You may remember the headlines from seven years ago. Surveys said that tired baby-boomer entrepreneurs—the eldest of whom were about to turn 60—couldn't wait to bail out of their businesses. A tsunami of business sell-offs was expected to flood the landscape, overwhelming the too few buyers, bankers and brokers needed to manage those transactions. Thousands of businesses—and tens of thousands of jobs—were supposedly at risk, because those retiring entrepreneurs weren't planning ahead for a strategic, orderly and tax efficient exit.
And then—nothing. While there are no national statistics on businesses going through ownership transitions (a company may be passed onto family or staff members, merged, sold to a third party or closed), experts in business succession agree that the flood didn't happen; the dam never broke.
Accountants, bankers and M&A experts are still waiting for the boom they were promised. And yet, the clock ticks on; boomers are seven years older but no closer to getting out. The tsunami has been postponed, not cancelled. And far-sighted business owners should take advantage of the lull—while it lasts—to shape up for the challenge ahead.
"I'd call it a 'quiet crisis,'" says Jordan Gould, a partner specializing in succession planning with Toronto accountants SBLR LLP. "Clients with businesses of a substantial size [$8 million or more in sales] may have a market to sell into, given the rise of private- equity investors. But clients on a smaller scale—they have nobody to sell to."
Few business owners have used the lull to get their companies in shape—a failure to act that could prove costly
Victoria-based financial planner Brent Boyd, who specializes in business exits, forecasts that 80% to 90% of businesses will not sell—given the surplus of sellers over buyers—in the coming transition period. A recent BMO survey found 36% of Canadian business owners want to keep their businesses in the family; but, Gould says, that's a pipe dream for most: "The next generation isn't much interested in following in mom's and dad's footsteps. They have other things they want to do."
Even companies that find buyers could be flattened by the wave. Most business owners (between 60% and 80%, according to surveys) aren't prepping their businesses to be sold; they still haven't got the message that successful exits require years of preparation.
That happened to the tsunami that never came?
The economy fell off a cliff, and boomers discovered that age 55 isn't so old after all (see sidebar, right). The result should be that business owners are better prepared; since the succession wave was first sighted, financial experts have written several books on the subject, and banks and accounting firms have hired specialists to help entrepreneurs prepare. (You can even download a free guide to successful succession from the Canadian Federation of Independent Business [CFIB] website.) But all sources agree: few business owners have used this lull to get their companies in shape for transition— a failure to act that could prove costly.
"People can save millions if they plan properly," notes Tom McCullough, chairman and CEO of financial advisory firm Northwood Family Office in Toronto. He recommends that if you plan to sell your business, you'll want to get its shares into the hands of family members who can each benefit from the $750,000 capital gains exemption. If you have a spouse and two kids, that's $3 million of the sale price that could be banked tax-free. (Shares may take up to two years to vest, and only incorporated companies qualify—two good reasons to start planning now.)
You also need a valuation of your business, so you know what it might sell for, and estimates of the taxes payable. Beware of preconceptions. "Business owners tend to overstate the value of their businesses," says Doug Bruce, vice-president, research, with the CFIB and its exit expert. "They are disappointed when they finally do their succession work and find out their company is worth half what they thought—and end up with a tax bill they didn't expect."