Your Roadmap to Success

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1 1 1 Your Roadmap to Success We start by saying congratulations! If you are reading this book, it means that you are a successful entrepreneur and are now looking to the next stage in your life. You have worked hard over the years to build your business to what it has become. You have a wealth of knowledge and experience that now needs to be passed on. Planning how the business will succeed into the future is as important as the planning undertaken to start and grow your business. Successful plans take time and care. The earlier you start planning, the greater the likelihood your transition will be smoother and successful. What is succession planning about? Succession planning is the process of exploring your options so you can protect the value of your hard-earned business investment and choose the right exit strategy that makes sense for you, your business and your family. Your succession plan starts with a vision for the future. It is your roadmap for taking charge as to how your future unfolds, whether your goals are financial security, family harmony and/or for the state of your health and peace of mind. Whether you want to keep the business in the family or harvest the proceeds and move on, succession is a process that requires thought, planning and time to arrange and implement. What this book will offer you This book will walk you through a structured process for analyzing your options and building your succession plan. It provides guidelines for creating and discussing your plans with your family members and other key stakeholders. It also presents numerous tips and checklists to help you through your succession planning journey. As your succession plan is as unique as your business itself, this book also includes a copy of these checklists on an accompanying CD which allows you the opportunity to create, modify and customize your succession plan to fit your unique situation. You can then use these checklists in discussions with your advisors who will assist in finalizing and documenting your plan.

2 2 Succession Planning Toolkit for Business Owners This toolkit is a guide to covering key and typical aspects business owners face when exiting their business. The chapters that follow guide you through the process of creating a succession plan. The topics include: Chapter 2 Exploring your options; Chapter 3 Keeping the business in the family; Chapter 4 Selecting and grooming a successor; Chapter 5 Planning a management buy-out; Chapter 6 Selling the business; Chapter 7 Determining the value of the business; Chapter 8 Financing the succession plan; Chapter 9 Understanding the tax and legal issues; and Chapter 10 Managing your wealth to secure your future. Life s successes and lessons Many of the concepts and strategies that are covered in each chapter are highlighted in Situations, Strategies and Solutions. These real life stories are based on interviews with Canadian business owners who agreed to share their succession planning stories. Some have learned the hard way, but by reading this book, you are putting yourself in a better position to prepare a solid succession plan so that you can enjoy your next journey wherever that journey might take you. Successful succession If you are thinking about the next stage of your life, you ve already started your succession planning. It s an informal plan but it s a starting point. } Successful succession doesn t just happen. Careful planning takes time. ~ A formal succession plan is a strategic document that sets out a process and schedule for a business owner s eventual withdrawal from the business. It outlines the steps the business owner will be taking to transfer management responsibilities and ownership interests. The formal succession plan includes the legal and other supporting documents such as the shareholders agreement and your will that are required to put the plan into effect and meet your objectives. The technical components ensure that the succession plan is implemented in a manner that will both benefit the business and keep family and/or employee relationships intact.

3 Chapter 1: Your Roadmap to Success 3 } The earlier you begin the process, the more successful the plan will be. ~ What does a succession plan include? The formal succession plan contains information about matters such as: The identity of the successor or successors; How the successor will be trained for his or her role; The roles of other key managers during the transition; The distribution of ownership; The mechanics for the transfer of shares in the business; Taxation and legal considerations; Financial considerations; Retirement considerations; A procedure for monitoring the process and dealing with disputes and problems; A timetable; and A contingency or back-up plan. What does a succession plan look like? The sample succession plan below was devised for Larry and Jane Jones, owners of a successful business. Larry and Jane were not in a position to select a successor (other than each other) but wanted to have measures in place in the event something should happen to either of them. The entire record fills a small binder, as the legal documents to give effect to their plan are referenced and included with it. Of course, each succession plan will differ according to the type of business and the owner s specific circumstances and exit strategy. X Y Z g r o u p s u c c e s s i o n p l a n Purpose The purpose of this document is to summarize all of the plans and documents in place with respect to the management and ownership succession of Larry Jones and/or Jane Jones. Refer to the Succession and Estate Planning binder for a comprehensive record of estate and succession plans. Management in the event of sudden death or disabilit y Larry and Jane have prepared contingency plans which should be referred to in the event of crises (see Succession and Estate Planning Binder, Tab 1). The contingency plans indicate that in the event of

