Transferring your business: A complete guide for business owners

You had a dream. You started your company, shaped it and built it up. Years later, it’s time to think about your business succession planning, even though retirement is still a few years away. Part of running your own business means that one day, you’ll need to pass the torch. What steps will help you do so with peace of mind?

In recent years, Canada has seen a dramatic increase in business transfers. According to the Canadian Federation of Independent Business, more people seem to be taking over existing businesses than starting new ones. The trend seems largely due to the wave of retiring baby boomers who started their own companies.

The most recent Survey on Financing and Growth of Small and Medium Enterprises found that business transfers are essential to our country’s prosperity, since small and medium-sized businesses (SMBs) form a majority of employers and are a key driver of Canada’s economic vitality. Such transactions ensure the continuity—and even sustainability—of these organizations that bring tremendous value coast to coast.

A business transfer is a process where a company’s ownership and management change hands from a seller to a buyer. As a result, the entity changes owners while keeping its identity.

The business transfer process requires financial, tax, legal, people and organizational planning. Many major decisions will be made every step of the way. External expertise from legal, tax, accounting and other professionals can often be crucial throughout the transfer process.

Here are the 5 main types of business transfers:

• Internal transfer to people in the organization (management or not)
• Transfer to a family member (children, nieces or nephews)
• Mixed (or hybrid) transfer to a combination of family members and key personnel
• Transfer to another company
• Transfer to a third party (outside buyer)

Like any major project, a business transfer needs to be well thought out and meticulously planned. The process is generally carried out over a prolonged period of time and comes with its share of challenges: identification of succession, due diligence, financing package, knowledge transfer, human resources management and a transition period. Every facet of the transaction must be carefully considered before and during the transaction.

“From start to finish, the transfer process takes about five years,” says Richard Quinn, Director of Business Transfers at Desjardins. “Once succession has been identified, expect another two to three years for the business transition to play out. It’s an important step where employees, suppliers and financial partners need to be reassured.”

The goal in starting the process with a solid business transition plan in hand is to maximize the financial benefits of the transfer, complete an accurate business valuation, ensure operational continuity and manage risks more efficiently.

“Preparing the team and planning the transfer has a very real impact on the business’s value and long-term success. It’s like building a house: You have to start with the foundation, which in this case is the preparatory work for the business transition.” 
– Richard Quinn, Director of Business Transfers at Desjardins

Clearly defining your personal and professional objectives is essential for a successful business transfer. Your account manager will direct you to professionals and act with your goals and values in mind. Here are examples of questions you should ask yourself:

• Where do you see your business in three to five years?
• Who do you know that could eventually take your place?
• Do you want to step away completely from your company? If so, when?
• Do you want to keep the company’s culture?
• How much income will you need at retirement?

Answering these types of questions can help you outline a transfer strategy that aligns with your goals and favours the long-term success of your family business, very small business (VSB) or small or medium-sized business (SMB).

 The most common obstacle to succession planning is finding a suitable buyer, according to a report from the Canadian Federation of Independent Business. So you need to ask yourself: Who will take over your business? Have any family members shown an interest? What about your management team? By voicing your intentions to retire in the short, medium or long term, you open the door to constructive conversations with potential successors.

Drawing up a list of selection criteria will guide you when it’s time to choose capable successors. The most lucrative offer isn’t necessarily the one that will help you achieve your goals.

“Selecting a like-minded individual who shares your vision and values exponentially increases the chances of a successful business transfer,” explains Richard Quinn. “In terms of skills, aside from background and management experience, we recommend that you focus on finding someone with a strong business acumen who can surround themselves with the right people, communicate effectively and build employee engagement. Your successor should be someone with a clear strategic vision, who prioritizes new technologies and productivity.”

It takes an objective appraisal to assess your company’s fair market value. Your account manager may suggest some chartered business valuators (CBVs), who use an unbiased, analytical approach.

CBVs will review the organizational context and assess it accordingly. Here are their 3 main valuation methods:

Income-based: This method estimates the company’s value based on its ability to generate future profits, factoring in its past performance.

Asset-based: This method uses the market value of the company’s tangible assets (land, buildings, equipment) and intangible assets (patents, trademarks), minus its debts.

Market-based: This method compares the company to others of a similar size that have sold recently. It places the company in a price range based on the current market.

“We recommend that owner-managers get an appraisal as soon as they start considering a transfer,” says Richard Quinn. “It allows them to check if the company’s value will be enough to meet their retirement needs. If not, it’s a great chance to work on increasing the company’s value—whether it means dropping unproductive assets, boosting productivity with a digital transformation, diversifying its markets or targeting growth through acquisition.”

The CBV’s final appraisal is one of the key elements that serve as a basis for negotiations to determine the final amount for the sale.

