Business Succession Planning: Why plan now?

A business often represents a lifetime of work and vision. However, despite almost three-quarters of business owners wanting to transfer control or exit ownership within the next decade, barely a third have a formal succession plan in place. Lack of a plan is also the most common reason family businesses fail to survive first-to-second generation ownership.

Leaving business succession to chance could allow someone else to decide what happens to your business, and potentially at significant cost. Planning early also helps reduce the tax impact of ownership changes, as well as ensure a smooth and successful transition of the business to the new owner or owners. A successful plan will also help the overall value of your business today.

The Succession Planning Process

The process of planning and enacting a successful transition consists of several steps, each of which are equally important. These steps include:

Identify and Review Priorities
The first step of the process starts with identifying your priorities. Business owners should ask themselves, “What do I want for my future, my family, and my business?”

Identify a Buyer or Successor
Who will run the business when you are no longer doing so?

Develop a Succession Plan
Since a variety of expertise is needed, it is important that you work with an appropriate team of experts to help you develop your business succession plan.

Integrate with Personal Financial Planning
Ensure that your personal retirement and estate goals are integrated with your overall financial plan.

Monitor Plan Implementation
It is important to monitor and review your plan during the implementation period to ensure that you are on track in terms of timing and deliverables.

Elements of a Succession Plan
Succession planning does not take place in isolation from the larger issue of your overall financial security. An effective succession plan will examine all aspects of your financial situation.

Distribution of Ownership
If you are transferring ownership of your business, a shareholder agreement is a key tool that should be considered.

Selecting and Grooming Your Successor
Identifying the right person to take over the reins when you leave is a process that requires careful thought and planning. TM Trademark used under authorization and control of

Business Maximization Strategies
There are many strategies you should consider to increase the value of your business prior to sale or transfer of ownership.

The Role of Key Employees
Key employees are vital to the success of ownership transition, and can offer real help in the planning process.

Business Valuation
While you may have a good idea of what your business is worth, you should still consult with a professional business valuator to confirm or determine this crucial figure.

Financing and the Mechanics of Sale
Financing the change of ownership should be a key part of your succession plan.

Taxation and Legal Considerations
It is important that you consult with your tax and legal advisors early in the process to make sure that your plan achieves your objectives.

Retirement and Estate Considerations
Since your investment in your business is probably your most significant asset, there are a number of important retirement and estate planning issues that should be addressed.

Timetable
When you develop your plan, you should ensure that there is a clear timetable, so those involved know exactly what will be expected of them, and when.

Monitoring Process
Be sure to update and adjust your plan as necessary if and when there are changes to your business and/or personal situation.

Contingency Considerations and Risk Management
If illness or death meant that you were suddenly unavailable to manage the business, who would take over your responsibilities?

Finding the right approach to exiting your business will depend on your own expertise, the complexity of your personal financial situation and the time and desire you have to manage your transition. Whatever you do, don’t go it alone. It’s important to get the right team working for you. Working with our professionals from across the Scotiabank Group, we can help get you take the first step in developing a plan that is right for you.  Contact us at (604) 535-4749, or use our contact page.

Business Succession Planning: The process

A business often represents a lifetime of work and vision. Yet, many business owners wanting to exit ownership barely have a formal succession plan in place. Leaving business succession to chance could allow someone else to decide what happens to your business, and potentially at significant cost. Planning early also helps reduce the tax impact of ownership changes, as well as ensure a smooth and successful transition of the business to the new owner or owners. A successful plan will also help the overall value of your business today.

The Succession Planning Process
The process of planning and enacting a successful transition consists of several steps, each of which is equally important. These steps include:

Step 1 - Identify and Review Priorities
The first step of the process starts with identifying your priorities. Business owners should ask themselves, “What do I want for my future, my family, and my business?”

Step 2 - Identify a Buyer or Successor
Who will run the business when you are no longer doing so?

Step 3 - Develop a Succession Plan
Since a variety of expertise is needed, it is important that you work with an appropriate team of experts to help you develop your business succession plan.

Step 4 - Integrate with Personal Financial Planning
Ensure that your personal retirement and estate goals are integrated with your overall financial plan.

Step 5 - Monitor Plan Implementation
It is important to monitor and review your plan during the implementation period to ensure that you are on track in terms of timing and deliverables.
Finding the right approach to exiting your business will depend on your own expertise, the complexity of your personal financial situation and the time and desire you have to manage your transition. Whatever you do, don’t go it alone. It’s important to get the right team working for you. Working with our professionals from across the Scotiabank Group, we can help get you take the first step in developing a plan that is right for you.

Step 1 – Identify and Review Priorities

This step in developing your business succession plan is to identify and review your personal, family and business priorities. Business owners should ask themselves, “What do I want for my future, my family, and my business?” In doing so, you need to cover all the contingencies, not just retirement.

