Believe it or not, one day you will leave your business. And, if you’re lucky— and smart—you’ll leave it on your own terms, with a handsome payoff that reflects all the time and effort you’ve poured into your business over the years.
So, how much thought have Canadian business owners put into planning for the day they walk away? According to the results of PROFIT’s Entrepreneurial Nation Survey, surprisingly little.
We asked owners of small and mid-sized businesses whether they have a succession plan in place. Just 18% responded that they have a formal, written plan for exiting their business. A further 38% said that while they have an informal plan in mind, they don’t have anything written down. Finally, a whopping 44% of respondents admitted to having no succession plan at all.
“This result is remarkable to me,” says Carmine Domanico, founder of Cristal International, an HR and strategic planning consultancy. “It begs the question: how do you actually expect to leave your business? Too many business owners don’t appreciate how hard it can be to extricate yourself from that situation successfully.”
That lack of planning is problematic, says Domanico, especially when you consider the ways in which business owners expect to make their exit. According to the survey results, some 25% of respondents expect to sell their business internally, to management or employees (15%) or to current business partners (10%). A further 21% hope to cash out by way of a merger or acquisition by another company, while some 24% expect to sell (10%) or give (14%) the business to family members.
While selling to managers or employees might seem like a logical idea, says Domanico, it only works if you plan for it. “Long before the owner leaves, he or she has to put a plan in place to turn those managers and employees into people who can actually run the business,” Domanico explains. “That means sharing the specifics of the business, the financials, getting staff involved in all aspects of it and maybe giving them some additional training or education.”
The same goes for business owners who hope to get bought out by another company, he says: “You might find a company that will buy you out, but they want the owner to stick around for a few more years. If you plan for that, you can develop the next generation of leaders within your business so that when you do want to exit, the business isn’t walking out the door with you.”
The lack of succession planning on the part of Canadian SME owners might be dismissed if, as a group, they tended to be younger. But according to our survey, these individuals average 53 years old. In addition, a solid majority of respondents expressed an intention to exit their business relatively soon. Almost half, or 44%, hope to cash out within five to 10 years, but a sizable group, 16%, intend to leave their business within fewer than five years. Another 15% will be looking for the door in 11 to 15 years.
Within how many years do you plan to sell, transfer or wind down your business?
|Less than 5 years||16%|
If these business owners stick to their current time frames, it would mean 60% of Canadian small and mid-sized firms would have to change hands within the next 10 years, and some 75% within the next 15 years. But not so fast, says Randall Litchfield, a serial entrepreneur who successfully exited his first business and is planning his departure from his second. (Litchfield is sharing his exit story through a regular column on PROFITguide.com.) “Just because people are saying now that they plan to sell within the next five to 10 years, that doesn’t necessarily mean there will be a glut of businesses for sale hitting the market at the same time,” he says.
Litchfield maintains that a lot can happen in five to 10 years in any business, which makes it difficult to make realistic plans more than a few years out.
“Selling your business often is an opportunistic thing, so even if you have a formal plan, that may not be the way it turns out in the end,” explains Litchfield. “But I’m not saying that people shouldn’t have formal succession plans. In fact, older business owners definitely should, especially if they already have a date in mind when they want to exit their company.”
Once business owners get within about five years of the time they hope to exit their business, Litchfield recommends that they start reading books and attending seminars on business succession.
They might even consider hiring a professional in the field to help with the process. “It’s human nature to put it off,” says Litchfield. “But when you get within that closer time frame, it’s time to turn on the afterburners and put a real succession plan together.”