Succession Planning - Check List


The sale of any business is complicated and significant business value can be lost by not thoroughly planning and preparing for the sale, thereby maximizing the perceived value of your business. We recommend that any succession plan should begin approximately five (5) years before your intended date to sell. Over this five year period, you will review what specifically you are selling; arrange your business affairs so as to accentuate the business’ strengths; correct any real or perceived weaknesses and arrange for the best income tax strategy. These are all key factors in maximizing the selling value of your business.

When selling a business it has been our experience that not enough consideration or time is given to recognize the emotional aspect attached to formally saying goodbye to long time loyal customers and / or staff, many of whom have become your family away from home. A good succession plan recognizes this emotional aspect of the transaction, which increases with intensity during the negotiating period and brings new complexities to an already emotionally charged environment.

Year 5

Five years prior to selling your business is an excellent time to begin taking an overall inventory of the business and assessing each component as to its impact on the proposed sale transaction. More importantly, how would each component be perceived by the potential purchaser?

a. Business Valuation

How much is your business worth today? What are the risks that could diminish this value and how can they be alleviated or improved over the next five years?

What actions would you take as the owner over the next five years which could increase the value of the business, and what actions could be taken to provide the greatest flexibility or selling options so as to sell the business over the shortest time period once listed?

Review the balance sheet of your company to determine where the transferrable value is and identify the risks which would discount this overall value.

Review the Statement of Income with a view to identifying areas of potential profit as well as areas where the company operations are vulnerable to such threats as increased competition, increasing expenses and / or lack of financial efficiency.

  • How does your company compare to industry experience?
  • What makes your business unique in the market place?

b. Long Term Financial Agreements

Review all Long Term Financial Agreements and determine their impact on your business over the next five years and in particular, their influence on prospective purchasers.

Premises Lease

  • How long is the current lease term and are there Options to Renew;
  • Review operating space requirements in line with current and projected revenue patterns;
  • What are the requirements to Assign the lease agreement;
  • Demolition Clauses
  • Personal covenants

Employment Contracts

  • Restrictive covenant agreements with key employees
  • Tenured Employees (severance issues)
  • Special compensation considerations
  • Minority shareholders

Equipment Contracts

  • Term remaining / buy out provisions
  • Assignment of financial contract
  • Personal covenants

c. Capital Asset Program

Complete a comprehensive review of all revenue generating equipment, including leasehold improvements that influence operating efficiencies. Identify any major capital expenditures required to modernize the business including computerization and applicable software, equipment, facilities, etc.

In some instances the acquisition of certain equipment, computerization or applicable software may not add value to the business, while in other settings the use of capital items are considered integral and thus their absence will tend to serve as a discounting factor to the business’ overall value.

Does the Company own the operating premises? Having the operating premises outside the active corporation provides greater flexibility in maximizing potential purchasers and is an excellent source of post ownership income.

d. Income Tax Considerations

The sale of any business has certain income tax consequences and thus, it is extremely important to review the income tax consequences of a future sale. Is the transaction going to involve a sale of issued share capital (possible income tax advantages) or a sale of operating assets?

The Income Tax Act has some excellent avenues in which to take advantage of favourable income tax benefits, but in most cases there are waiting periods which delay sale activity (normally up to two years).

Having a good succession income tax plan can be worth thousands of dollars incorporated in to the value of the business.

e. Potential Purchasers

While it is often difficult to envision who might potentially be interested in acquiring your business, it is always a good idea to begin to identify the strengths of the business and in turn begin to develop a list of potential purchasers, even if it is limited to a general description of whom it might be.

  • What makes your business unique and will this uniqueness attract or detract purchasers?
  • Does your business have transferrable Goodwill, personal Goodwill or a combination of both?

Although often looked upon as innocent bystanders, employees have a significant impact on the value of a business and in certain instances represent the best potential purchasers. Incorporate employees as part of the succession plan in order to diminish risk (transition assistance) and maximize perceived business value.

