Succession Planning: The Legalities Business Owners Need to Know

Succession planning hinges on sound leadership development and astute forward-thinking, but there are also legal factors to consider. This week, Philippe Richer, author of Knowledge Bureau’s new Business Law certificate course in the Executive Business Builder Program, shares some important legal considerations for transitioning or selling your business. Philippe will also join us as a special guest lecturer at the new Business Builder Retreat.

Excerpted from Philippe Richer’s law blog:

Business succession planning starts early. How early? Try: when you start your business. Any business owner who wants to create something of value should consider how he or she will exit at some point in the future.

Now this does not mean your exit plan should be fully formed before you get started, but when you start, you should have some sense of the type of legacy you want to leave and who your potential successors are. Will you build something you can leave to your children? Are you building something that can be sold to someone else?

Passing the business on to another generation
Starting early is especially important if you develop a family-run business with the intention of leaving it to another generation. Many businesses don’t survive generational transitions. Lisa Taylor wrote on the subject in 2013. In her article, she highlights the problem where children compete to take over. The rivalry in that instance destroyed the business.

Can you pass it on or sell it?
Not all businesses can be passed on. For example, are you starting a solo-preneur business centered on your specific skills and personality? If so, you won’t have much to pass on to someone else. If this is the case, then you want to maximize your ability to earn income throughout your career. Most of the money you invest will be towards developing your own skills.

On the other hand, if you build a landscaping business, you can build something to package up and pass on to another generation or a potential buyer. In this case, you want to invest in the business and in your processes.

Preparing for sale
If you are looking to sell, buyers look for consistent cash flow and low risk. You should structure your business to maximize both. Systems, contracts, diversification and consistent income streams will make your business attractive. On the other hand, wildly variable income, lack of written contracts, and indispensable key personnel make it less so.

Developing formalized, documented processes provides a business stability by making the work done by key employees “public.” This way, your organization will benefit from the competencies of its key employees, but won’t be held hostage by them. In the event something happens to a key individual’s employment, the business should be able to replace him or her.

Additional benefits of formalized systems
Demonstrating that employees, key suppliers and customers are under contract (if possible) creates tangible benefits. Properly drafted employment agreements mitigate risks associated with wrongful-dismissal claims. Contracts or agreements with key suppliers provide evidence of the terms and conditions of the relationship. These becomes reviewable and measurable.

Accounting considerations
Finally, if cash has accumulated in the corporation over the years (provided you are incorporated), you must develop a plan to transfer your cash from the corporation to yourself. If you transfer all the funds in one year, you will be sharing a good portion of your money with CRA. The more cash you have, the longer it will take to transfer. You should consult with your accountant as early as possible.

Conclusion
The main point is that by structuring and building your business properly to begin with, you won’t have to implement a bunch of changes when you start thinking of selling. Because by the time you start thinking about getting out, it will probably be too late to make the changes that need to be made.

Philippe Richer is President of TLR Law Group. TLR has been located in the St. Boniface neighbourhood, in Winnipeg, since 1996. The office serves the middle class and small business within the province. With a focus on estates, wills, real estate and corporate law, he leads his team in providing accessible legal services. Philippe also authored the Business Law course for the Knowledge Bureau and instructed the français juridique class at the Faculty of Law at the University of Manitoba.

Additional educational resources:

1. To improve your knowledge about succession planning as a small business owner, or to help clients with the process, enroll in the Fundamentals of Succession Planning certificate course; and earn credits towards a Master Financial Advisor designation.
2. Join Knowledge Bureau in discussing tough issues, like these, that affect Canadian business leaders, on the LinkedIn Executive Business Builder Network. Also, register today and join fellow business leaders from various industries at the Business Builder Retreat, which we are so pleased to unveil for the first time at the Distinguished Advisor Conference in November. Philippe Richer will be a featured speaker at this event.
3. Enroll online and study at your convenience. A free trial of Business Law from the Executive Business Builder Program is available. Or, complete the full designation.
4. Are you a small-business owner ready to brush up your skills to better address operational needs? Register for our Insurance Strategies for the Small Business Owner or Tax Accounting for Proprietorships certificate courses.

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