4 4 Succession Planning Toolkit for Business Owners Larry s sudden death or disability, it is recommended that Jane should immediately be given the title, duties and authority of President. Conversely, if Jane were to suddenly become disabled or die, her contingency plan recommends that Larry immediately be given the title, duties and authority of Secretary-Treasurer. If both Larry and Jane were to be suddenly absent, the existing management team will take charge. Share ownership upon disabilit y Larry s Power of Attorney (date) indicates that in the event Larry becomes mentally incompetent or incapable of managing his affairs, Jane will be able to vote Larry s shares in XYZ Co. Jane s Power of Attorney (date) indicates that in the event Jane becomes mentally incompetent or incapable of managing her affairs, Larry will be able to vote Jane s shares in XYZ Co. Copies of Larry and Jane s Powers of Attorney can be found at Tab 2. Share ownership upon death XYZ Co. shareholders agreement (date) indicates upon Jane or Larry s death, the remaining shareholder will buy or the corporation will redeem the shares held by the deceased shareholder so that the estate may realize the value of the shares. A copy of the shareholders agreement can be found in the Succession and Estate Planning binder at Tab 3. Each year, Larry and Jane meet with their professional advisors to discuss if the plan needs to be updated to reflect any changes in their business or personal lives. What are the benefits of planning ahead? Planning will help ensure your business transition goes smoothly and profitably. A well-planned succession plan will help you: Ensure the future financial stability and value of your business; Determine a realistic timeline for selecting and grooming the best successor; Weigh the potential tax liabilities of transferring the ownership and structuring the transaction to minimize tax;

5 Chapter 1: Your Roadmap to Success Determine the transitional and future management roles of family members who are either currently involved, or would like to be involved, in the business; Set a timetable for transfer of ownership to your successor, whether a family member, employee or an outside purchaser; Integrate your business succession planning with your personal estate planning; Ensure legal documents that give effect to your plan (e.g., the shareholders agreement and the transfer of the business ownership) are appropriately drafted. This also includes supporting documents such as your will, estate plan, marriage or domestic contract, any employment contracts and insurance policies; and Develop a contingency plan for the business to ensure its survival should you or a key manager become incapacitated. } Tax is a critical component of any succession plan; however, it should not drive the process. Your goals for yourself, your business and future generations should drive your decisions in creating your succession plan. ~ Working with your professional advisors Good, sound professional advice has a way of paying for itself. Your exit from the business may well be the most complicated financial transaction you undertake, and must be approached with the utmost of caution. There is a lot to organize and plan for and a great deal of professional advice is required. It is crucial to know when to step back and bring the professionals into the transaction, especially as emotions can sometimes stand in the way of making sound business decisions when personal affairs are on the line. Surround yourself with the best professional advisors chartered accountant, tax advisor, lawyer, banker, personal financial planner and succession planning specialist/facilitator as they will play important roles in laying the groundwork for successfully implementing a plan that will achieve your objectives. Now is not the time to put your company at risk by trying to do everything yourself. Hire the right professionals!