Five Year Business Plan

Having completed the foregoing described homework, develop a comprehensive Business Plan, including financial, management and operational objectives detailing your plan of action for the ensuing five year period. Begin each year in the next five years with reference to your accomplishments and areas remaining outstanding. A Business Plan is your road map in reaching your destination, and throughout your journey, serves as a constant reminder of your original objective and commitment to achieving the desired goal.

Formulate a Succession Team

A succession team is a group of individuals who have the special knowledge and talents in which to assist you in achieving your goal. Assign duties and responsibilities with reporting time frames to ensure everyone is on the same page and you remain an effective quarterback.

The risk of lost value is too great to assume full responsibility for completion of the Succession Plan.

Year 4

In concluding Year 5, you approach Year 4 having identified the core areas requiring immediate attention to maximize the perceived value of the business, including;

Employee Considerations

The company’s employees are considered the company’s number one resource and as such add significant value to the business. Do you have the right people on the bus in the right seats?

Complete a comprehensive review of all employees, including their training, qualifications, and ongoing contribution to the company’s operations. If you were a purchaser, could you count on these employees to diminish or increase your investment risk?

Is there an employee or group of employees who could be considered serious purchasers of the business four years hence forth?

Consider how the employees could assist in your Succession Plan if they were to be involved.

Transferrable / Personal Goodwill

Consider what changes are required within the business that would transfer identified Personal Goodwill to Transferrable Goodwill.

Identify what makes the business unique within the industry and implement changes to ensure this form of Goodwill is transferrable.

Identify key employees and their long term contribution to the company including identification of transitional assistance to new ownership.

Review long term company advertising programs, sources of rated (A, B, C) customers and prepare listings of top customers including annual revenue generation.

Income Tax Strategy

Year 4 is a great year in which to begin any corporate re-organizations, transfer of assets, etc.

By implementing these strategies in Year 4, reviewable transactions are outside the three (3) year limitation in financial and income tax reporting.

Once completed, one can begin to establish financial patterns providing immediate benefits as well as serving any time delay requirements.

Employee Training / Advancement

Whether changing people on the bus or changing peoples’ seats on the bus, Year 4 allows for sufficient time in which to train people for their new positions and to begin realizing the resulting benefits. If left too late, implementation risks could increase.

Capitalization Program

Year 4 is a great time in which to acquire important capital items that will modernize the business and affect financial efficiencies. The timing provides a great opportunity to begin realizing the financial efficiencies which add value to the business, all the while the business takes advantage of the tax implications arising.

This is also an excellent time in which to look at the existing technology reporting systems in comparison to industry and financial management efficiency. Without modern technology in the field of management, the purchaser will discount on account of perceived management, anticipated capitalization, and training post ownership transfer.

Year 3

Year 3 is big for cleaning up as many of the financial inefficiencies as possible, maximizing profitability contributing factors, as well as documenting management, procedural and process systems. The more documentation one has that relate to the business’ activities, the more the potential purchaser’s transitional risks are diminished. Diminished risks mean greater business value.

It is now time to once again take a good look at the financial operations and how the two previous years’ efforts have contributed to business value. Identify what’s working and what is not and make last minute changes. The value of any business is dependent on what happens in the three most recent fiscal periods. If you didn’t get the results you wanted by Year 3, you still have Years 2 and 1 in which to realize the real benefit.

Financial Position

Year 3 is the year you want to begin seeing the company’s balance sheet from a point of adding value;

  1. A strong working capital position with diminishing loans and demand debt;
  2. Industry acceptable accounts receivable and inventory balances;

    Accounts Receivable balances should reflect good credit policies, good client relations and communications which in turn reflect good management;

    Stock and trade inventory balances represent industry level turn rates, with no excess inventory contributing to higher than industry cost percentages, again confirming good management control.

c. Minimal redundant assets being reported such as surplus cash reserves, personal use items (such as non-business related vehicles), debit shareholder loan balances and amounts due to or from affiliated companies.

The Purchaser and their advisor will want to see a balance sheet representative of what they will receive when they purchase the company.

Statement of Income

The next three years financial reporting will reflect what the Purchaser is acquiring, and thus it is extremely important to take a very close look at the financial operations coming out of Year 4 and going into Year 3.

