retirement, you will be able to have control over who will succeed you in running your business. Normally, when a business is sold as a going concern, the vendor remains active in the business for a predetermined period of time. This serves two purposes. First, it allows the new owner to learn how to run the business. Second, it gives some reassurance to the customers that they will continue to be looked after, notwithstanding the sale.
For more information on all aspects of selling your business, see The Complete Idiot’s Guide® to Buying and Selling a Business for Canadians. The Family Business
The most obvious place to look for people to succeed you in your business is within your family. Presumably, your family will understand and appreciate your work in starting and running the business. If you are lucky, they might even understand the dynamics of running the business and be interested enough to continue to operate it. Even if they have not actively participated in running it, with proper instruction from you, interested family members can probably learn what is involved in operating the business.
Entrepreneur Beware
It can be difficult to resist getting involved with the business you have sold. Unless the terms of the transfer allow you to remain or consult, you have no legal right to continue your involvement. Regardless of how much you want to help, the new owner is under no obligation to accept your advice and suggestions. Having your help rejected can lead to feelings of powerlessness in a situation in which you were formerly all powerful—a major stress producer if ever there was one. Further, if the new owner still owes you money, your interference could be so annoying that you might jeopardize getting paid.
Hot Tip
When negotiating the sale of your business, regardless of the purchaser, be sure to clarify the nature of your continued involvement in the business, including what you will do, how long you will do it, and how much you will be paid for doing it. Unless otherwise agreed, after-sale services should not be provided by you on a complimentary basis or as part of the sale price.
Entrepreneur Beware
As attractive as the family option may appear, it does not work for all families. In many families, children have little or no interest in running the business. It is unreasonable to expect these people to continue to operate it. And although one or more family members might have some interest, they might not have the requisite competence. Business history is rich with examples of fam-ily businesses being poorly managed by second and third generations of family members.
Building Block
If you want a family member to continue your business, it is best to involve your designated successor in the business long before you expect to pass it on. Make sure that they experience all aspects of running the business, from the dull and bor-ing to the exciting. Involve them with planning, record keeping, deal-ing with suppliers and your banker, serving customers, and even cleaning up. This will give them the opportunity of seeing for themselves what is involved in running the business while you assess their inter-est and their overall competence.
It may also be possible to complete the sale without the purchaser having to produce a significant amount of money (this might be especially necessary if it is handed over to a son or daughter). Instead of actually selling the business, you give all or part of it to a family member as a pre-death inheritance.It is also possible, perhaps even likely, that if a family member succeeds you in business, you will not receive fair market value for the sale. Family members might expect allowances or discounts that other potential purchasers would not expect.
Unless you and your family members are convinced that it is right for them to carry on the business, don’t even think of them succeeding you. If, however, you all agree that having a family member take over will be successful, you can prepare your transition plan. Among other items, this plan will address purchase price and payment provisions, who does what and when, and what happens when and if someone defaults on the agreement. It is also a good idea for you and the purchaser to have separate lawyers to prepare and review the agreement. This can help prevent problems later on after the excitement of the sale is but a memory.
Employee Purchase
The next best place to look for your successors is with an employee purchase. They are familiar with the business and understand what is involved in looking after customers. This should facilitate a relatively easy transition to new owners running the show. Theoretically, as far as your customers go, there should be no difference after a change in ownership.
Bringing about an employee purchase is similar to arranging a transition to a family member. Make sure that the employee as prospective purchaser experiences all aspects of running the business. This will allow all parties to satisfy themselves that a sale to the employees is likely to be successful. As was advised with a family purchase, once there is agreement that the sale will work out well, prepare a transition plan that will allow you to phase out of the business while your employee takes over. If you know far enough in advance that an employee will ultimately purchase your business, you can start issuing shares to the employee as part of the compensation.
Entrepreneur Beware
Unfortunately, employees do not always make good owners. They might not have the money or access to money to purchase the business. Further, they might lack the managerial skills to run the business themselves.
Sale to a Third Party
If you do not have any family members or employees who might succeed you in your business, your only option—sale to a third party—might be your best one. Assuming that you can locate a qualified purchaser, you can pass your business on to an interested, qualified, and motivated individual. With fair market value being defined as the amount that a purchaser is willing to pay a seller, you will receive fair market value on the sale of your business. The ultimate selling price will be determined through negotiations between you and the prospective purchaser.
The major obstacle to selling to a third party is finding an interested and qualified purchaser. One of the major reasons for this difficulty is the unique and personal nature of small businesses. In many, if not most cases, customers patronize small businesses because they enjoy dealing with the owner. Once the owner leaves, they often choose to take their business elsewhere. (The lawyer who purchased my practice learned this very soon after I left). Unfortunately, we pay a price for our uniqueness and individuality.