6 6 Succession Planning Toolkit for Business Owners } With careful planning and appropriate advice along the way, you can take charge of how your future unfolds. ~ Failing to plan is planning to fail Succession planning is all about taking the helm and setting the course for your eventual exit from the business. Lack of a carefully thought through succession plan, with input from family members and other key stakeholders, could mean under-valuation, under-performance or ultimate failure of the business. In family-owned businesses, the lack of a formalized succession plan is viewed as one of the biggest reasons 70% of intergenerational transfers fail to survive into the second generation and 90% fail to pass to a third generation. Failure to plan, communicate and manage succession is the greatest threat to the survival of a business. Family conflict can easily overcome a family business. As succession planning represents a critical turning point for you and your family, the input from family members (including those not involved in the business) throughout the planning process can spell the difference between success and failure. Who s going to be in charge when you leave? Why should Frank succeed you when Alex is just as good? Why does Brenda always get her way? Who will sign the cheques? I have no intention of working around the clock like Mom and Dad! Will everyone get their fair share? What is fair share? Why are you thinking about selling the business? What s going to happen to the employees who have been with us all these years? What s in it for me?!!! If not properly handled, the tension and conflict could tear the family apart. To reduce this risk, many families hire a professional neutral facilitator to assist them in discussing business and personal issues and understanding each other s perspectives. } Family dynamics add a challenging dimension to succession planning. ~

7 Chapter 1: Your Roadmap to Success 7 A well-structured succession plan A well-structured succession plan includes the strategy and tools that will help ensure: The business is ready for succession; A successor is properly identified and ready, willing and able to take over the business at the appropriate time. Depending on the owner s exit strategy, the successor may be a family member, a key manager in the business or an outside party; and Key stakeholders such as family members and non-family senior management are involved in the plan. When should you start planning? Today. Not tomorrow. } The more time you have to plan, the more options you can consider and the more likely you will achieve your goals. ~ Don t wait until your retirement is close on the horizon. Early planning will help minimize the risks for your business and your family as well as give you enough time to achieve the best balance of family and business priorities. Certainly, it can reduce stress and costs. } By involving your family members and other key stakeholders early in the process, you will be better prepared to make the best decisions for everyone involved. ~

8 8 Succession Planning Toolkit for Business Owners Some experts recommend the optimal timetable for planning is 10 years. In truth, planning can be accomplished in two to three years, or less if absolutely necessary. The earlier planning begins, the better, however. For example, potential successors need to be involved and aware of your plan well in advance so that they can build their knowledge, experience and skills to eventually take over the business. Alternatively, if you are thinking about selling to an outside third party, you will want to plan the timing of the sale so that you can get the maximum value for your business or find just the right buyer. } Your succession planning can help you reap the rewards of all your hard work. But it requires your commitment. ~ Planning Checklist 1.1 Getting Started will help you focus on the matters that we will be discussing throughout this book. It can also help you overcome the procrastination that so commonly postpones the owner s succession planning. So let s get started! f o c u s o n p l a n n i n g Your roadmap to success In this chapter, we have discussed: The process of creating your formal succession plan; What a succession plan includes; Working with professional advisors; and The benefits of planning early. The next chapter provides an overview of your options for exiting the business.

9 Chapter 1: Your Roadmap to Success 9 P L A N N I N G C H E C K L I S T 1.1 Getting Started This checklist is designed to help you get started on your succession planning journey. Family members often play a very important role. If you have not discussed these issues with your family, you will likely be surprised at how many sleepless nights they have had worrying about some of these very same issues, although usually from a different perspective. Write down your answers to the following questions. If something were to happen to you today Who could run the business? Who would run the business? Who do you want to run the business? What income would there be for you and/or your family to sustain your current lifestyle? How much do you and your family need to sustain your current and future lifestyle? Valuation How much do you think the business is worth if you sold it to an outside buyer? How much do you think the business is worth if you sold it to a family member? Insurance How much and what type of business and personal life insurance do you have? Who are the beneficiaries? Legal Do you have a will? If so, when did you last amend it to reflect any changes in your personal and business life or your wishes? Are you aware of how your estate will be handled if you do not have a will or if the will has been found to be invalid? Do you have a power of attorney? Do you have a shareholders agreement?

10 10 Succession Planning Toolkit for Business Owners Business Do you have a strategic plan for your business? Who are the stakeholders in your business? Family members Business partners Key employees Franchisor or distributor When would you like to slow down or exit the business? How much time do you have to prepare for your transition?

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