Article by Trevor Hood
Quick Tips: Baby Boomers Need to Plan for Succession by Maximizing Company Value
By Trevor Hood
First published in Burlington Post, January 23, 2008.
The Canadian Federation of Independent Business predicts that over the next five years, 41 percent of small to medium-sized businesses will transition to new ownership, retirement being the number one reason. Only one third of these businesses have exit strategies in place, and baby boomers need to plan now for succession.
Chartered Business Valuators (CBVs) are experts who determine company value based on “value drivers” and risk assessment. Trevor Hood, a CBV and Senior Valuations Manager at SB Partners LLP, offers this advice:
- Evaluate likely successors: Determine if the successor will be a family member, management or a competitor. Make sure the next generation can be successful.
- Focus on business growth and profits prior to sale: Valuations are based on multiples of earnings or cash flows. Growth in these areas means higher sale proceeds. Re-evaluate unnecessary or discretionary expenses.
- Reduce tax minimization tactics: Buyers only pay for what they see. Perceived value is lower if things are buried in financial statements.
- Fine-tune management infrastructure: Reduce reliance on owners and ensure knowledge is not concentrated with a few individuals. Document business decisions and operations for easier transition.
- Diversify customer/supplier bases: A buyer will not pay as much if the business depends on one or two customers or suppliers.
- Maximize capital gains exemptions: Remove non-operating assets like cash or investments, which may not receive proper value if sold or transferred, impacting an owner’s ability to claim their $750,000 capital gains exemption. Consider restructuring—by adding a spouse or family trust as shareholders, additional individuals may qualify for the capital gains exemption.
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