You’re Selling Your Business. Do You Have a Succession Plan?

You’ve been the operator of your business for 20 years now and it’s time to retire. Or you’re ready for a career change and you want to sell your company to kick-start something else.

Whatever your reasons, selling a business is no easy task. There are a countless number of moving parts over which you need to maintain complete control, not to mention the fact that a clear plan must be in place to ensure that your successor is properly equipped to fill your shoes.

Managing Relationships with Staff Members

The last thing you want in the midst of a business sale is upheaval among your staff members, suppliers, vendors, key stakeholders or community relations. It is critical that you consider the wants and needs of everyone involved and start buckling down on the nitty gritty details such as determining who will stay and who will go, who is in favour of selling and who isn’t, will outside relationships be maintained or will the new owner source his or her own contacts?

Contracts for Employees or New Hires

You want to give the new business owner as much confidence and security as possible. Part of that might include drafting agreements for present and/or new employees. By binding staff members through legal agreements, your new business owner will know with full confidence that those who have signed are serious about the company and plan on staying.

Renewing Your Lease

A secure company is one whose lease isn’t about to expire. Make sure your lease agreement is up to date and even more so, seek a fair assignment provision. Although often overlooked or missed, a fair assignment provision can make the transition process much smoother in a couple of ways:

  • It gives you the right to pass your lease to the new owner without going through a lengthy approval process with your landlord (provided the new owner is credit worthy)
  • It avoids the possibility of your landlord demanding that the new owner sign a separate lease, which creates ample opportunity for rate hikes and unfavourable provisions, resulting in negative repercussions on the deal

Avoid Entering into Long Term Agreements Unnecessarily

If you know a business sale looms in the near future, make wise decisions when it comes to company contracts. For example, renew your credit card POS terminal contract for one year instead of five, stay on a month-to-month phone plan and don’t make long-term binding agreements with suppliers. You want to give the new business owner the security of knowing these systems are in place, but also the flexibility to make his or her own decisions.

Stay in the Know

Do you have your finger on the pulse of your business? Do you know your weaknesses and strengths?

The more you know, the better able you’ll be to manage the sale of your company. Interested buyers won’t be thrilled by surprises that pop up along the way or undisclosed information that suddenly makes its way to the surface. Be open, be honest and be knowledgeable about your business.

A good legal advisor can guide you through the intricacies of selling your company. With the right people on your team, you’ll experience fewer complications, a fair agreement, a faster sale and a more seamless transition from one owner to another.

Don’t Let the Excitement of Starting a New Business Leave You with Blinkers On

It’s new, it’s exciting and you’ve been waiting for the right opportunity to present itself for some time now. You can’t believe that you’re finally about to start your very own business.

Although this is certainly a time of great excitement and anticipation, it’s also a time that calls for calculated, careful and strategic planning.

  • Do you know exactly what you’re getting into?
  • Have you done your homework before putting yourself into a position to say “yes”?
  • Are you aware of all the red flags and warning signs to look out for?
  • Have you sought the advice of a legal advisor – ahead of time?

There are no shortcuts to success.

Be weary of letting yourself become too hasty in the decision-making process. Whether you’re acquiring an existing business or you’re in the process of launching a new company, take your time, analyze every detail and understand the provisions within the agreements you sign. If something looks too good to be true, it probably is.

Do you need a lawyer more than you think you do?

Maybe this is not your first business acquisition or startup. Or, perhaps you’re new to the entrepreneurial world. Whatever your situation, take a moment to step back and look at the big picture. It’s easy to think that you’ve considered everything, that you understand completely what you’re about to commit yourself to, and that there is absolutely nothing a lawyer can say that you haven’t already thought of. But does this sound logical?

Accept help where you know you need it.

When it comes to the legalities of acquiring, running and owning a business, it’s highly likely that you don’t know everything you need to know. This is a corporate lawyer’s domain – the same way running a business is your domain. Accept the fact that information, advice and guidance from a business lawyer is likely to be some of the best money you spend on your new company.

Budget for professional advice at a time when you can avoid critical mistakes.

After the agreement is signed, the lease is finalized or the office remodelling is complete, there’s not much a lawyer can do if you suddenly realize you’ve made a huge mistake. In new acquisitions and startups, it’s difficult to budget for everything you need. Products and services always seem to cost more than you think, and you may be tempted to cut and slice where you see fit. Just be sure you’re skimming what you can afford to skim.

Getting corporate legal advice at the beginning, before anything has been finalized is one of the wisest decisions you can make for yourself and your business. The right lawyer can help you understand the implications of your decisions, make important considerations you would have otherwise missed, and enter into an agreement not only that you’re comfortable with but that has your absolute best interests at hand.

