Business transfers: six bad excuses for delaying succession
A successful business succession starts by addressing pessimism and preconceived ideas.
The Fonds régionaux de solidarité FTQ has a long history of supporting business transfers throughout Québec. Whether the succession is familial, internal or external, Éric Drolet, Investment Director for Québec City and Chaudière-Appalaches and Philip Blouin, Investment Director for the Côte-Nord, often observe that people just don’t know the facts. Here, they debunk a few myths about the process.
1. It's not the right time
The worst time to transfer a business is when the principal owner has no choice due to age or illness. It's best to begin the process when you have time to plan.
First, identify potential buyers. “Experienced managers in the business are the best possible candidates,” observes Drolet. “They often know what improvements need to be made and since they bring a different perspective than the founder, they can breathe new life into the company.”
When opportunity knocks, be ready to answer. “There are always changes in the market. For example, the pandemic has generated some great business successes, particularly in the recreational products and outdoor equipment sector,” views Blouin. “The sales of some of our partner companies have skyrocketed over the past year. A new employee can also trigger the succession process. It happens more often than you might think!”
2. It's complicated
A smooth business transfer is directly proportional to the degree of preparation. In short, this means creating favourable starting conditions for the buyers. That includes three important ingredients: a good company, a good seller and a good buyer.
“When you have all three, you have the makings of a strong case,” adds Blouin.
Planning can involve accountants, buyout specialists, tax specialists, appraisers and other experts who are familiar with all the business levers for a successful succession. All but one.
“In the end, the human factor is the most important element,” adds Drolet. “What type of person do you want to trust with your business? Are you ready to concede to competitors? Do you want the head office to stay in Québec? Do you want to protect job security in exchange for a better price? These are all subjective questions that can outweigh the bottom line.”
3. The founder doesn't want to know about it
Buyers and sellers shouldn’t be afraid to broach the subject, otherwise they risk missing a good opportunity.
For example, Drolet points to RMH Industries - Placage au Chrome de Sainte-Foy, which the Fonds régional de solidarité FTQ recently supported during a second transfer. A few years ago, when a group of managers wanted to propose a first transfer to the founder, he was so attached to the company, they didn't dare discuss his possible departure with him.
“When they finally had the courage to approach him, the seller not only accepted their offer, he got a great deal,” adds Drolet. “In this current buyout phase, a new generation of talented managers wanted to seize the opportunity to push RMH even further,” he added
4. The buyer isn’t always a leader
There’s no doubt about it: assuming the helm of a company requires leadership, i.e. knowing how to supervise and delegate, the ability to express a clear strategic vision, being involved on a daily basis and not being afraid of competition and pressure, among other things. But all this can evolve over time, as part of planning a transfer.
Blouin recounts the example of Atelier de réparation Laforge, a recreational vehicle dealership in Sept-Îles. Three employees under the age of 30 wanted to take it over from the two founders, a-husband-and wife-team.
“The buyers were young and I was immediately impressed with how well prepared they were,” said Blouin. “The owners had been actively supporting their development for years, sharing everything with them, from the best to the worst: how to hire well, but also how to fire well. They helped them adjust to working in committees and so on. At the end of the day, all those factors added up to a more valuable company. For us, they were ideal partners and we didn't hesitate to finance them.”
5. The buyer is from another sector
Leadership transcends industries, but only to a certain extent. Anyone who wants to take over a business in another sector should carefully study the nuts and bolts of the new business to understand the issues, ensure employee trust and to make sure they’re truly interested in the type of business. This can be done, for example, during an exploratory visit with the seller.
“Buying a company is not just a simple investment. It’s a project the buyer must be involved with on a daily basis. It takes knowledge and experience, surrounding yourself with the right people when needed and, most of all, making sure you like the work!” adds Blouin.
6. No one wants to finance it
You don't have to be a millionaire to buy a business in Québec: several institutions compete to provide financing, including the Fonds régionaux de solidarité FTQ.
“Buyers often worry about raising enough money for a down payment. But in reality, there's always money in the market for them,” views Blouin.
Since there‘s a choice of financing, take advantage of it to diversify. For example, transfers financed by the Fonds régionaux de solidarité FTQ often complement traditional financial institutions. That means that a buyer can combine their own down payment, a bank loan and an unsecured loan from their regional Fonds.
“We rely on the quality of the project, rather than on tangible assets. That’s why it’s in our best interest to help the company succeed, create wealth and make a social impact. Those are at the heart of our mission,” explains Drolet.
“It’s just like buying a car: it also needs gas in the tank. Likewise, you need a solid financial structure with sufficient liquidity so that the new owners can get up and running quickly, avoid acquiring too much debt and get prepared for the worst-case scenario, if necessary,” concludes Blouin.