Posts Tagged ‘exit’

When “What If?” Becomes “What Now?”…

Tuesday, September 4th, 2012

 

This week’s guest is Howard Lerner, Partner at SBLR LLP Chartered Accountants, a full-service accounting and business advisory firm located in mid-Toronto.  With 9 partners and over 40 team members, including a strategic tax department, SBLR specializes in providing creative income tax solutions and high-level growth and exit strategies for profitable, privately-held companies.

 

One of the most important – but often ignored – reasons for preparing for the future succession of your business is to minimize the fallout from the unexpected.  While things don’t always go according to plan, the business has a much better chance of surviving if you’ve made preparations, in advance, for it to continue without you there.

The following is based on an actual story, illustrating the importance of planning ahead.  In a real-life situation, Karen, 56, started Staywell Corp, a health services business, 23 years ago. Her son John, 27, and daughter Beth, 24, have worked in the business since graduating from university.

Karen recently contracted a life-threatening virus leaving her paralyzed and unable to work.   Not having developed a strong senior management team, much of the business knowledge resided with Karen.  With the help of a few loyal employees, Karen’s children kept things together for several months, hoping in vain that their mother would quickly return to work.

Karen and her family never discussed what would happen in case of a tragic event, so John and Beth were completely unprepared for the responsibility resulting from their mother’s lengthy absence.  After six months of declining sales, John and Beth realized it was necessary to sell the business. The value received for Karen’s shares was substantially less than it should have been, as much of the intellectual capital was tied up with her.  The proceeds still resulted in a taxable capital gain to Karen of $1.2 million, thereby costing her family $110,000 in capital gains taxes.

After the sale, John and Beth left the company; only one has since found new employment.  Karen’s disability insurance, a fraction of her former CEO’s salary, means the family is struggling financially, as Karen needs full-time nursing care, and the after-tax proceeds were used to pay down debt.

How could this family have experienced a better outcome?  The answers all have one thing in common:  PLANNING.

1. Succession Planning – Karen could have developed a strong and capable management team and delegated as much responsibility as possible to the team, with the objective of making herself redundant to day-to-day operations.

2. Insurance Planning – At least bi-annually, life and disability insurance policies could have been reviewed to provide adequate coverage in case of death, illness, or disability.  Insurance strategies can often include funding the premiums using corporate assets certain situations.  This planning also involves the preparation and updating of proper wills and powers of attorney.

3. Tax Planning – A proper corporate structure also might have allowed Karen to multiply the Capital Gains Exemption on the sale of Staywell Corp’s shares, possibly eliminating all of the $110,000 of capital gains tax.

4. Exit Planning – Karen could have been developing and communicating her plans for the business, so that the key stakeholders (her family and senior management) would know and understand Karen’s wishes and how to execute them in case of disability or sudden death (yes, that happens, too).

5. Financial Planning – a solid financial plan could have established family assets in addition to the business investment, making the group less reliant on Staywell Corp for support.  Debts could have been managed to maximize interest deductibility.

Karen and her family have a tough road ahead of them but their situation offers an important lesson to the rest of us. Call your trusted advisors today and put some plans in motion to mitigate the implications of unexpected yet potentially disastrous situations.  After all “What if” can often turn into “What now?” but with a phone call or two, you can avoid that.

For more information, please contact Howard Lerner at SBLR LLP Chartered Accountants at 416-488-2345 Ext. 222 or at hlerner@sblr.ca

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4 Tips for Making your Exit a Graceful One……

Saturday, January 30th, 2010

About 4 years ago CIBC World Markets published a study which said that more than half of the owners of small businesses were expected to retire within 15 years.

At the time, 3 points paticularly caught my attention. The fact that the sale of their business was expected to generate roughly 30% of retirement income for self-employed people was the first (I am a Scotsman after all). The second was that approximately 40% of business owners were expected to sell their companies to outsiders or non-family interests. And finally, less than 50% of the business owners had a clear plan for exiting their business.

From what I can see not much has changed. You may find this hard to believe but there will come a day when the call of the golf course/boat/cottage/grandchildren etc. can no longer be ignored and even you will either want to sell your company or pass it on to someone in your family. So here are 4 tips based on the experiences of the companies we’ve worked with since the study was published.

Tip # 1. Plan your exit early and carefully. That way you’ll get the biggest financial return for the years of sleepless nights, missed vacations and everything else that you’ve invested.  You don’t ever want to look back and say “I could have got more for the company”. Even if you know who your successor will be, start early, don’t risk waiting until health or other issues pressure you to complete a deal and get out.

Tip # 2. For most of us, selling or passing along our business is a once in a lifetime experience, so talk to people who has already done it – or who have advised those who have done it. Think about things like how long a transition period you want – will you leave immediately after the transfer of ownership or will you stay on for a predetermined period of time? Consider how you would like the purchase price to be paid – are you willing to have some of it come from future profits? Talk to your personal financial advisor. Get him/her to update your calculations about how much you’ll need for retirement.

Tip # 3. Get the help of specialists to value your company and to structure the sale or transfer in order to handle the tax and legal issues effectively. The accountant who does your financial statements and the lawyer who does your contract work may not have a lot of experience buying and selling companies. Find someone who specializes in the valuation of companies (he/she may have the CBV designation).  If the valuation comes in below what you think the company is worth they’ll help you understand why and tell you what you can do about it (Another reason to start early – give yourself time to take a few simple steps that could increase the selling price.) They’ll also make sure you don’t overlook things like the value of any intellectual property you leave in the company. Similarly, find an accountant and/or lawyer and who works daily with the tax and legal aspects of the sale/acquisition and transfer of businesses. If you don’t know anyone we can recommend some specialists we’ve worked with.

Tipo # 4. Many business owners believe that it will only take a few months to dispose of their company, once they’ve decided to get out. That’s an incorrect assumption. Even with a successor waiting in the wings, it takes many months to put everything in place. If your buyer is an outsider rather than an employee or a family member it will take longer to complete the sale. Finding a buyer and then negotiating with someone you don’t know will take even more time.

To build and run a profitable business you have had to do many things well. Don’t let the last thing you do with that business be one of the worst.

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