As a general rule, shop owners from coast-to-coast often overlook the importance of their succession planning. People will get into the business with the best of intentions, fully realizing that they wouldn’t be there forever, but have perpetually put-off the idea of establishing a viable and beneficial exit-strategy.
In order to help wade through some of the complexities of succession planning’s murky waters, SSGM magazine had a conversation with Doug Robbins, the president and founder of Robbinex Inc., a consultative business intermediary firm, specializing in the sale of mid-sized privately held companies. Throughout the course of the conversation, and as a result of reading the literature available on the company’s Web site, some very valuable suggestions were gleaned. While some of the information may sound rudimentary or unimportant, picture for a moment this scene.
You work for half a century building not only a solid income for you and your family, but you also built a business of which the community can be proud. When it comes time to retire and you hand the keys of the business to a friend, an employee or a family member, because the transition was not expertly handled, and because a proper succession plan was never really part of the approach, within two years you’re driving past a boarded-up building that used to be a fifty-year old, profitable institution.
While the thought is certainly unpleasant and often too real for some, it is also entirely avoidable.
The first steps of handing-off the business
Robbins started our conversation with the overarching statement: “The day after they open their shop, they need to be prepared to sell it.”
As surprising as it may seem for a statement of fact, Robbins went on to describe exactly what that means for the day-to-day operation, and how a diligent succession plan would not only enhance the operations of the shop, and its current profitability, but would also help to increase the overall value and appeal of the business when the time did finally come to sell the operation.
According to Robbins, the key to a profitable and smooth transition is preparation. Not only should that preparation cover things like deeds, leases and up-to-date tax information, but it should also encompass financial forecasts and provable trend lines. “If everything is in order, it is going to increase buyer confidence, and ultimately increase the overall value of your company,” said Robbins.
Further to that point, being ready also involves the daily upkeep, maintenance and overall cleanliness of your facility. As Robbins pointed out, “neat and tidy businesses are more valuable businesses.” However, by saying “neat and tidy,” Robbins was not only referring to aesthetics, but also to accounting practices, inventory and general business controls. The bottom-line is that if you don’t have paper strewn all over the work-shop, don’t have receipts strewn all over your office either.
Always get professional help
Perhaps the most important refrain that continually arose in the conversation with Robbins, was the notion of professional help. While many fiercely independent shop owners insist on doing things their own way, retaining a professional to help navigate the pitfalls of a succession transaction is something that cannot be stressed enough. According to Robbins, this means finding the right legal advice, which more often than not, comes from speaking with a legal professional whose specialty is business transactions.
“You really need an expert. Law is like medicine, and so there are many different kinds of specialists,” Robbins said.
The list is actually confusingly comprehensive, and so the medical analogy is really not far off. Legally speaking, just as there are lawyers who specialize in criminal, litigation, corporate and real-estate law, there are those whose sole focus is transaction law. It is this kind of specialist that according to Robbins, you want on your side. Most dangerously in terms of legal representation, are the legal versions of the general practitioner, who sort of dabble in all sides of the legal game but are not experts in one field, such as succession planning. These kinds of lawyers are the one’s that should be avoided, even if their initial cost or dollars per hour figure seems low.
“A specialist transaction lawyer will obviously be more expensive in terms of an hourly rate, but they will also likely work much faster, and could actually cost less when it is all added up,” he said. “The general approach to law is kind of like being half-pregnant.” Furthermore, an expert in the field will also be able to help you establish yourself in more lucrative business units that will be outlined in the next two sections.
Going the corporate route
While many shop owners have already gone through this process, incorporating your business is something that Robbins believes should be more widespread in the industry. Never mind that a corporation is exempt from the first $500,000 of capital gains, and have the right to nominate whomever the owner wishes as primary share holders and trustees (your wife and kids, for example,) but it can also help shield the owner personally if things get financially tenuous. This sort of basic protection is simply not available in many sole-proprietorship scenarios.
As it pertains to succession planning, however, simply incorporating a business can allow for a smoother transition, and greater earnings for the owner selling at the end of the day, specifically if the owner can simultaneously establish a real-estate holding company, which will be discussed below.
Land is still power
Memories of the old country often reveal this one seemingly timeless piece of advice: that land ownership is the most ideal place to be in terms of a secure financial position. As such, many shop owners across the country own outright both the building in which they operate, and the land on which that business sits. When it comes time to sell that business and its assets, many owners aren’t aware of their options, and are often short-changing themselves in the end.
Many shop owners look to sell the land they currently own as part of their final exit strategy, as they look to make a completely clean break from the business. As a quick extrapolation of some of the potential numbers involved will quickly reveal, this may not be the best method.
Undeniably, the final sale price will be higher if the land and building is included in the final deal. However, seeing as a final sales option is more often than not designed as something of a retirement plan, it is always best to look at the long term financial ramifications of the sale. So, using some very basic and estimated numbers, it is possible to see where the final shake-out may lead.
Let’s suggest for a moment that the owner bought the initial parcel of land plus building for $100,000 some ten years ago. According to real estate trending, that same property and building, assuming proper maintenance and upkeep has been undertaken, is now worth somewhere in the $300,000 range. If the property and land were to sell at that price, one would be left with a total nest-egg of approximately $240,000, after capital gains and other associated fees. If that $240,000 were then injected into a standard RRSP, accruing some 3.5-4 per cent annually, then at the end of the day, one would be left with a tidy little profit, of something in the $9,500, to $10,000 range annually.
Unfortunately, in order to access that money, one would be subject to the full 45 per cent tax-rate assessed by the federal government on people smart enough to invest their money. That leaves a netting somewhere in the neighbourhood of $5,000 a year.
Thankfully, for the shop owner willing to keep the slightest of fingers in the pie, there is another way. Admittedly, the notion of playing land-baron is not terribly appealing to some owners for whom a clean brea k is the most desirable. But, for those who find that $5,000 figure a little less than appealing, leasing out the building and the land to the purchaser of the company might be the way to go.
In fact, when Robbins broke-out the numbers, the contrast was stark. This is where that aforementioned real-estate holding company enters the picture. Such a corporate entity should be established, which on paper owns, as a private enterprise, the land and the building the shop or shops use. This basic separation will allow one to maintain ownership of the land; lease it to the next owner/operator and in the end, increase annual retirement funding.
For example, given the same $300,000, that land could easily result in an annual take-home of $20,000 simply because the profits would be taxed at the much more attractive corporate rates.
Obviously, this sort of financial wheeling and dealing is something that can’t be done effectively or even legally by just anyone. That is why it is important to always use a professional. A DIY approach may work with fixing an engine, but when it comes to succession planning, such an approach will only lead to costly trouble in the long-run.