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Nine ideas to help your company prepare for and execute a smooth leadership transition

Find out how to address your succession plan and identify who you'll need to work closely with

Aug 12, 2014

by Allison Myggland

There is no single way to prepare a succession plan, and in any case it is an ongoing process. Every business and each industry will have quirks and legislation and rules that will apply exclusively to them. However, there are key points that are essential to each and every business. In this guide we have provided some essential steps that you’ll need to address in your succession plan and identified who you’ll need to work most closely with to complete each step. Even if you’re not planning to step down in the next few years, putting a clear succession plan in place will prevent chaos in the event you become unable to run your company due to a medical issue or other event. Not all successions are planned. But they ought to be. So, in any case, here is what you need to do.

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Pick your exit strategy

According to Peter Collins, the practice group leader for business law in Field Law’s Calgary office, there are typically three options available when you are planning to step down: you can leave the business to family; you can promote from within the company; or you can sell to a third party. This guide will primarily address the keys to family or employee succession. But there is a bonus consideration: prepare for an inside transition correctly, and if the deal falls apart for whatever reason, you’ve already done most of the work for an outside sale.

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Choose your successor

You’ve decided that you don’t want to sell to an outsider. Professional business intermediary Neil Gerritsen, of Alberta Business Sales, has a word of caution for owners who hope to keep the company within the fold: make sure whoever it is that you have in mind as your successor is willing to take your place. “If you do not have that ­interest, you really do have to get it ready to put it out for sale.” So talk to your employees or talk to your family. Let them know that you’re planning for your exit and that you want them to take over. If the response is enthusiastic, then you’re set, move on to the next step.

Key player: successor

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Keep it confidential

Once your successor has agreed to take over your business, Collins recommends that you have a lawyer prepare a confidentiality agreement. If they are to be taking over the company, they need to know absolutely everything about your business. A confidentiality agreement protects the assets of your business in the event that a competitor attempts to poach your newly trained successor for their inside knowledge and prevents the individual from using your proprietary information to start their own business.

Key players: managers, lawyer, successor

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Determine the value of your company

Don’t know what your business is worth? Hire an accountant that specializes in business valuations to make an unbiased assessment of the value of your company. A chartered ­business valuator (CBV) is a chartered accountant with specialized training in appropriate valuation techniques. Don’t rely on a rule of thumb, or advice from your neighbour. An overpriced business can kill a sale and you may fail to optimize your position if you undervalue your company. It’s in your best interest to make sure you optimize the price of your business and ensure the company can survive long enough to buy you out.

Key player: accountant

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Figure out the financial framework

You will need to discuss the financial aspect of the business transfer. In a third party sale, it’s most common to negotiate an upfront payment to buy you out. When the successor is a family member or current employee, the financing situation will be more complex. Talk to your lawyer and your banker. If upfront financing isn’t possible, Collins suggests that you may want to consider an estate freeze, a legal manouevre that captures the value of your business at the time of the freeze and grants you shares of the company valued at that amount. ­As long as the company remains profitable, you can cash in your shares as you desire.

Key players: banker, successor

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Prepare for transfer

Lift under the rug and clean out your closets. It’s time to address those dust ­bunnies and skeletons. Have your lawyer begin due diligence on your company, check the public registry for lawsuits, registrations, mortgages against title, and old financing on inventory. Take care of any outstanding issues. If there are things you can’t clear up, do a risk assessment of potential losses and add that information to your sale documents. Every corporation in Canada is required to have a corporate minute book. Hand yours over to a lawyer and have them go through it with a fine-toothed comb, making sure it satisfies the requirements set out in the Business Corporations Act.

Key player: lawyer

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Update policies and practices

Are there any “unspoken rules” or situations in which staff defer to you personally because it isn’t stated in policy? Get your policies in order. Have your successor involved in decision-making. Early. Check to make sure your privacy officer is up to date. Don’t have a privacy officer? You need to designate one. Are you adhering to all applicable laws? If not, make it so.

Key players: management, successor

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Training and transition

Take time to sit your successor down with each department and, if possible, put them to work in each department. It’s important to create open communication and trust within the company, and good faith measures go a long way to creating a strong corporate culture. You want to reassure each department that the new leadership understands its role. You should introduce your successor to all your clients to transition the relationship to the upcoming leader. When done correctly and with transparency this ought to reassure your clients that they will continue to receive the same level of service.

Key players: management, successor

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Complete the deal

Due diligence checked out. Financing has been approved. Policies have been written. And your new successor is ready to take over the corner office. All that’s left to do is sign the final paperwork and go on a nice, long vacation.

Key players: lawyer, travel agent

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One Response to Nine ideas to help your company prepare for and execute a smooth leadership transition

  1. Jey Arul says:

    Great article that was simple to read and understand. I appreciate Peter’s article but I would like to add that often times when a business owner tries to sell his/her business to an employee and fails to do so for whatever reason, it makes it very difficult to sell the business to an outside third party. This is primarily in my experience I have found that most of the time the employee end up leaving the company thus leaving the owner with a void to fill in the business. The amount of confidentiality about the sale is often quite relaxed when an employee is involved in buying the business since after all most employees “talk”.

    Instead what I recommend to business owners is try to sell the business to a third party first and if you get a good offer than provide your employees the option to meet the offer if they want to buy the business. I believe that this is a great way to first find out what is the true market value for your business, secondly provides the employee or family member to match a real offer.

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