Life & Disability Business Insurance: Hope for the Best, Plan for the Worst

Life and disability insurance – is this an exit strategy or an entry strategy? At first thought, it may appear to be the former since you’re planning for what happens in the event of a death or serious disability. But in fact, the decision to obtain life and/or disability insurance for your company is anentry strategy in the sense that this is something you need to do at the beginning, not when it’s too late.

For best results, make this decision part of the drafting process for your shareholder agreement.

No Insurance = No Order

Isn’t this the way insurance companies want you to think about the situation? Long lives the debate of whether or not buying into insurance is the right decision. Some argue the fact that paying into the “possibility” of an unfortunate outcome may not be good business. But let’s think about the other side of the equation: you and your business partner do not have life or disability insurance and one of you dies. It isn’t difficult to imagine the upheaval when the appropriate systems and levels of protection are not in place.

Particularly for businesses that have borrowed extensively in the past or that are currently operating with a significant debt load, if one partner dies or becomes permanently disabled and unable to work in the same capacity, insurance can solve a number of problems and make succession arrangements more efficient.

A Business Roadmap

Insurance gives you an opportunity to make sound plans for the future of your company.

In the absence of life insurance, you might ask yourself: does the deceased partner’s spouse become part of the business or is he or she compensated on a payout schedule? How will the surviving shareholder pay for the acquisition? Without life insurance, a typical payout schedule can take anywhere from 5 to 10 years. With life insurance, you decide what happens if a death occurs. A company life insurance policy can pay spouses immediately, in which case the business carries on. Or, spouses can join the company and the insurance policy can be used to pay down debts or fund the business.

Now let’s say your business partner becomes disabled and cannot continue working. He or she still must be paid a salary and yet you need to continue the business in a feasible and sustainable manner. You likely cannot take on the work of two and yet you – and your clients – have likely come to rely on a certain volume of business. Business disability insurance provides you with the funds you need (or at the very least, helps to bridge the gap) to pay your partner a salary and to assist you in the process of hiring a replacement.

A Little Money Today, is Peace of Mind Tomorrow

For your protection and that of your family, life and disability insurance can provide tremendous relief now and in the future. You can rest assured knowing that even in a worst case scenario, your family will receive the compensation they deserve quickly, and your business partners can continue earning a living and running the company you worked so hard to build.

Not sure where to start? Consider using the services of a corporate legal advisor you can trust.

How to Navigate a Sellers’ Market

The truth is, it really doesn’t matter whether or not it’s a buyers’ or a sellers’ market. Why? Because purchasing a business is about you – it’s about knowing what you’re capable of.

Think back to our Caveat Emptor article in January. The same applies here. As the business buyer, it is your responsibility to read between the lines, to understand the deal and to know exactly what lies ahead for you and your newly purchased company.

Are You Asking Yourself All the Right Questions?

Buying a business is exciting but be careful you don’t let the prospect of an affluent future cloud your vision. During the selection process, due diligence and closing procedures, it is critical that you keep a straight head.

Think objectively.

  • Are you overpaying for an asset, and if so, can you sustain such an overpayment?
  • Are you independently verifying all information or simply relying on what you think you know?
  • Are their problematic elements in the deal?
  • Are you sweeping too many issues under the rug?
  • Are you suffering from escalation of commitment?

Just because your bank gives you an approval for financing, doesn’t mean this is the right deal for you.

Reap the Rewards of a Creatively Structured Deal

The quality of the business for sale is just as important as the way in which the deal is structured. You may be a shrewd entrepreneur, but you might not possess the skills necessary to configure a business deal strategically and intelligently.

This is what a legal advisor is for.

For example, perhaps it is possible to pay for the company in part upfront, with the remainder to be paid on a monthly schedule over a set period of time after the purchase. This makes it easier for you to manage your finances and smoothly transition into the business.

Or there may be an opportunity for an earnout, in which the sellers of the business must “earn” part of the purchase price according to company performance following the sale. Such a clause ensures your protection and guarantees that the company you purchase will achieve particular financial goals – and if not, then a pre-negotiated portion of the purchase price is deemed non-payable.

Sellers Dictate the Marketplace … Or Do They?

Sellers set the price, outline their terms, and naturally, will do everything they can to get the most for their business. So in a sense, they will certainly try to dictate the marketplace but in the end, there is no sale without a buyer.

And if you think of it in these terms, there is a profound shift in power.

Buy a Franchise Or Start My Own Business?