Personal / Family Considerations

• When to exit the business
• Post-succession involvement in business
• Family member interest and involvement in the business
• Retirement / post-succession income needs
• Wealth preservation / transfer
• Minimization of taxes
• Philanthropy
• Family harmony / equality / fairness

Business Considerations

• Retention of key employees and customers
• Shareholder agreement
• Ensuring business survival
• Minimization of taxes
• Minimization of disruptions

Step 2 – Identify a Buyer or Successor

In some cases, a combination of these options may turn out to be your best option. It’s important to seek professional advice to make sure you find the best solution for you, your family and your business.

Passing the Business to Family

Family members can be good choices for successors, but only if they have the desire, commitment and ability to manage the business successfully. Ownership and management are two different things. You may be able to handle both, but your family members may be better off retaining ownership only and leaving business management to others.

If you do select a family member (or members) as your successor, doing as much advance planning as possible will help your successor build the skills and knowledge he or she needs to take over the business. The process of grooming your successor will include things such as training; introduction to key customers and suppliers; and managing the transition so there is minimal disruption to the business.

Transferring Ownership Through a Management Buy-Out

If keeping your business in the family is not a suitable strategy, one alternative is to offer key management the opportunity to purchase all or part of the business. If there are employees who are prepared to take on the risk of ownership, a management buy-out can help ensure continuity of personnel and the business itself.

There are many methods of structuring and financing a management buy-out, including stock options, a buy-out over time, or a financial purchase. Each of these has different implications for your business, taxes and the timing and amount of income you will derive from the transfer of ownership.

Selling the Business to an Outside Party

You may decide that selling your business to an outside party is the best option for all. Selling your business can create immediate value and also limit family disputes.
A sale can be structured in many different ways, depending on your objectives. Seeking the advice of professionals to help you determine the right approach will help ensure that a sale achieves your most important goals.

Once you have made the decision to sell, you’ll need to focus on determining the value of your business and finding ways to improve this value so that you can receive the maximum sale price.

Winding Up the Business

In some cases, you may not be able to find an appropriate buyer or successor for your business. However, you still have the option of liquidating business assets such as real estate, inventory, equipment, customer lists, etc…Make sure you get professional advice to find the best way to dispose of assets and minimize tax and other liabilities.

Step 3 – Develop a Succession Plan

Given that your succession plan should be built around the unique characteristics of both your family and your business, every succession plan will be different. However, there are several common elements to most successful plans, including:

• Statement of distribution of ownership: how much to sell and when
• Identity of successor and how they are to be trained
• Business maximization strategies
• Roles of key players during transition
• Business valuation and mechanics of purchase or sale
• Financing
• Taxation and legal considerations
• Retirement and estate considerations
• Monitoring process and procedures for dealing with disputes
• Timetable
• Contingency considerations

Since a variety of expertise is required, it is important that you work with an appropriate team of experts to help you develop your business succession plan. This team should include tax, legal, insurance and investment representatives.

Step 4 – Integrate with Personal Financial Planning
Since your investment in your business is probably your most significant asset, there are a number of important personal and estate planning issues that should be addressed in conjunction with your professional advisors.

Freezing the Value of Your Shares or Estate

For most business owners, your investment in your business will have a high value but a low tax cost. Consequently, a significant tax liability could exist upon transfer of ownership. However, there are several ways you can reduce, or at least defer, taxes.
By freezing the value of your business shares / investment, future gains will accrue to heirs and won’t be taxed until they sell. An estate freeze also effectively locks in the tax liability that would arise upon death, so that you and your business can plan ahead to ensure that this liability can be met.
It’s a good idea to review any plans for retirement at the same time you are considering an estate freeze. As an owner of a business, you have considerable flexibility when it comes to creating sources of retirement income and you should carefully consider each of your retirement savings plan options. Make sure you get professional advice and expert help.

Insurance

Life insurance is a powerful tool by itself and also when used alongside an estate freeze. For many business owners, insurance provides the only real option for dealing with the income tax that will be payable at death, short of selling the business. Once you freeze your estate, you can purchase enough insurance to pay the projected tax liability.
Life insurance has a second important use in estate planning for family business owners. Treating your family fairly doesn’t necessarily (and often does not) mean treating them equally when it comes to your business. In particular, splitting the shares of a family business equally among children who have varying degrees of involvement in the business can cause problems. To avoid these problems while maintaining fairness, insurance can create an “instant estate” that can be used to provide for children who are not active in the business.

Retirement Planning

As an owner of a business, you do have flexibility when it comes to creating a source of income in retirement, and you should consider each of these retirement savings options when planning for retirement.

