Part 1 in our video series on Business Management. We’re focusing on the Top Reasons Why Small Businesses Failed followed by videos on “How to overcome these top reasons.”

The statistics are shocking on the number of small businesses that fail in their first year. Sadly only 20% of all new start-ups don’t make it past their first year. 50% close their doors for good within 5 years.

Amazingly, when we look at the Top Reasons why small businesses fail, there is a pattern of mistakes they have in common.

From the buyer’s perspective, a business that can show healthy cash flow, that’s well maintained and enjoying sustained growth, is much more attractive.

Canada’s population is aging and Canadian entrepreneurs are no exception. In fact, close to 60% of Canada’s small and mid-sized business owners are aged 50 or older, nearly double the proportion of the overall workforce.

As a result, Canada is in the midst of a major shift in business ownership as the baby boomer generation retires.

Within the next five years, 41% of entrepreneurs in Canada expect to leave their existing business without acquiring another one. This is up from one in three in the mid-2000s. Of the entrepreneurs who expect to leave without acquiring another business, 83% say they plan to retire.

An increasing number of entrepreneurs are thinking about retiring and selling their businesses. With so many sellers on the market, the competition could be fierce, especially for those who haven’t taken the right steps to prepare the sale of their business.

Entrepreneurs could be leaving money on the table

Much like a homeowner putting a house up for sale, any entrepreneur planning to sell a business—typically his or her biggest asset—wants to realize the highest possible return. And, as for a house, careful preparation is an important step that will precede the successful sale of a business.

Unfortunately, many entrepreneurs are not making the best moves to boost the price of their business before their exit.

Among the entrepreneurs looking to exit without acquiring another firm:

• 71% are reluctant to take risks to improve their business’s performance.
• 52% have little interest in expanding their business.

This cautious approach may drag down the market value of these businesses, and could even impact the entrepreneur’s retirement.

Need to track financial performance better

Improper bookkeeping and business owners not leaving enough cash into the business are other issues that can affect the sale price of a company.

42% of business owners who expect to sell to buyers outside the family appear to have done little or nothing to spruce up their financial reporting. Most have also not taken action to maximize cash flow in anticipation of a sale.

These omissions do not augur well for the future value of their enterprises. From the buyer’s perspective, a business that can show healthy cash flow, that’s well maintained and enjoying sustained growth, is much more attractive.

Larger businesses are better prepared

The recent study paints a brighter picture for entrepreneurs in bigger businesses. They seemed to be better prepared for transition compared with the overall sample of Canadian businesses.

For example, entrepreneurs with 20 or more employees were more willing to grow their companies. 63% said they plan to continue expanding their business before selling it, compared with only 48% of all Canadian SMEs.

They also track financial performance better, two-thirds of larger businesses have sound financial reporting in place, and they were more likely to have taken action to maximize profits.

Finally, entrepreneurs with 20 or more employees seemed more preoccupied with the continuity of their businesses. Only 3% of them plan to wind down the business and sell the assets, compared with 22% of all Canadian SMEs.

6 tips to boost the value of your business

There are a handful of fairly basic things entrepreneurs can do that can help maximize the sale price of their business. Unfortunately, we don’t always see these things happen.

Here are 6 tips to help entrepreneurs boost the value of their companies before their exit.

1. Invest and improve right up to the sale

A business that has limited potential due to outdated buildings and equipment is usually worth far less than a firm that has maintained its capital assets.

2. Boost your profits and keep money in the business

The best way to boost the value of your business is to show solid performance and profits in recent years.

3. Keep detailed and reliable financial reports

A three-year audit trail or three years of financial reports prepared under a review engagement will give outside buyers confidence in your numbers.

4. Make your business stand out from the crowd

Strategies for building interest around a business can be as simple as maintaining an up-to-date online presence or having a bank of favourable customer testimonials.

5. Look for buyers outside your local market

Finding serious buyers locally can be a challenge, especially for rural businesses. Consider looking to bigger, urban centres, both for advice and as a source of potential buyers.

6. Get outside help

Consider tapping key advisors, including your bankers, accountant, and lawyer to identify serious prospective buyers. You may also want to hire a consultant who specializes in business transitions.

Planning can help you significantly reduce your tax liability in a succession. Failing to do so could mean the business has to close or be sold. Or perhaps it might have to incur an unhealthy level of debt.

Taxes are one of the main considerations when it comes to family succession. Without proper planning, you can wind up with a larger-than-expected tax bill in a family succession and have no way to pay it.