  • Are revenues increasing, decreasing, or fluctuating?
  • Are direct expenses maintaining consistent, decreasing or fluctuating cost relationships to revenue?
  • Are fixed overhead expenditures remaining consistent?
  • Have you revised the Business Plan in order to effect changes in the operating performance of the business?
  • Have you minimized personal expenditures on the financial statements to decrease confusion and perceived risk?

A purchaser can only purchase what they can see, not what you tell them.

Prospective Purchasers

Year 3 is the best time in which to narrow the list of prospective purchasers and begin to research who and where they are located. Research what the market conditions are for business transfers in your industry and what are generally acceptable terms under which ownership is transferred.

In some industries (particularly in the professional sector), the best potential purchaser is found within the employee base and thus Year 3 is an opportune time to revisit the employee pool for prospective purchasers. While the first three years of the Succession Plan are a great time to single out employees who are prospective purchasers. Year 3 is the year in which the subject should be addressed to determine the actual level of interest, if any.

If there is no employee interest in the succession plan, as an owner you must safeguard the company assets (restrictive covenant agreements) and perhaps consider changing personnel with those who have the desired interest.

Company Strengths / Weaknesses

It is now time to take an inventory of the company’s strengths and in particular its weaknesses as one enters the last two years of the Succession Plan. What is the impact of the weaknesses on the Purchaser’s consideration of value and can they be corrected?

Review and revise the Business Plan for the last two years of the Success Plan and draft a blue print for management, operational and financial results to “peak” in Year 1.

Year 2

Year 2 is all about revisiting the original Business Plan to identify all the areas where improvement was identified, corrective action planned and results projected with a view to considering any last minute management action. This year it is all about achieving the very best operating year in Year 1. Going into Year 1, we want to see a Balance Sheet that reports transferrable value and Goodwill flowing from good financial management, modern revenue contributing equipment being in place, and increasing profitability by way of increasing revenues and consistent management of operating expenses.

Marketing the Business for Sale

Year 2 is also the year when the owner begins to develop their marketing plan to sell the business. Selling a business at the maximum perceived value begins with leadership by the Vendor who makes his/her position clear from the outset;

  1. A clear definition as to what is being sold:

    Is the Vendor selling the issued share capital of the company or the operating assets?

  2. For what price:

    The Selling Price should be specific in amount with how one arrived at the value, or demonstrated the value by apportionment of the selling price in relationship to operating assets included in the sale price, with particular attention in how goodwill is valued.

  3. Under what terms and conditions:

    Does the Vendor want a cash transaction or are they considering participating in the acquisition financing? Are certain operating assets to be excluded from the transaction? What sort of transition period is the Vendor prepared to provide?

Prospective Purchasing Market Analysis

In beginning to market the business, it is extremely important to have a very good understanding of the market place within which the prospective purchasers are located. As with any economic transaction, the value is influenced by the economy and thus if the economy is experiencing a downturn, there will be a depressed purchasing market which will discount value or influence the availability of investment funds.

It is extremely important to understand the purchasing market prior to entering into negotiating discussions as this will be the area from which the Purchaser begins their analysis and thus discussions.

Special Prospective Purchasers

Having completed the marketing material representing the proposed business sale, Year 2 is the best opportunity to approach Special Prospective Purchasers such as employees or businesses who have expressed interest in acquiring a business such as yours. In all cases, one would obtain a Confidentiality Agreement prior to providing any marketing information.

For discussions with employees, a word of warning; once the discussion with an employee includes consideration for purchasing the employer’s business, the employee / employer relationship has changed. One cannot negotiate at night and work alongside the employee the following day as if the previous evening’s discussion had not occurred.

Retirement And What Now Do I Do?

As one enters Year 2, consideration towards retirement should be at frequent intervals, including reviewing one’s current life style and the making of a “bucket list” of things to do when the business sells. Take time to investigate various retirement activities, including extended vacations, hobbies, various sport activities and yes even interesting part time jobs. Year 2 is an extremely important time to kindle interest in something other than your business or else your lack of an alternative (to the business) will influence your objectivity to sell. The lack of a clear objective and a commitment to new activities, will negatively influence the various decisions required in reaching a satisfactory transaction to sell the business.