The business transfer (or business succession) plan describes the steps needed to ensure operational continuity. It maps out the entire process, including the human and strategic aspects as well as the transfers of ownership and management. 

Drafting a transfer plan begins in the earliest stages, by anticipating future needs and fostering an open dialogue with the parties involved. It clearly lays out every step of the transfer: preparation, appraisal, knowledge transfer, due diligence, financial transaction and transition.

It’s important to always keep track of the plan’s progress and efficiency and adjust if need be.

Yes, a successful business transfer in a climate of uncertainty or turbulence is possible. The key is to closely monitor the situation to protect the company’s cash flow while staying locked in on the transfer’s end goal. Rather than dwell on sluggish results and financial losses brought on by the current context, the seller and their team of specialists should also consider the company’s long-term performance and outlook. Slowing down the process gives you more time to properly set the stage for the future and stay flexible as challenges arise due to the volatile climate.

Ownership transfer involves several core steps: signing legal documents to formalize the change in owners, restructuring the organization’s management and responsibilities, and finalizing the financing for the transfer. 

At this point, you must pay particular attention to the legal and tax aspects. “We’ve come to the transactional part of the business transfer, which includes signing the sale contract and non-compete agreements as well as the transfer of the employment contracts to the new employer,” explains Richard Quinn. “We recommend having a lawyer involved to oversee the representations and warranties.”

“Ideally,” he adds, “tax planning should start two or three years prior to optimize the corporate structure. This preparation lets you maximize your capital gains exemption and minimize tax traps, and can facilitate a smooth transition financially.”

Here are the legal documents you might need for the formal business transfer contract:

1. Non-disclosure agreement: Document signed before talks begin, in which the buyer agrees not to disclose confidential information obtained about the company. It allows the process to get underway while protecting the seller’s confidential information.
2. Letter of intent: Document in which the buyer indicates their willingness to acquire the company (equity or assets) at a given price and in a certain timeframe. It’s not a legal commitment; the buyer can pull out from the transaction at any time.
3. Offer to purchase: Preliminary offer in which the buyer proposes to acquire a business at a set price and under certain conditions (timeline and payment terms). This document becomes legally binding once the seller agrees to it.
4. Buy-sell agreement: Final agreement between the seller and buyer, detailing the final terms of the sale, including payment, guarantees and non-compete agreements. This document formalizes the transaction and is legally binding.
5. Shareholder agreement: Key legal document that takes precedence when a transaction involves two or more shareholders. It helps structure relationships and clarify the rules around governance, share transfers and decision-making. It aims to prevent conflicts and maintain the company’s stability after the transaction.
6. Financing agreement: Formal arrangement between the buyer and financial institutions (or other funding sources) that outlines the terms of the acquisition’s financing. It specifies the amounts borrowed, collateral required, repayment schedules and conditions of the loan.

A smooth transition calls for a carefully crafted financing package for the business transfer. Desjardins offers practical tools and advice to walk you through this complex process, while guiding you toward personalized financing solutions. As Richard Quinn explains, “The seller is a pivotal player in financing the business transfer. First, by choosing the right successor, and then by supporting the successor financially—particularly through balance of sale price—you send a clear message to partners and investors about your commitment and trust in your succession.”

As the transfer becomes official, communicating with everyone concerned is important; it strengthens trust and ensures operational continuity. The seller and buyer must create an internal and external communication plan to better control the narrative. They can bring in a communications firm if needed.

According to Richard Quinn, transparency is the best approach. Transition planning requires a strategic approach to human resources that includes the buyer’s arrival and change management for the parties involved. 

Depending on your business transfer agreement, you can mentor the successor during the transition, being mindful of their values and vision while supporting their smooth integration into the team.

A business transfer closes out your professional life cycle while also beginning the next chapter.  Your business is an important part of your wealth that must factor into your retirement plan. Your wealth manager, who’s been there throughout your transfer journey, will help you define a personalized investment strategy with your goals in mind.

The emotional side of this major change must not be neglected. How will you manage this important step in your life, where you feel both pride and a sense of loss at seeing your company move into a new stage in its development? “The decision to pass the torch and withdraw from their company is one of the biggest a business owner will ever make” says Richard Quinn. “That’s why account managers at Desjardins Business bring up the matter well in advance, and most business owners welcome this discussion and appreciate the fresh perspective.”

In short, a business transfer is a crucial process that requires careful planning and an understanding of the various issues at hand. It’s important to negotiate terms that make sense to both parties. In addition to offering you personalized support, your account manager at Desjardins Business can direct you to lawyers, tax advisors, accountants and other professionals, who can help you with your specific needs. By following the steps we’ve outlined above, you’ll set yourself up for a smooth and efficient transition.

Trust the business transfer and wealth management teams at Desjardins Business, who can guide and support you through every step of this complex process, drawing on many successful transfers. Your business is a major part of your wealth. Start planning your business transfer today.