It’s important to get started early on to structure the transaction in a way that minimizes your tax liability. It can take several years to implement the optimal structure.

Here are the steps to consider. (Note: You should get professional tax advice about your specific situation. Also, rules differ for fishing and farming businesses.)

1) Start early—Consult a tax expert early on about the tax consequences of a succession. Many entrepreneurs wait too long and the transition ends up happening in a crisis—for example, due to a health issue or death. That can lead to lost opportunities to save on taxes.

The worst-case scenario is that the business passes to a child on death, but the family doesn’t have the means to pay the tax on the accrued capital gain.

2) Minimize capital gains tax—Whether you pass on your business in a sale or give it as a gift to a family member, it’s deemed to be disposed of at its fair market value. You are taxed on half the gain in the company’s value (as a capital gain) at your top tax rate. The capital gain is calculated on the difference between the business’s initial share cost and today’s share value.

(There is an exemption for a transfer to a spouse, in which case the gain and tax are deferred until the spouse sells or gifts the business.)

If the business is a qualified small business corporation, you can claim a lifetime capital gains exemption to reduce this tax. The exemption is $824,176 in 2016, meaning a gross gain of up to this amount is tax-free. The exemption is indexed to inflation and, hence, increases each year.

To qualify for the exemption, a company must meet several conditions. For example, it must have been owned by the same person for the past 24 months, and at least 90% of its assets must be used for business primarily in Canada at the time of transfer. See a detailed list of the conditions here and more information on the capital gains exemption here.

3) Consider an estate freeze—An estate freeze is a way to essentially lock in the gain (and capital gains tax) based on the company’s value. A common way of doing so is by exchanging your common shares in the company for fixed-value preferred shares, and then issuing common shares to your children. Any future growth in the company’s value goes to the common shares and isn’t taxed until your children in turn sell or gift their shares. The shares can be held by the children directly or in a trust.

4) Think about incorporating—If you haven’t already incorporated your business, think about doing so. Owners of an unincorporated business don’t qualify for the lifetime capital gains exemption and generally can’t do an estate freeze.

5) Defer taxes—You may be able to defer some of the capital gains tax if you help finance the sale and are being paid over several years. In this case, you may be able to declare the capital gain over the duration of the payments, for up to 5 or 10 years depending on the circumstances.

Planning a successful business succession takes years. According to experts, transitions can take up to five years to complete and, in the case of a family business, as many as 10, depending on the firm’s size and complexity.

A recent survey of 2,500 entrepreneurs found that five out of six entrepreneurs surveyed estimate that the process will be completed in two years or less from the time they meet with potential buyers to the moment the eventual sale goes through.

For entrepreneurs planning to sell their business, the best strategy is usually achieved by not rushing things and by taking the time needed to ensure a smooth transition.

Creating a succession plan is a great way to ensure you get the full value for your business or are able to pass it along the way you had hoped. This is especially true if unexpected trouble arises, such as a surprise health problem.

Here are five reasons why you shouldn’t wait to start succession planning.

1. It clarifies your options

You may have an idea in your mind of what your succession will look like, but you may be in for a surprise when you go ahead with it. For example, your plan may be to sell your business to an external buyer. But many entrepreneurs struggle to find an outsider willing to purchase their company. Instead, an internal successor—such as a family member or manager—may be your best candidate to take over.

2. You can prepare your successor

If your successor is a family member or manager, you need time—five years or more is normal—to get them ready. They need to learn how all parts of the business work, gain needed expertise and build relationships with employees, suppliers, and customers.

3. You can prepare your company

You need time to optimize the sale value of your company. This means making sure it has good growth prospects, a record of profitability and a solid balance sheet. You may need to invest in the business, remove personal expenses from the books and consult an accountant on how to structure the sale to minimize your tax liability.

You also need to prepare your company to operate without you. For example, you should document your business processes so that someone new can easily take over. Your employees should get training so they consistently execute these processes as documented.

4. You can arrange financing

You need to start talking early on with bankers about financing for the transition, especially if it involves an internal successor who doesn’t have a lot of capital to invest. You may have to use a mix of financing, including the buyer’s investment, vendor financing, a term loan, and mezzanine financing.

5. It’s an emergency plan

Many entrepreneurs have a hard time letting go of their business. But having a succession plan in hand is useful as a just-in-case emergency contingency, even if you’re not planning to exit any time soon.

If you leave it until a health issue comes up and you need to sell, you’re not going to optimize your company’s value and you’re probably going to leave your family with a larger-than-expected tax bill. And that’s not to mention that the business will have a hard time continuing normal operations.

