Exit Strategy and Succession Planning

For many of Edmonton’s small business owners, the term “succession planning” can mean the passing along your business to a family member or friend. In reality, succession planning is about finding the right strategy to hand over your business to someone else. To define succession planning is to think of it as a process in which the business owner plans for the transfer of knowledge, skills, labour, management, control and ownership of the business onto the next generation.

Here are some of the most common methods of succession planning:

  • family transfer
  • management buy-out and
  • selling to outside interests

Selling your Business

When it's time to sell the business
The sale of a small, private business is usually a unique event in the life of a business owner. Selling a company built on hope and hard work can create a strong sense of loss. Therefore, it is not always easy for the owner to decide whether a sale is the correct course. A methodical analysis can help you reach a decision. The process should begin with a business valuation and an overview of the most common reasons why businesses are sold. We have guided Edmonton area businesses through this process for over twenty-five years, so you can be confident in knowing you’re being directed appropriately.

Business Valuations
The first and most important step when planning your ‘exit strategy’ is to determine the value of your business and understanding how business equity value calculations are used in setting the asking price as well as negotiating the often much lower selling price for your business.

Will anyone buy my business?
The only way to find out is to place your company on the market. A small business that is relatively new, unprofitable or has a sharply declining sales history will be difficult to sell. The higher the growth potential of your business, the more chances you have finding a buyer. A larger corporation that is active in the same business area may be able to improve on your profit margins by making your business one of their business units. Also, a larger corporation trying to grow quickly in a new strategic area may be willing to pay a premium to quickly acquire market share.

The primary motivations for the sale of a business are:

  • Desire for personal liquidity: When almost all of your personal wealth is tied up in the business, the prospect of a sale offers an opportunity to convert the holdings into cash and diversify your investments.
  • Need of expansion capital: High growth companies often exceed their financial capabilities and commercial lines of credit. In this situation, a sale can offer the expansion capital needed to exploit growth opportunities. In such circumstances, you can retain a minority share of the business or a percentage of earnings. Although these arrangements involve immediate loss of control and the end of your managerial role, you might find them preferable to seeing your business wither for lack of capital.
  • Partial sale: You may decide to sell part of the business rather than all of it. If one segment of your operation is growing much more quickly than another, you may consider selling the less successful portion. If you are able to sell it, you will have more time and money to invest in the growing remainder of your company. Note: in order to do so, you will have to break out the financial information and prepare different statements for the separate business segment you are selling.
  • Anxiety caused by personal liability and unreasonable risks: Personal guarantees such as tax obligations (employee withholding taxes), product liability, personal damages, and personal guarantees of the company's debts. In general, these personal guarantees originated in the early, risky days of the business and where never removed.
  • Age and health: This is by far the most common reason for selling a business. Many entrepreneurs never consider this possibility, and when the inevitable problems of age and health emerge, they must face the prospect of cashing in.
  • Boredom: This is another common reason for selling a business. After living on the edge for many years, many entrepreneurs look forward to reducing the incessant pressure so they can pursue other interests. Selling their business can pave the way to new professional and personal opportunities.

Have a valid reason to sell. It's probably the first question a potential buyer will ask you. The more valid your reason, the more serious the buyer will be. However, avoid disclosing personal information: it would give the buyer leverage on you during the negotiations.

Do not wait until you have to sell for economic or emotional reasons. Anxiety can force you to accept an offer than is not good for you.



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