Start planning now

There’s a “silver tsunami,” Terry Freeman, Managing Director and Head of Investment with ATB Private Equity, observed. Silver tsunami refers to a demographic trend where entrepreneurs are reaching an age where they wish to exit their businesses, and often have no plan for succession, both operationally and to replace their capital. People often think succession planning is an easy one-and-done document. But there are a lot of conversations to be had, family decisions to be made and work to ready the business. “I think of it more as a process,” said Amanda Vella, Managing Director Business Consulting with ATB Wealth.

You may also need more time to find your successors because your pool of candidates could be smaller. These days, fewer children are inclined to take over family businesses, and management teams, having watched now-burnt-out owners struggle through COVID, may be wondering about the wisdom of assuming a business.

From a tax perspective, Michelle Seymour, Managing Director Wealth Planning with ATB Wealth, recommends consulting with a tax advisor more than two years in advance. This allows you to do comprehensive tax planning and maximize your after-tax proceeds from the eventual sale. “The sale of a business is a significant life event for a business owner, but it also represents a very significant tax event.”

Always be ready

If you’re considering selling, ensure your business is “ready to sell, all the time, even if you’re not in the market,” advised Freeman. You don’t want to feel pressured, or desperate, when the time comes, prone to forgetting something or making mistakes. It will look like your business is running you, rather than you running your business.

Eliminate dependencies, document your processes, structure a proper data room, track your EBITDA adjustments, learn what a quality earnings report is. This ensures that when prospective buyers come knocking, they can see the growth potential and how they’ll make their rate of return. The biggest risk Vella sees is dependencies—on the owner themselves, a customer or supplier, even a single employee. She recommends starting your process by identifying and reducing those dependences to mitigate the risk to the buyer.

Know thyself—and your partners

Knowing your business’s worth is crucial. However, as Vella pointed out, most owners don't have a good grasp of that value. “It’s their baby and nobody has an ugly baby.” She estimated that 95% of the time, business owners think their business is worth more than it really is. Knowing its true value will help you make better decisions.

If you’re planning for a full exit, that may call for a different private equity firm than if you’re looking for a minority shareholder. If you are not looking to exit, this major transition of business owners also creates a significant opportunity to grow your business by buying other businesses that are for sale. If you are looking to grow through acquisition, then do your due diligence on your prospects. Get as much access to management as you can to understand how they operate to ensure that small red flags spotted in negotiations don’t turn into giant red flags later.

More transition tips

• Don’t get hung up on multiples or get multiple envy. Things change quickly in that arena, and most people exaggerate them anyway.
• Keep a level head. This is your baby, so that’s easier said than done, but when emotions get in the way, they can quash deals.
• Think about what your life after business looks like. Get excited about this new stage. This will make your well-deserved transition that much easier.