Over the past few years, there has been increasing media coverage on the effect of the baby boomer generation reaching retirement age. Baby boomers with salaried jobs have a relatively simple transition to retirement as long as they have built up sufficient savings. But for baby boomers who are business owners and operators, there are questions on how they will successfully transition to retirement.
If you fall into the second category of business owners and operators, how you choose to manage this transition will be one of the most significant decisions of your life. If you still have a few years before your retirement, starting to plan early can save you headaches in the future and potentially a lot of money.
Set out below are the more common routes that you, as an owner/operator, could choose to take in your retirement transition:
Retirement Option 1: Hold and transition control
Retirement from your organization doesn't necessarily mean that you have to sell. If your business is large enough that it can run without your day-to-day management, a general manager can be hired in your place. This option allows you to retain your company and earn retirement income through a wage or dividends (if cash flows permit). The business could be sold at some future date when financial performance and/or market conditions are right to maximize your return. This does come with some risk as changing economics or market trends may impact the future value of your business.
Retirement Option 2: Pass the business on to your children
If you have children or other younger family members such as nieces or nephews who are active in the business, or may wish to become active in the business, you could choose to pass on the business to them. A business transfer to this group could occur a myriad of ways, such as an outright sale, a gifting of the shares, or an estate freeze. This type of transition would keep the business close to you, but reduce, or eliminate, the need for you to be involved on a day-to-day basis. An estate freeze can be an attractive choice as you can crystalize today's value by way of redeemable preferred shares that can provide you cash flow (by way of their gradual redemption from the company's cash flows) in your retirement. It will also motivate the younger generation to be positive stewards of the business as all future growth in value would flow to them.
Retirement Option 3: Sell the company to employees
If you have built a good team, you may find that the most suitable buyers for your business are your current employees. Employee buyouts are becoming more common and financing is generally more available for employees to complete these business purchases. If you're concerned about the well-being of your staff and the future stewardship of the company you've built, your employees may be a great choice. You could even decide to retain a portion of your company and a seat on the board of directors to ensure that you can provide your insight on future operations.
Retirement Option 4: Sell the company to a third party
The last, and if done correctly, often the most lucrative option, is an outright sale of your business to a third party. This option would expose your business to the market, and if the timing is right, provide for a competitive process with multiple potential buyers. Often you will find special purchasers (those who may pay a higher price than the intrinsic fair market value of your business) are interested in your business to obtain vertical or horizontal integration, remove a competitor from their market, or to diversify geographically. In a competitive process, you could obtain both a higher selling price and/or better terms from the purchaser.
What route you ultimately choose would be based on your personal preference, specific situation and the type of business that you own. Your advisor can assist you with finding a buyer and facilitating the transaction if you choose to sell. With transaction experience and a network of buyers in a multitude of industries across Canada, our strategic partners can help determine the best process for your company and assist you in your transition to retirement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