Year 1

Business Valuation

As you go into the year scheduled to sell your business, it is important once again to complete a valuation of your business. As in Year 5, this process is to confirm the market value of the business as well as identify the strengths and weaknesses of your business. After all the planning and working to improve the business, one does not want to enter the marketing of their business not knowing what the prospective purchaser will see, nor does one want to enter this phase not having a very good idea as to the value of the business.

Over the past several years, and in particular since the world economic crisis occurred, financial institutions have increased their requirement for support business valuations as an integral part of their lending due diligence. Having an up to date business valuation on hand could reduce financing time lags, as well as assist in achieving a cash transaction.

Business Broker

Negotiating a business transaction that involves the transfer of ownership is complex and should be addressed with total objectivity. Thus, we recommend business owners engage the professional services of a business broker as opposed to undertaking this challenge on their own. In choosing a broker, and to achieve the greatest results, one should make sure the broker has the market and industry knowledge in which to maximize the owner’s exposure as well as talk the language of prospective purchasers.

Business brokers have fees ranging from a flat fee, a percentage of the selling price to hourly rates.

Status Quo

Once the business is offered for sale, it is difficult to keep focused on the business while remaining motivated to begin your retirement. In this challenging time period, we recommend the vendor continually focus on improving the business from a systems and management point of view. Any capital expenditures should be weighed as to the ability to recover the acquisition cost in addition to the marketed value. This is an opportune time in which to increase customer relations as one can never tell who may be a prospective purchaser.

Consideration to enter into any long term agreement and / or liabilities should be weighed against the impact on the business sale and in particular, the prospective purchaser.

Selling a Business / House

Selling a business is very much like selling a house; a great deal of value lies in the eyes of the beholder. Make sure the business facility is looking its finest, and that it is maintained in a clean and orderly fashion. Look for potential problem areas as possibly noted by a prospective purchaser

  • Is there obvious unnecessary clutter, disorganization, or needed repair?
  • Is all equipment in running order and if required inspected for quality?
  • Are employee performance evaluations and compensation reviews up to date and in order?

Good prospective purchasers have already conducted their own tour before they actually make contact to begin the formal process.

Be Discreet

While it is important that as many people as possible know that the business is for sale, being discreet is important in keeping the transaction professional. We generally recommend that employees not be informed that the business is being marketed, nor do we recommend releasing any information regarding interest or negotiating discussions until a firm and binding contract has been completed.

Employees knowledgeable of a business being offered for sale assume the worst, such as losing their job or having their compensation reduced and begin to look for alternative employment.

Customers who become aware of a pending ownership change assume their relationship with the business will change and begin to look for alternative sources.

Prospective purchasers may not share the same intensity for being discreet and accordingly begin to interfere with the business’ day to day activities, including contacting the business directly to request information regarding the sale.

We recommend pre-qualifying prospective purchasers, as well as having them sign a detailed Confidentiality Agreement prior to entering into even preliminary discussions.

Succession Planning Checklist

Year 5

  • Business Valuation
  • Long Term Financial Agreements
  • Premises Lease
  • Employment Contracts
  • Equipment Contracts
  • Capital Asset Program
  • Income Tax Considerations
  • Potential Purchasers
  • Five Year Business Plan
  • Success Plan Team

Year 4

  • Employee Considerations
  • Transferrable / Personal Goodwill
  • Income Tax Strategy
  • Employee Training / Advancement
  • Capitalization Program

Year 3

  • Financial Position
  • Balance Sheet
  • Statement of Income
  • Prospective Purchasers
  • Company Strengths / Weaknesses

Year 2

  • Marketing the Business for Sale
  • Prospective Purchasing Market Analysis
  • Special Prospective Purchasers
  • Retirement and Now What Do I Do

Year 1

  • Business Valuation
  • Business Broker
  • Status Quo
  • Selling a Business / House
  • Be Discreet

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