BUSINESS SUCCESSION PLANNING: Passing down your business
Why plan who will take over your business now? What’s the need? It is estimated that in the next ten years just about half the number of people now running small businesses in Canada would reach the retirement age varying from 55 to 64. It is also observed that compared to the nineties of the last century, more such people seem to be getting old. Actually, their numbers now is nearly double of what it was ten years ago. Only a few of them are contemplating retirement, and, may be making some plans, while the majority are seemingly unaware of such an eventuality. This is a paradoxical situation having regard to the forecast that much more than a trillion dollars of business assets are going to change hands within the next few years, an unprecedented passing of economic crop from one generation to the other.
The process has to start early because one is going to handover a business built up over a lifetime (or may be inherited) to someone else, and it would take relatively a long time for completion (on average about five years considering the learning curve etc…). As the owner of a business, it would be your responsibility to pass over the knowledge, skills, labour, along with management control and ownership of the business. While doing all this, you have to think about what would be your own financial future and how it would be affected. So, perhaps you will begin by discussing the matter with experts or professionals, like the lawyers at Levy Zavet PC. After all, as a businesswo/man you have been seeking advice from professionals like accountants, bankers, lawyers and so on over the years in the belief and knowledge that they know more than you in their fields, and are in a position to give you proper guidance. Succession planning is like that, it would be worthwhile to benefit from the experience of specialists. It is also necessary to discuss the evolving scenario with your family as you go about making your plans for exiting the business. It is important to keep in mind that you are not throwing away anything, and, in fact, making efforts to maintain the legacy of your enterprise, enhance its values, bring financial prosperity to all concerned with the business, and deal with all sorts of possibilities, good or bad (mostly, bad, like death, illness and accidents). There is also the goodwill to protect (the business name), the employees’ interests to look after, and the maintaining of cordial relations with business partners.
There are a number of choices before you while selecting the appropriate candidate to takeover the business. Although family members are regarded as natural successors, it is surprising that on average less than 20 percent of Canadian small businesses are handed down. One reason could be the inexperience of the children and the time taken by them to get the hang of the business. Another could be the children’s attitude having been close to the owner. Anyway if that is what you have in mind, then you have to handpick your choice, discuss the matter thoroughly with the lucky one, and then prepare to hand over controls at a pace you consider appropriate.
The advantages of handing over the reins to partners or employees are quite a few. For instance, they are (supposedly!) as much interested in the development and growth of the business as you are. Also, they would know the ins and outs of the trade, and the transition would be expectedly smooth and expedient. The benefit of selling the business to an outsider, even to your competitor, is that financially it could be rewarding. However, that would only be possible if your sales graph has climbed steadily over the past few years and you have excellent transparency of your financial history and performance. If it is the opposite, then perhaps it would be in order to arrest the decline and go for a handover. There is also the possibility of a big group taking over your enterprise, a surefire way to increase your business value.
In this context, it would be necessary to find out the net worth of your business prior to making the sale. The net worth consists of your retained profits, assets, liabilities and the like. Then there is future potential profit, intellectual property (goodwill), the customer base, and market competitors to take into account. It is not uncommon for a buyer to be interested in your past business figures and the trend thereof; an area where a business valuer/actuary could be of help to you, such as a seasoned business lawyer or accountant. Following is the issue of taxation and the legal implications of selling or buying your business. In fact, stringing along a tax lawyer from the beginning may be a good idea. S/he would be thus in a very good position to tell you authoritatively the measures needed to reduce the tax, and to indicate with reasons why you do (or do not) qualify, for instance, for the capital gains exemption and some of the other tax minimizing provisions of our Income Tax Act. It would also be worthwhile to find out whether or not you can proceed with an estate freeze; a measure of when the value of the shares you own are frozen (by taking out fixed preferred shares in lieu thereof) and common shares are issued to adult children who will be looking after the business. Thus allowing you to “freeze” the current value for your own benefit and ensure that all future value is accrued to your children. Because your children are not obtaining any actual value on paper, their tax implications will only be as a result of their own performance and how they grow the company and eventually sell-out in the future (they wont be liable for the growth in capital over the time you owned/managed the business). Furthermore, because you did not transfer/sell your own interest in the business (and so long you don’t take more value out of the company than what its worth at the time of the estate freeze), you can defer your tax implications until your ready to actually sell-out or hand-over through a Will! To discuss an estate freeze or any other business succession plans please call the lawyers at Levy Zavet PC.