Building a succession plan: 7 things to consider when planning your future

Examine your vision for the business: how will it grow and evolve? What needs to be done to realize this vision? Do marketing efforts need to be strengthened or a stronger sales team developed? Knowing what you want for the business will help you determine which option is the best: passing the business to a successor, a management buy-out (or an employee buy-in) or selling the business. 

Whatever you choose, this will be a big transition for you, especially if you’ve been in charge for many years; it’s not going to be easy. Keeping the lines of communication open between all parties impacted by the succession will help with the creation of a realistic plan.

2. Select and prepare a successor

Regardless of whether your successor is a family member, key employee or an outside buyer, you need to thoroughly assess their ability to follow and execute your vision. If you agree to stay on for a year or two, it’s possible a buyer might pay more to capture your expertise and help in the transition. 

1. Develop a leadership profile: outline the skills and experience the successor will need to deal with the challenges to come.
2. Identify suitable candidates and gaps in skills and experience. Candidates do not necessarily have to have everything outlined in the leadership profile, but it’s important to discover any gaps so that action plans can be developed for additional training, coaching and mentoring. 
3. Prepare a management development plan – this will be a road-map for succession candidates. It should project the company’s future needs and provide guidance for meeting those needs. The plan should be reviewed regularly to ensure it still makes sense for the business.
4. Evaluate the successor candidates and pick one. After going through the above steps, the choice may be clear, but if it’s not then careful consideration must be given to: Who has shown commitment to the task? Who has earned the respect of employees and business associates? Whose leadership style would be the most appropriate?
5. Communicate succession plans – once the choice is made, communicate the decision to everyone who is involved in, or will be impacted by, the change in leadership. Even with careful planning, employees and customers may be fearful of the changes that lie ahead, so avoid making the announcement too early – wait until all plans are in place and the successor is ready to take up their role. 

3. Determine the value of the business

A valuation considers both the tangible and intangible assets of a business. Tangible assets are things like property and inventory, while intangible assets include patents, trademarks, and customer goodwill.  Measuring a company’s value is not so much about how it has performed in the past, but gauging how well it will perform in the future, thus determining its fair market value. Due to tax considerations, it’s important the valuation is done by a certified professional to avoid any challenges.

4. Sell the business 

Once you’ve decided to sell, you have to decide when. You should plan to spend a year or two getting ready to sell by strengthening the business and enhancing its value. You will also need to look at your personal income tax and estate planning to ensure the sale is tax-efficient – especially since for most business owners, the sale of the business is their retirement plan. 

With the help of trusted advisors, create a selling document that accurately describes the company: history, products, markets, personnel – everything! 

At the same time, develop a list of potential buyers – look to suppliers, competitors, family members, employees. Potential buyers will want to do their own due diligence to avoid last-minute surprises that could jeopardise the sale.

5. Finance the succession plan

You will need to decide what is being sold; is the business a proprietorship or incorporated? Does the structure need to change for legal or tax reasons? 

You will also need to consider how you want to be paid – lump sum or installments? 

Another consideration is whether you want to keep working for the company in some capacity – or if you prefer to make a clean break. Remember that as well as looking at the tax and legal implications, you need to look at the lifestyle changes that will come around. Are you ready to go from working long days to having no responsibilities? Or do you prefer the idea of a gradual retirement?

When choosing your successor you will need to look at their ability to finance their purchase. A wise purchaser will see the seller as an asset and a source of information as they draw up their business plan. The purchaser and seller working together can also help convince potential lenders that this is a good investment.

Be sure to consult with your lawyer and/or accountant on your options regarding financing and payment.

6. Understand the tax and legal issues

Tax and legal implications are important, especially if you’re looking to the sale of your business to fund your retirement; start consulting with professional advisors early in the succession planning stages. Tax will apply differently if you’re selling to an outsider versus to selling to family, and remember farms are treated differently than other businesses. You will want to look carefully at the business structure to ensure you qualify for the Lifetime Capital Gains Exemption. 

7. Managing wealth to secure your future

Work with a financial advisor to help you plan how to deal with your new wealth. You need to be sure that the money you make on the sale will allow you to live the life you want… for as long as you live. Get recommendations on advisors from trusted friends/associates and then interview three or four, to find the person you are most comfortable with and are willing to trust with your money.

Don’t forget to consider the income tax implications of any investment decisions. You will also need to look to estate planning – what happens to your wealth once you’re gone? Estate planning often falls low on people’s priority list, but it needs to be thought out in order to ensure that your legacy is protected and family members who are relying on you for financial stability are not left without.

Keeping it in the family or Management buy-out?

It’s natural to want to pass your business onto the next generation, but this requires that they have the knowledge, skills, and experience to run the company and take it forward. Regular meetings of all involved will keep everyone informed and provide a safe space to discuss business concerns. You may want to consider using a facilitator since there are bound to be conflicts arising from overlapping family and business lives.

There are also tax implications to be considered when passing the business to your children, especially with regards to the Lifetime Capital Gains Exemption. You will want to talk with an accountant or tax professional before making any decisions. 

A management buy-out is essentially the purchase of the business by part or all of the existing management. Since the financing can be trickier, the owner’s exit is often gradual, with the transition taking place over three to five years. It’s important to ensure that all members of the management team agree with the vision, and are all truly interested in owning a stake in the business.

The management team needs to be strong and credible with a well thought-out business plan and sufficient financial backing. Both the business owner and the management team should engage independent professional advisors to guide them through the negotiations. 

Start planning today

The overriding theme is to begin the process as soon as possible if you haven’t already. If done properly, succession planning is not a one-time exercise, but an ongoing process that you regularly update and amend as circumstances change.

For more information please visit:

• The 5 Phases of a Successful Exit Strategy (webinar)
• The 6 Phases of Buying an Existing Business  (webinar)
• Lifetime Capital Gains Exemption – is it for you?  
• Canada Business Network has a lot of great information, including links to template plans.

Finally, never forget that CFIB is here to help you. You can always call our counsellors if you have further questions.

Check out our succession report for recommendations on how government can make succession planning easier. Happy planning!