If you are lucky, you can find your own purchaser. Let your network contacts know that you are interested in selling your business and allow them to help you in the search.
Entrepreneur Beware
Selling a business as a going concern is not like selling other assets such as real estate or office equipment. Realistically, there are few potential purchasers for specialized businesses such as professional practices (as I found out when I sold my law firm) and very personalized businesses such as graphic art and design. It often takes a very long time to locate interested, let alone, qualified purchasers (I learned this too).
If someone does locate a purchaser for you, consider paying this person some kind of a finder’s fee for saving you untold hours of frustration.
You might also contact a realtor or business broker for help in locating potential purchasers. Although there will be a fee payable if a broker finds someone who ultimately purchases your business, the fee is money well spent. Again, it will save you many hours of frustration and fruitless searching.
Once you have located an interested and qualified purchaser, involve your lawyer and accountant to help with the sale negotiations. Legal and tax considerations of selling a business are such that you risk serious consequences if you undertake the process without professional assistance.
Winding Up Your Business
Not all businesses can be sold. If your business is not saleable, the only option is to wind it up by liquidating assets and discharging liabilities. There may be some positive aspects to this.
If the assets have little or no value, it should be relatively easy to dispose of them, either by giving them away or simply throwing them out. Be kind to our environment; donate your castoffs and recycle what you can.
It might also be possible that specific assets might have a higher value if sold alone instead of as part of a going concern. You might have some intellectual property, such as patents or trademarks, that other businesses might be interested in acquiring separately. Similarly, you could have a valuable customer base or location that other businesses might be willing to pay for. Just because you are going to sell your assets individually, it does not mean that none of them have any value. Check with your accountant or financial advisor. Who knows? Your assets might be worth more to other businesses than they are to you.
Entrepreneur Beware
When you sell your business assets individually, you are unlikely to recover anything for goodwill, which is that intangible asset that makes your business so valuable and enjoy-able to you.
Although there is a very large and active market for used business equipment, it is unlikely that you can tap into this market. Used furniture and equipment dealers usually make bulk purchases from large organizations. Seldom are they interested in the furniture and equipment used by small businesses. Although you love your special desk and favorite chair, few purchasers will be willing to pay you what you think it’s worth.The first step in winding up your business is to check with your professional advisors to determine what legal and tax implications will arise from selling your assets. Once you have clarified what you must and must not do, arrange for appraisals so that you will know what the assets are worth if you find a qualified purchaser. These appraisals will be a starting point in your sale negotiations.
It is unlikely that you can find anyone—apart from friendly auctioneers—who will sell your assets on your behalf. You will be on your own to find a purchaser. Follow the usual approach: Let your network contacts know that you are selling your equipment and advertise however and wherever you see fit. If you have tried all of these suggestions and still have unsold equipment and furniture, try giving it to a charity. At least you will have disposed of it and you might even get a receipt for a charitable donation.
Don’t Just Sit There, Do Something
Just because you belong to a health club it does not necessarily mean that you are in good physical condition. Similarly, just because you have now finished this book about small business, it does not necessarily mean that you will successfully run your own business.
Are You Ready to Start Your Own Business?
If this describes your position regarding small business, go back to the beginning of this book and start working through Parts I, II, and III. Your challenge is to put together useful business and marketing plans to get your business up and running.
Hot Tip
Regardless of what action you are going to take regarding your business, make sure that you and your cash flow stay healthy. Reread Chapters 25 and 26 whenever you or your cash flow starts to sag. Without your good health and a healthy cash flow, nothing else much matters. Are You Ready for More Business for Your Existing Business?
If, like all small businesses, you are looking for new business, go back to Part III. Your first challenge is to figure out how to supply more existing goods and services to your existing customers. Your next challenge will be to supply existing goods and services to new customers and then move on to developing new goods and services to provide to your existing customers. You have a lot of work to do; but take heart, it will pay off.
But don’t just focus on developing new business. Make sure that your can also look after the business that you develop. Check Part 4 to know what’s involved in expanding your business when the time comes.
Are You Ready to Expand Your Business?
Don’t automatically think about hiring an employee. There are other alternatives that might be more suited to you and your business. Check out Part IV to find the approach that is right for you.
Are You Ready to Get Out of Your Business and Move On?
It’s time to start working on your succession plan. Do not pass go, head directly to the beginning of Chapter 28 to begin to plan your exit.
It has been a pleasure for me to put together this book. I hope it helps you to enjoy, and succeed in, running your own business.
The Least You Need to Know
To ensure the least disruption for everyone concerned, plan who is going to succeed you in business and how this plan will be implemented.
Your successors could be family members, employees, or third parties.
If you can’t sell your business as a going concern, the only option will be to wind up the business by liquidating the assets and paying the liabilities.
