Passing It On – Succession Planning for Business Owners
Kate D. Harris, January 2012
Download PDF
“Succession planning” involves examining the manner in which an owner-manager plans to sell, transfer or otherwise liquidate his or her business. If you are a business owner, you should have a succession plan and should revisit it from time to time to see whether changes in applicable laws or personal circumstances dictate an update. It is never too early in the life-cycle of a business to begin discussing succession planning.
When developing a succession plan, you and your planner will need to spend time considering your objectives, the nature of your business, family dynamics, your non-business assets, life insurance, shareholders’ agreements, and your existing Will and other estate planning documents. Discussing these topics is important because all of them influence the succession plan.
There are a number of ways of passing on your business. You may want to sell your business to an unrelated party for the maximum possible proceeds. There may be key employees who you want to make an owner, or you may have one or more children who are (or might become) interested in the business. Even if you have a plan in mind, it remains important to have the initial discussions with your legal and financial advisors so to ensure that the plan is consistent with your financial and lifestyle goals and needs.
If your ultimate plan is to sell to an unrelated party, early planning can ensure substantial tax savings on the eventual disposition. Proper corporate structuring at an early stage increases the likelihood of using the “capital gains exemption” to reduce or eliminate tax payable on the sale proceeds. Further, adding a family trust to your structure can multiply the tax savings available on the sale. Planning for the capital gains exemption cannot be done at the last minute because certain requirements must be met over the 24 month period prior to the sale. Because timing is crucial on an arm’s length sale, it is important to be ready to accept an offer. Also, given the demographic trends in Canada, there may be a surplus of businesses for sale over the next 10-20 years – another good reason for early planning.
If your goal is to transfer the business within your family, the design of a proper corporate structure can minimize and defer tax; however, the personal issues that often arise tend to require an equal attention:
What do you want/need financially for retirement? Are non-business assets available to fund retirement? Do you want cash up front? Or, will the business pay you out over time? In the latter case, you may want to consider retaining voting control, at least until payment is received.
Will you continue to be involved in the business? Is continued involvement consistent with your retirement goals? Will your absence negatively impact the economic viability of the business?
How will family harmony be maintained? If some children will not be involved in the business, you may wish to update your Will to ensure they are ultimately treated equal. If more than one child will be involved, adopting a shareholders’ agreement may help avoid disputes in the future.
There is no question that every succession plan is different and requires different strategies to devise and implement. All business owners should consider the eventual disposition of their business – early and ongoing planning can help you achieve your goals and ensure a successful transition.
Disclaimer: This publication provides information only and is not intended to confer legal advice or opinion. If you have any further questions please consult a lawyer. Please note as well that many of the statements herein are general principles which may vary on a case by case basis.