You started your business 30 years ago with a few family members and now you have a 100-employee company and your adult children are actively involved.

Mentoring, trust and a deep knowledge of the business have been the keys to a smooth transition from one generation to the next. One of the benefits of your children growing up around the business is learning the business from its patriarch. Seeing the business through their eyes, their values, work ethic and love of the business.

Starting from their high school years, your children can begin to learn every aspect of the family business. While these are invaluable lessons, higher education should be encouraged such as business, accounting & finance.

Learning the business from the ground up

Transition processes are some of the most important and delicate challenges in the life of an entrepreneurial business.

One thing that can make the transition process easier is to begin to hand major decision-making to the children gradually. The key is to let them problem-solve on their own. It’s important for them to learn from their mistakes while maintaining their confidence in making decisions.

Not every decision can be made by family

Family-run businesses face the same questions that most entrepreneurs have to face at a certain point: How to make sure to have the right management structure in place for growth? Consider engaging a management consultant for help. An outside consultant can help you make the difficult decisions necessary to grow your business.

Out of the process also flows the need to hire a controller—mainly to find ways to save on costs, develop departmental budgets and better understand margins. Consider introducing performance reviews for employees with a focus on developing their skills.

Most of all remember we all hope that our children will take over the company. But just because they share the last name doesn’t necessarily mean that they are the best for the job. They will have to prove that they are the best leaders for the company.

Diversification and financial management are key strategies

The recession of 2008-09 may have occurred nearly a decade ago, but it’s still a painful memory for many entrepreneurs. More recently, the decline in oil prices has caused a slowdown in producing regions that have hurt business owners.

Unfortunately, economic downturns are a fact of life when you’re running a business. But there are steps you can take now to prepare your business to weather a storm and emerge even stronger.

Entrepreneurs often know they should be prepared for tough times, but they don’t always take the necessary steps.

Here are five ways you can recession-proof your company.

1. Grow your customer base

It’s hard to overemphasize the importance of increasing the number of customers you have. According to a recent study, nearly one in six well-established businesses had encountered financial difficulty because of losing a single client. Very often, businesses are not prepared to deal with the unexpected loss of their biggest client or contract.

2. Focus on your finances

Solid financial management is vital for ensuring your company is ready to weather an economic downturn. Entrepreneurs need to have early warning systems to let them know when trouble is brewing. The numbers tell you the truth about your business and you need to embrace them.

Consider setting up a cash flow planner. To do so, use a spreadsheet to record projected revenues and expenses for the next 13 weeks and then update it each week. This allows you to get a handle on when payments from customers are expected versus when suppliers must be paid. You can then plan for periods of tight cash flow, coming projects and financing needs.

Consider setting up a financial dashboard, showing four or five key performance indicators on the financial health of your business.

3. Offer new products and services

It’s easy for business owners to get comfortable with the products or services that have been successful for them in the past. However, broadening your line-up may be the key to surviving during the next recession.

In fact, you may not even have to come up with something completely new. Instead, you might be able to repurpose your products for another market. For example, manufactured products used in the oil and gas sector could be effective in other areas with just a few changes. Research showed that having a range of products and service lines can be an important form of diversification.

4. Expand internationally

International expansion is another great way to diversify your business. If your sales dip in Canada, you may be able to make up the shortfall in markets with stronger growth.

Exporting opens up a lot of opportunities. Canada has cultural and economic ties with the U.S. and Western Europe, and our small and mid-sized businesses can often be very successful there. Those markets, in turn, can be a launching pad to higher-growth emerging markets.

5. Stress-test your business

As the last recession proved, some circumstances simply can’t be foreseen.

That’s why it’s important to run through various scenarios now, including how you’d handle a sharp drop in sales. While you’re at it, look at different crisis and disaster scenarios and put contingency plans in place to deal with them.

Look at things like: What happens if our input prices rise because of the weaker dollar. What if key people in your business were all of a sudden unable to come to work because of illness or a natural disaster? Unexpected developments can derail businesses.

Lessons learned

• Innovation counts—Successful businesses offer new products and services often and quickly adopt new technology.
• Get help—Networking, hiring consultants and setting up an advisory board are ways successful businesses get external advice.
• Map it out—Developing a strategic plan with specific targets will help to keep your business on track even as economic conditions change.
• Master financial management—Keeping tabs on your finances allows you to plan better, see trouble brewing and react quickly.