http://www.canada.com/northshorenews/news/story.html?id=b839bcc1-1171-4fdc-9a76-3a593de27e7d
| North Shore News |
Wednesday, November 05, 2008
As the boomers retire over the next decade or so there's going to be plenty of businesses up for grabs, but whether or not owners can successfully pass the baton depends on the steps they're taking now -- steps that many haven't really given a second thought.
"A lot of people think succession planning is hiring someone to do what they do, but we're saying 'no, no, no' you've got to do way more than just hire somebody," says North Vancouver's Lorraine McGregor, co-owner of Spirit West Management, a consulting company.
According to McGregor, the huge surplus of companies on the market combined with the dismal economic situation is bad news for boomers who aren't adequately prepared to sell.
So, what exactly does being "prepared" mean?
McGregor believes the only way to get top dollar for a business in such a competitive climate is to go through a two-three year process of valuation planning -- examining the company from top to bottom to ensure that it's maximizing profits -- in addition to succession planning, which is leaving behind a strong management team to take over.
Currently there are 1.7 million businesses in Canada, half of which are owned by people who are turning 65 within the next few years and plan on funding their retirement through the sale of their businesses.
"If you think about this in the same way you think about real estate -- those houses that have been improved for street appeal and have been remodeled . . . those houses sell first.
"If an owner wants to attract an investor they've got to make sure the investor knows there will be certainty of profitability going forward, because what an investor is going to buy is the future of the business not the past," says McGregor.
That means cleaning up legal agreements, implementing a growth strategy, showing steadily increasing profits, ensuring a tax benefit for the next owner and cutting out non-business related expenses.
"Owners typically fund their lifestyle from revenue of the company and that is a real negative. . . . In order to be attractive to investors you have to have only the business costs because you want to show the business produces a lot of cash," says McGregor, explaining anything that doesn't make sense to a buyer will reduce the amount they're willing to pay.
Leaving behind a team that is well-connected to key industry contacts is very important but sometimes overlooked, she adds.
"(Some owners) don't pass on their knowledge or their relationships to their management team or they don't even have managers, they do the work themselves."
And that's a definite deal breaker, according Jeremy South, a West Vancouver corporate finance partner at Deloitte.
"For the most part most businesses are sold with management team in place and the most important thing to that business is the management," says South.
"It's critical because no one is going to buy a business without management already."
When Ralph Turfus, a Horseshoe Bay resident, sold his computer software company in 2004 he had someone ready to fill his shoes.
"He had been there for 18 years and he stepped in immediately and took over and that's what the buyer wanted," says Turfus, whose company Class Software Ltd. is used for all parks and recreation departments in North America.
With the company bringing in $20 million in revenue, Turfus knew he had enough to retire if he sold, but he still had to give it a couple of tries.
"I had four runs at selling and the fourth time I went to sell I was successful. I tried to sell in 2000 which is right the bottom of the tech bubble, the very bottom it turned out and that was just terrible," he says.
"I think that time is like right now."
South agrees timing is an important consideration.
"You wouldn't want be selling a business right now that has a significant concentration in U.S. housing market or the Canadian housing market for that matter," he says.
"You can't always time it but certainly there are better times to sell certain businesses than others."
Although this is all pretty much common sense, South says there are a number of owners who don't consider their exit strategy until late in the game.
"Often we'll get calls from business owners that say 'I want to sell my business' because of events that happen or . . . they suddenly realize they're getting old or getting sick but they haven't done all this preparatory work," he says.
"People don't think about it until they get an approach from a buyer, which is not the time you should be thinking about it."
For owners looking to sell within the next few years, the time to start planning is now, says McGregor.
"If owners can't extract the wealth from their business that has huge impact for their own retirement and also for the economy," she warns.
"They can close the doors, which would result in people losing their jobs, local economies losing their tax base and towns losing places people love to go and shop."
Spirit West will be hosting a seminar on valuation planning, How to Maximize Your Company's Worth: The CEO's Guide to Becoming Prepared for Investment on Nov. 20 at the Eaglequest Coyote Creek Golf Club in Surrey. For more information go to
www.spiritwest.com.
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