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By Mark Bertoli, IPC Securities Corporation
Special to the Financial Independence Hub
It has been estimated that over the next decade there will be approximately $1 trillion in personal wealth transferred from one generation to the next. A great portion of that wealth is currently tied up in equity within Canadian small businesses. A recent study conducted by IPC Private Wealth, a division of Investment Planning Counsel (IPC) revealed some startling statistics.
A full 42% of business owners are uncertain about their retirement and what is more alarming is that almost half of business owners (48%) do not plan to seek the advice of an advisor. Some of the existing plans of business owners consist of working until they are unable to do so (36%) or exiting when they have enough money (25%). One highlight is that 29% of business owners plan to run their business until their successor is ready.
How to maximize the value of a business
Start with a plan: it is a great strategy to start early. A 10-year plan is a good starting point. Seeking a financial advisor with experience in business transition is a great advantage. This may be the owner’s first business sale but the advisor may have navigated these waters many times and has the advantage of knowledge. The advisor may bring in specific expertise to increase the value of the business. If an advisor – who truly acts as a coach – is brought into the situation, one of the first projects would be to systemize the operation and create a turnkey situation. The business is then far less reliant on the owner and more valuable to a potential buyer or successor. With time on your side, many other strategies may be employed.
A family business or a liquidity event
When selling or transitioning a business, there are several steps that are critical to its future success, as well as the social continuity of the seller, buyer, or heir.
As a result of being involved in multiple business transition plans, I have personally witnessed the division that has occurred as a result of the variation of vision and/or values. The current owner has a commitment to existing clients and “the business has always done it this way.” The buyers or heirs may have their own vision for the future. In the event that the business owner is training a successor from within or passing the business to the next generation, this becomes very important. Alignment of vision, mission and values is one of the most important factors in the successful transition of a business.
Liquidity options
Once we have maximized the value of the company, we now need to create the transition plan. This can take multiple forms: either transition the business to an heir, develop a successor from within, or do an outright sale. In many cases, business owners undervalue or overvalue the business. One of the simplest ways to get an accurate valuation is for the business owner to have a conversation with their banker or business valuation expert. What is the value based on the financial statements? What is the amount of money the bank would lend toward the sale of the company? Once you have a realistic view of the value, you will have clearer direction. An advisor can also give specific advice with respect to developing a successor from within or doing an outright sale.
The next generation: The family meeting
The transition to the next generation may seem simple but it is the most dynamic in many ways. How many children will be involved? Will it be fair for everyone in the family? Like all planning, it is important to start this conversation early and openly. Delaying this conversation may end up with some unexpected results. Although the parents may have grand plans, the next generation may want nothing to do with the business. Family continuity is more important than business continuity. Earlier, we discussed vision and mission values. Within the family transition dynamics, this in one of the most important conversations. This can be facilitated by the advisor or advisory team. Clear expectations, visions and values are important here.
The Postcard transition from Business Owner to Retirement
- The advisor has figured out exactly what will be required for an enjoyable and worry-free retirement, financially.
- The business continues to grow successfully with great service for the clients and great value for the new owners.
- In case of a family transition, the family estate is equalized between the heirs.
- There is family continuity from a perspective of shared vision and values.
Mark Bertoli is a Kamloops-based investment advisor for IPC Securities Corp. He spent time working on a National Board in Toronto and an international Board in Dallas Texas. Mark owned and operated a number of successful businesses, such as operational companies and commercial real estate development firms through the B.C. Interior. With this vast business experience, Mark brings a hands-on approach to tax, as well as corporate and estate planning for his clients.
