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Succession & retirement planning

You've put a lot in. What will you get out?

Starting and building a business means years of hard work and sacrifices – and hopefully, great success. But eventually you'll want or have to leave it, whether it's for retirement, through a sale or for health reasons. The present is the best time to think about what's next. When you're looking at exit strategies, here's what you'll need to consider.

Choosing a successor - family first?

Because you're the driving force, you've had the vision to make your business a success. But when it comes to handing it over, that vision may become less clear, particularly when it involves family. Here are some important issues to discuss:

  • Do your children want to be involved in the business and do they share your vision for the company?
  • If more than one person is involved (siblings or perhaps your child and your partner), can they work together and how will authority be divided?
  • How will you phase out your involvement in the business?
  • When should ownership be passed on? There could be important tax advantages in giving the business to your children while you're still alive. For example, an estate freeze transfers ownership while providing an income stream.
  • What's the best leadership preparation – education, apprenticeship, or both?
  • If a key employee or business partner is taking over, will they buy you out.
  • Will a trust help with the transition and a succession plan?

A family trust buys you time.

If want to keep your company in the family but you're not sure who to hand the reins over to, a trust can ensure your business carries on without committing you to a decision. Essentially, the trust can become a shareholder in the business. You own preferred shares with controlling votes that reflect the current value of the business. Your children own common shares, which will reflect future increases in the company's value. These common shares are held in the trust with your children as beneficiaries. This allows you a substantial period of time to "wait and see" before deciding who should get control. Because a trust is a taxable entity, separate tax returns have to be filed.

Selling – realizing the value of your business.

If you're not transferring to a family member, you can sell to a key employee, a partner or to outside interests. If you've built up a larger operation, an MBO (Management Buyout) may be a possibility. In any case, getting good value for your business can take considerable time and effort. Enlisting the aid of a specialist to help provide a fair valuation of your business is important. Different methods can be used to arrive at a fair market value, including:

  • Examining your assets, totaling up all your investments in the business
  • Comparing to similar businesses that have sold recently
  • Auditing past earnings and profits
  • Comparing sales and net cash flow with liabilities and current market conditions

The right advice makes all the difference.

Rules governing the lifetime capital gains exemption for qualified small businesses are complex. Your business advisor and tax specialist can help you determine ways to maximize the potential tax benefits. They can also show you how to take advantage of strategies you might otherwise overlook – for example, paying yourself a "retiring allowance" that can be rolled into your RRSP over and above your regular limit.

Together, you can make sure your succession plan covers all the essential areas, including:

  • How to structure the deal, its timing and tax treatment
  • The financial benefits for you, your spouse, and other family members
  • Insurance planning that takes into account additional funds necessary to keep the business running or provide for the family while it's up for sale
  • Changes to wills, insurance and perks such as company cars
  • Agreement on the extent of your ongoing involvement
  • Contingency plan for unexpected events such as the death of your chosen successor
  • Transitional roles for you and key employees
  • How and when to communicate ownership change to employees, customers, suppliers, banks and other third parties.

Put your succession plan in writing.

In many ways, a business succession plan is like a will. Besides the need to be up-to-date and legally sound, it should present no surprises to anyone involved. Like any important document, it should be reviewed periodically to accommodate any change in needs or circumstances.

To further safeguard your business legacy, be ready for the unexpected. Your greatest risk is not being around, through either death or disability, to see your plan through. Insurance is the best way to provide income protection for your family.

With careful planning, you'll ensure you get out of your business just as much as you put into it.