Eight steps to a profitable exit

Written by Susanne Baillie

Retirement, shifting gears, golden years — whatever you call life after business, you can’t count on your company to lay the nest egg you’ll need to live comfortably. Securing your future takes preparation — and it’s a sad fact that many entrepreneurs suffer a built-in tendency to linger too long in the business without planning for their exit.

Don’t fall victim to succession-itis. Take these eight steps now to a profitable exit later.

1. Start yesterday

The earlier you start the process of retiring, the more flexibility you’ll have to choose options that meet your goals, says Michael Nedham, a managing director at Newport Partners Inc., a Toronto-based wealth-management firm. At the very least, if you intend to retire at 65, experts recommend you start planning your departure between the ages of 50 and 55.

That’s when Ron Foxcroft started. “The day I turned 55, I woke up and said, ‘I need a plan’,” recalls Foxcroft. “I felt that I’d slowed down, and I decided that I’d have to do a re-engineering of my life plan.” Although the 58-year-old entrepreneur shudders at the thought of ever retiring, he did want to ensure a long-term future for his four companies, including Hamilton, Ont.-based Fox 40 International Inc., maker of the renowned Fox 40 whistle. Still, it was another year before Foxcroft acted on the realization, underscoring just how difficult the prospect of exiting can be for entrepreneurs.

2. Make yourself dispensable

Goodwill can boost the selling price of your business beyond the value of its physical assets. However, goodwill — which covers money-making intangibles such as a company’s good reputation, customer relationships and management skill — is often concentrated in the heads of entrepreneurs. When the leader departs, so does the goodwill.

Keep goodwill in the company, rather than yourself, by growing a team that can progressively operate without you, advises Phillip Gates, a Victoria-based chartered accountant. “You’ll never get the value out of the business unless you embrace people who can pick up where you left off.” Consider a possible successor — or at least the attributes you’d like your successor to have, which may help you identify a candidate.

Frank discussions revealed that Foxcroft’s two oldest sons were not interested in taking over the business. So, with his family’s help and support, he hired a COO and a controller to succeed him in operations.

Foxcroft also developed a manual that outlines company operations and offers a road map for his gradual withdrawal from the company, defining responsibilities and ownership rights for management and family if he is disabled or dies. He admits it wasn’t an easy process. “The toughest part was addressing the what ifs,” he says. “You’ve got to be coaxed, you’ve got to be convinced, your answer to everything is, ‘That will never happen’,” says Foxcroft.

3. Conduct a detailed analysis of your business

Sloppy records or an out-of-whack price tag will turn off buyers. “Publicly traded company-type documentation is what everybody looks for when they buy or exit a business,” says Nedham. Prepare financial statements according to Generally Accepted Accounting Principles, formalize your business plan, keep accurate historical records and, he says, have a budget. Your accountant or financial advisor can help you find a professional valuator to accurately assess your firm’s worth.

4. Clean house

Assess your assets. Low-risk items, such as real estate and equipment, won’t lose much value if you’re not around, notes Barry Brownlow, a chartered accountant in Ancaster, Ont. Lower the risk on high-risk assets, including product lines or non-core divisions, by selling them or improving them.

5. Pick your path

Foxcroft, who currently owns 100% of his company’s shares, has arranged for a gradual transfer to his family and COO as his involvement in the business wanes. But there are many options for getting your cash out. You’ll need to consult your accountant and lawyer to determine your best option.

Selling the business outright to a competitor or strategic buyer will maximize your value in the short term; you’ll get the highest price for the business because the buyer can use your facility, your assets and your cost structure to enhance their business. You can also choose an outright or gradual sale to management. That option probably won’t yield top dollar, says Nedham, because there’s often a need for debt financing, which may impede the growth of the company. Other options include selling to family / heirs, going public or winding down. Closing shop is probably the least attractive option, since you won’t be able to make use of the $500,000 capital gains exemption on the sale of your shares.

6. Draft a shareholders’ agreement

If you’re not a sole owner, a shareholders’ agreement is critical. Get tangled in a dispute with other stakeholders and you risk having to sell at bargain-basement prices — or worse, not at all. A shareholders’ agreement establishes ground rules and dispute mechanisms for how shares will be dealt with or paid for when one shareholder sells, becomes disabled, retires or dies. “It helps you focus and establishes a stronger foundation for the success of the business,” says Doug Brown, a managing director at Newport Partners.

7. Pay yourself and invest outside the business

“Diversify your assets so that as you’re building a growing business you don’t have all your eggs in just that basket,” says Brownlow. Often-overlooked investments include retirement compensation arrangements and independent pension plans, which let you build retirement funds beyond RRSP limits.

8. Revisit your plan

When personal and professional circumstances change, be sure to update your plan to reflect them.

Finally, says Foxcroft, “When you do your plan, double the time you think it will take, and double the cost.” He expected the process to take two years. So far, it’s taken four and cost $100,000. Still, Foxcroft and his family feel good about the future: “That’s what it’s all about.”

© 2004 Susanne Baillie

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