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Executive Summaries Mar 18, 2021

Let The Succession Rise!

The importance of finding succession for business owners is an unavoidable issue that many entrepreneurs face or will face in the future. In fact, many articles have been published to convince managers and owners of the importance of planning for the succession of their business. Some have even categorized this imperative need as the governance duty of any good leader.

According to the Business Development Bank of Canada, by 2022, 35,000 owners will be considering selling or transferring their businesses (Study: The Coming Wave of Business Transitions in Canada). The opportunity is there for the next generation of business owners, and it must come forward.  It then becomes essential for a buyer who wishes to ensure the succession of a business to have an understanding of the advantages and stakes, but also of the strategies that will promote a harmonious transfer.

Going into business, two different approaches!

Many individuals with the entrepreneurial flame want to start a business. Going into business and founding a company may be the most advantageous option for some. In fact, the government and other para-governmental entities have put in place several programs to encourage start-ups, such as incubators, business gas pedals and university entrepreneurship centers that offer coaching services to young companies. That being said, this type of entrepreneur who aspires to create his own business must be aware of the issues and challenges associated with building a brand image, developing a clientele, and finding suppliers or business partners in order to move the project forward. This is why some will prefer to take over the reins of an existing business. However, it would be wrong to claim that taking over a business is easier; it also brings its share of challenges. Indeed, the personal capital outlay required to acquire an existing business is generally greater, the financial situation of the business or the relationships with suppliers, employees or shareholders can be tumultuous and many other challenges await the buyer. An existing business comes with financial, emotional and sometimes familiar baggage and as an entrepreneur you will need to know how to manage this baggage.

Who are you?

As an entrepreneur, it is undeniable that you need to be introspective and able to position yourself among the various protagonists of the business.

  • Are you a family member?
  • Are you an employee?
  • A competitor?
  • Would you like to make the acquisition alone, with a family member, with a team of investors?

All of these questions are essential to enable you to make an informed choice as a successor. By being aware of your situation and your role, you will be able to face the various issues that will arise. Depending on the business, some employees may be keeping a close eye on the owner's succession plans and may even be offended if they are not offered shares in the business at the time of the sale. However, these employees must raise their hands and show their interest in being involved in the business succession. A family takeover can also bring its share of challenges if everyone's expectations are not well defined or if relations between family members are tumultuous. The various players in a business are all interrelated, and you will have to be sparing in order to get the most out of each of them.

Know-how vs. interpersonal skills

Once you are aware of the challenges, the issues and the different players in the field, it is important to be able to "sell" yourself. Owning a business means, in most cases, a strong attachment to the business that the owner has built, countless hours spent developing an idea to bring it to where it is today. The successor must be delicate in his or her role as the new owner and new manager while demonstrating his or her intention to take over the reins. This very present duality can bring challenges for both parties. Very often, the transferor will want to keep a certain role in the business and the successor has every interest in giving him or her this role.

Succession plan!

Here are some important elements to consider to ensure a positive transition for all parties.

  • Gradual sale of voting shares: It is possible to plan for a gradual sale, spread over a few years, of the seller's shares in favour of the succession. A gradual sale would certainly help the succession financially, since it would not be necessary to raise the funds needed to acquire the entire business. Moreover, this option will promote collaboration between the seller and the succession, since the seller will still hold shares in the business, he will also be able to gradually transfer the management of the business, his knowledge and expertise to the succession. In this situation, we advise you to foresee a good shareholders' agreement in order to protect the interests of all parties and thus manage the relationship between the parties.
  • Provide the transferor with a director's position: The successor can also provide a director position for the seller on the company's board of directors to benefit from the expertise of the transferor. This way of involving the seller is preferred when the sale of shares is done gradually. It is an excellent way to keep the seller involved in the business, but at a more strategic level. The seller's contribution to the board of directors will certainly help guide and advise the succession during the first years following the transfer of powers.
  • Balance of sale: In the case of a business succession where all the shares are sold to the successor, it is most interesting to provide for a balance of sale of the shares due to the seller, repayment of which is spread over a specified period of time. The seller will inevitably remain invested in his business to ensure payment of the balance of sale price and will thus have every advantage in contributing to a smooth transition and the prosperity of the business beyond the first months following the sale. Moreover, when the seller finances part of the transaction through a balance of sale, it often secures the lender who finances the acquisition of the business since the presence of the seller ensures continuity in the operations and management of the business. The transferor's contribution through the balance of sale price also allows the successor to limit the amount of his down payment.
  • Key employee and/or special advisor position: When the seller has sold all of his shares, but a balance of sale is due to him, the successor can provide him with a more specific role as a key employee or advisor of the business. Creating or granting a role to the transferor in which he can put his experience to good use will support the succession while leaving him the necessary space to allow him to take on his new management role.
  • Minority participation: The integration of the succession through a minority participation in the company's shareholding is an excellent way to involve the succession in the company's business sooner rather than later. Of course, the challenge is for the business owner to properly identify the succession he wishes to integrate into the ownership structure. Will it be one or a few employees, family members or a combination of the last two groups? For those who wish to be part of the succession, it may be appropriate to make their interest known to the owner, which will certainly make it easier for him to identify and choose his successors.

In all cases, good planning and role definition will have the effect of reassuring the various players in a succession project, including the lenders who will finance the acquisition of the business by the successor. In addition to contributing to the sustainability of the business, a smooth transition can allow customers, suppliers, and/or employees, as the case may be, to build a bond of trust with the new player and leader of the business.

In conclusion, the determination of the succession and its willingness to properly plan the transfer of a business and the powers of the transferor are key elements for success. With the support of a lawyer with expertise in the field and a well-defined plan and expectations, the table is set to ensure a sound negotiation of the various legal tools and thus undertake a transition on solid foundations. Do not hesitate to contact Luc-Antoine Manneh or Sophie Boulanger to learn more about business transfers, financing of succession projects and shareholder agreements.

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