
Blog Picking which Divestment Alternative is Right for You
October 01, 2019Last month, we talked about where to start when exiting your business, including the importance of running retirement projections and matching them with the value of your company.
The next step is to look at your business succession and transition options, including the value you can receive from each.
There are four main options to transition or divest your business:
- Wind the business down
- Sell to a third party
- Sell to a key employee or transition to family
- Retain ownership and hire managers to run the business for you
Each option has its pros and cons, and what’s best for one family may not be the best for another. In all cases, it’s best to start considering your options as early as possible.
Wind down the business
In the absence of planning, closing shop is the only option. Unfortunately for many family businesses in Calgary, this ends up being the direction they take.
Even with proper planning, businesses are not immune to economic slowdowns, as witnessed in recent years within Alberta’s oil and gas sector. Dwindling profits, depreciating assets and fragile client lists might deter potential buyers from ever making an offer.
Prior to deciding to go this way, consider your end cash result – not just settling accounts payables, but also selling inventory, hidden tax implications, employee severance or delayed warranty claims. Does that end result fit with what you need for retirement, or will you be required to work longer?
Sell to a third party
While most owners envision this or family succession as their eventual finish line, few take the steps that are required to make their business salable.
Start by determining what your business is worth well in advance. That’s where a qualified broker can come in and help determine its value on the open market, which you can then compare to your retirement projections. (Remember, broker fees and taxes still need to be factored into the equation.) If the value is less than what you need, then what strategies are you willing to implement to increase it? Are you willing to re-evaluate your retirement lifestyle?
Also, when selling to third party, usually some type of work requirement is part of the deal. If you are tied up in the daily operations, that could elongate how long you’re expected to work with/for the new owners as part of a transition plan.
Sell to employees or family members
You might envision selling your business to a key employee or family member. Yet just because that person is a good worker, does not mean he or she is qualified to run your business. They might have the technical skills, but not be leadership savvy. Create a mentorship program leading up to your exit so that the employee or family member is prepared when it comes time.
Also, employees or family members typically won’t be able to purchase the business outright, meaning you might need to finance some amount. Be prepared for this risk – including the potential that you might have to come out of retirement if the new owner fails.
Retain ownership and have management run the business for you
On the outside looking in, this may seem like the holy grail. Yet it’s risky in that someone else has to manage the business when you’re gone. That means you have to find the right person, and then hope they don’t leave.
Are you prepared to keep an eye on the business in retirement? What if management fails to run the business successfully? Are you prepared to step back into the management role?
Also, factor in your long-term plan for these shares in the business. Even if you plan on owning them forever, eventually you will die, and these shares will be disposed. Planning for this will be important.
If you are looking to start planning for this transition, the advisors at Three60 Wealth & Estate Solutions can help. Three60 Wealth & Estate Solutions helps business families reclaim their time, gain peace of mind and achieve their own unique version of success. The team of Calgary-based wealth and estate planners have curated a trusted network of professionals to eliminate your planning blind spots and identify potential opportunities you may not realize you have.
For a truly different financial planning experience, contact our office online or at 403-640-4414 to schedule an introduction meeting.
Authored by: Jason Nagel, Director of Advanced Planning at Three60 Wealth & Estate Solutions Inc.