“If I buy a franchise instead of starting my own business, it’ll be easier because I’m buying into a proven system.”

Sound familiar? Is this a sentiment you share? It’s a common misconception among aspiring business owners and entrepreneurs. Although in theory the statement seems as though it shouldmake sense, experience suggests otherwise.

What works now, may not be in your best interests in the future.

Before you sign on the dotted line, take into careful consideration what the business arrangement entails both today and in the future. Plenty can change in 5, 10, 15 years and it is critical that your franchisee agreement reflect that.

For example:

  • Is the franchisor flexible?
  • Are there unsustainable lifetime royalties in the deal?
  • Do you have fair exit options?
  • Who owns the lease? You or your franchisor?
  • Are there renegotiation options?
  • Is the arrangement cooperative?

Weigh your options. Read between the lines. Understand the commitment. Ask yourself, what am Ilosing by partnering with a franchise?

Inexperienced? Buying a franchise isn’t going to change that.

Don’t bite off more than you can chew. If you don’t know the first thing about running a business, buying into the franchise model won’t solve your problems. Be careful that you are not misguided by the power of the brand behind the name. It isn’t as simple as acquiring predesigned plans, guides and procedures ready for implementation right out of the box.

Running a franchise requires sales, marketing, operations, financial and management skills – just like any other entrepreneurial venture. If you are not equipped with the essential skills required to build a successful business, whether you select a franchise or choose to start your own company, the outcome will be one and the same.

You’re not buying an income. You’re buying the potential to make one.

A franchise doesn’t produce results for you. It doesn’t provide a template from which you can run a business without the slightest issue or complication. And it can’t solve your problems or make decisions on your behalf.

Franchise owners are business owners. Their responsibilities mirror one another. It is an endeavour – one that has the potential to be very lucrative, but an endeavour nonetheless.

Making the right purchase decision is no easy task but the assistance of a professional advisor you can trust is invaluable. Consider calling upon a corporate legal attorney to help.

I’m starting a business. Why should I incorporate?

Since it’s one we hear all the time, we decided to answer this follower’s question from last month.

Whether you are a young entrepreneur fresh out of school, an engineer starting a consulting business or a physician about to open the doors to your own practice, this is likely one of many questions on your mind.

As you navigate your way through the winding paths of business startup tasks, it is a worthwhile endeavour to understand the difference between a corporation and a sole proprietorship and the implications of each.

Separate Entity vs. Same Entity

Generally, you have two choices: a sole proprietorship or a corporation. As a sole proprietor, simply put, you are your business whereas a corporation is its own legal entity – a separate person, if you will. A corporation can enter into contracts, go into debt, acquire assets, sue or be sued and even be found guilty of a crime. Unlike sole proprietorships, incorporations continue to exist until officially dissolved, even if one or more shareholders or directors leaves the corporation, sells their shares or dies.

Limited Liability

If you’re like most business owners, liability is of top concern. You want to make sure that you, your family and the personal assets you’ve worked so hard to acquire are safe and protected.

As a sole proprietor, should your business go into to debt or file bankruptcy, you are held liable.

As a corporation, usually shareholders have limited liability and are not responsible for the company’s debts.

Improved Business Structuring

With the right advisors, you can structure your corporation any number of ways to take advantage of tax breaks, income splitting and many other benefits.

If your corporation operates in a surplus, you have the flexibility to leave money inside the company and take advantage of dividend options. The funds that stay in your corporate accounts may be taxed at a lower rate than personal income and you may have the ability to invest these funds to defer tax payments until a later date.

In the event that a shareholder has lower-income earning immediate family members, the corporation can pay these family members with a lower tax rate, resulting in substantial savings in the long term.

Access to Capital

More often than not, corporations can raise money far easier than a sole proprietorship. They also have the ability to issue bonds and give investors share certificates, whereas sole proprietorships have few options other than to use their own money and loans to supply the business with capital.

Because they are considered lower risk enterprises, corporations are often able to borrow money at lower rates than other businesses, which leads to greater opportunities for growth and expansion.

What Comes With Incorporation

Although incorporating a business has many benefits, it has certain implications, a few of which are:

  • Higher costs (i.e. cost to incorporate, file taxes each year, associated legal and accounting fees)
  • Formalities (i.e. federal incorporations must file particular paperwork to Corporations Canada each year, file corporate income tax returns, maintain specific corporate records, etc.)
  • Complex structure (i.e. appointing shareholders, directors, officers, etc.)

If you’re unsure of what the best decision is for your business, seek guidance from a professional advisor you can trust.