Creating a Succession Plan For Agencies
Succession Planning
Succession planning is a strategy companies use to pass leadership roles down to another employee or group of employees, or an external person. Succession planning ensures that companies can continue to run without major interruption, after the original leaders or owners move on to new opportunities, retire, or pass away.
Many entrepreneurs in the marketing world wish to hold on to the reins for as long as possible, as they likely have an emotional attachment to the agency, creative content, and the legacy of the company that they built. However, it might be easier to let go later on if some advance planning is put into place to find the right person to hand the company over to. Knowing there is someone that has good business sense, and will also take care of staff and clients, can be very reassuring.
Choose the best option for you
There is more than one way to set up a succession plan, and lots to consider.
One option if you aren’t ready to retire, is to delegate the business engagement side of the company. You could consider staying on as a full-time or part-time employee for a few years and phase yourself into retirement gradually. This way there is an upfront payment for the business, but you remain as an employee and still have a steady income flow to assist with your retirement savings and debt management.
Another option is to sell a function of the business, for example, a particular service of your agency that you feel takes more time and energy to manage. Or you could choose to outsource certain services, rather than keeping everything in-house. You could then take care of the parts of the business you enjoy most such as the creative copy only, design work, etc.
Alternatively, you could sell the entire agency, while keeping the building that it operates from if you own the real estate. You could rent the office space to your previously owned agency, or another business, and this way you secure the inflow of rental income to use toward your savings or debt repayment.
These are just some of the many examples of what a succession plan can look like. However, without a plan, you could eventually be forced to make a snap succession decision – if you’re the one to make one at all. This can harm your agency if it forces management to spend more time focusing on stabilizing the company’s leadership than on growth. Below are some strategies that will help you develop a succession plan to give you and your agency a future.
Start with valuation and build from there
For an unbiased, outside view of your agency’s valuation, consider hiring a chartered business valuator (CBV). The CBV Institute, the umbrella organization for the profession in Canada, has a searchable online registry that includes CBVs in your area. Even obtaining a quick snapshot from an online evaluator like BizEquity could provide a starting point. Generally speaking, any estimate will be based on one or more of the following:
Comparable sales offer the most straightforward approach. As you would when selling your home, you’d base your estimate on similar properties (in this case other marketing agencies) that have recently sold. The drawbacks? As the Corporate Financial Institute says, it’s tough to find directly comparable businesses to yours, and there’s seldom enough information to generate a reliable estimate. Moreover, in fast-moving markets like today’s, comparisons can quickly become dated.
Earnings: Similar to a forward price-to-earnings ratio on a stock, this type of valuation looks at past earnings and projects them into the future. The valuator will then come up with a multiple of those profits based on a range of factors, including the business’s asset value, balance sheet, intellectual property and “goodwill” (intangible items such as customer loyalty and brand strength). According to the Business Development Bank of Canada (BDC), this multiple could range from three to six times earnings before interest, taxes, depreciation, and amortization (EBITDA).
Keep in mind that there’s a subjective element to valuation: different estimators and methods will generate different figures. Still, the process will give you a starting point.
How to ensure a smooth succession – emotionally and financially
The topic of succession could span many articles, but let’s assume you’ve ruled out selling to an outside buyer and will transition your agency to a family member or current employee. According to the Business Development Bank of Canada, a family-business transition can take as long as a decade to complete. When you consider the emotional and financial factors involved, it’s easy to see why.
In the case of succession to a family member, you’ll want to leave time to assess their interest in taking over, and their ability to do so. You’ll also want to allow time to smooth over any family politics that may be involved, say if you have multiple family members interested in the company. Keep in mind the issue of nepotism when selecting a successor. Review all applicants, both related and unrelated to the family, and consider giving the potential successor time to access their financial position to ensure they are able to sustain the financial burden of taking on the business. It is prudent to obtain Independent Legal Advice for all parties involved, whether they are related or not.
In addition, as marketing agencies are often heavily personality-driven and require creativity, it is important that you consider whether the successor can maintain an encouraging, creative environment moving forward. This is something to consider for your current employees to ensure continued success.
On the financial side, it is imperative to have a team of professionals by your side. Your Business Advisor can assist you in coordinating that team to ensure you exit the business properly. It is recommended to include a Personal Financial Advisor, Wealth Advisor, Lawyer, Chartered business valuator as well as appraisers and brokers who can help you sell your agency. As always, you will need the assistance of Accountants to work through the critical issue of taxes, because no matter who the next owner is, the transition counts as a sale to the Canada Revenue Agency.
As a result, gains on the sale are subject to capital gains tax. If your agency is incorporated and you sell it whole rather than breaking it up and selling off its assets, 50% of your profit on the sale will be added to your income in the year the deal closes, and it will be taxed at your marginal tax rate. There’s a lifeline available, however: your business may qualify for the lifetime capital gains exemption, which lets you shelter all or part of your gain. An advisor can help you navigate the financial implications when the time comes.
Get started today
As with many things in business (and in life), the key to a successful succession is to get started as early as possible. Advisors can help you kick off planning and help you choose the best option for you and your agency. It’s never too early to start the conversation.
By Anna Plut, Business Advisor at BlueShore Financial