• Maximize RRSP Contributions – If you receive a salary from your corporation, this salary will be earned income for the purposes of making RRSP contributions.
• Individual Pension Plans – It may be possible to set up a pension plan for yourself and other family members, known as an Individual Pension Plan, or IPP. For older business owners, the potential retirement benefits provided by an IPP can exceed the benefits provided by regular RRSP contributions. The rules are complicated however, and these plans are more costly to run when compared to a conventional RRSP.
• Redemption of Freeze Shares in Retirement – If you implement an estate freeze, you will generally hold fixed-value preference shares after the freeze. Once you retire, these shares can be redeemed over time, providing you with dividend income from the corporation. These redemptions will also reduce the accrued gain that will be taxable upon death.

Given that there is risk associated with all businesses, it is usually prudent to use some or all of the methods discussed to save for retirement. Should the business fail or experience cash flow problems, you should have other sources of income to fall back on.

Preserving Your Estate

We’ve already touched on the importance of preserving your estate and the value of your business. As a business owner, there are a number of steps you can take to protect your business assets. In addition to good management and insurance, you may want to consider the use of a holding company for real estate assets or your business itself for both liability and tax reasons. If creditor claims are made against the operating company, the real estate may be sheltered from these claims.
A holding company can also be useful if your business generates cash flow in excess of amounts required for business investments and cash paid to you as a salary or dividend. If a holding company holds the shares of your operating company, the excess cash can be paid to the holding company as a dividend on a regular basis, and again this cash may be protected from creditors. The inter-company dividend will generally be tax-free.

Step 5 – Monitor Plan Implementation

If you’ve started your planning early, the transition period between the development of your plan and the actual time of succession may be several years. It is important to monitor and review your plan during this implementation period to ensure that you are on track in terms of timing and deliverables.
Your business succession plan is something that should be reviewed on a regular basis – at least annually – and whenever there is a major event such as a birth, marriage, illness or death, family member entering the business or even relevant change in tax legislation.

Contact us at (604) 535-4749, or use our contact page.

Business Succession Planning: Elements of a Plan

Succession planning does not take place in isolation from the larger issue of your overall financial security. An effective succession plan will examine all aspects of your financial situation. This includes:

A) Distribution of Ownership

If transferring ownership of your business, a shareholder agreement is a key tool that should be considered.

B) Selecting and Grooming Your Successor

Identifying the right person to take over when you leave is a process that requires thought and planning.

C) Business Maximization Strategies

There are many strategies you should consider prior to the sale or transfer of ownership.

D) The Role of Key Employees

Key employees are vital to the success of ownership transition, and can help in the planning process.

E) Business Valuation

While you may have a good idea of what your business is worth, you should still consult with a professional business valuator to confirm or determine this crucial figure.

F) Financing and the Mechanics of Sale

Financing the change of ownership should be a key part of your succession plan.

G) Taxation and Legal Considerations

It is important that you consult with your tax and legal advisors early in the process to make sure that your plan achieves your objectives.

H) Retirement and Estate Considerations

Since your investment in your business is probably your most significant asset, there are a number of important retirement and estate planning issues that should be addressed.

I) Timetable

Ensure there is a clear timetable so those involved know what will be expected of them, and when.

J) Monitoring Process

Be sure to update plan as necessary when there are changes to your business and/or personal situation.

K) Contingency Considerations and Risk Management

If you were suddenly unavailable to manage the business, who would take over your responsibilities?
Drawing on expertise from across the Scotiabank Group and working with your professional advisors we can ensure that your business succession plan and personal financial plan are aligned to create a superior, overall plan.

A) Distribution of Ownership

If you are transferring ownership of your business, a shareholder agreement is a key tool that should be considered.
A shareholder agreement is an agreement that governs the conduct of shareholders and determines ownership rules. It should address all areas of possible concern, including who can hold shares, it and how shares can be sold or transferred, and to whom, and what happens in the event of a marriage breakdown, disability or death.

B) Selecting and Grooming Your Successor

Identifying the right person to take over the reins when you leave is a process that requires careful thought and planning, particularly if your successor is a family member or key employee.
When selecting a successor, you’ll need to:

• Establish measurable criteria for assessing potential successors
• Identify suitable candidates
• Identify gaps in their skill and experience
• Create and implement management development plans
• Evaluate successor candidates
• Select a successor
• Train and prepare your successor to run the business
• Communicate to key stakeholders
• Manage the transition

C) Business Maximization Strategies

To ensure that your business can be successfully sold, and to maximize the price you receive, there are many strategies you should consider prior to sale or transfer of ownership.
Implementing some of these may be a relatively lengthy process, which is another reason planning well in advance of your target exit date is important.

• Focus on business growth and profitability
• Diversification of customer and supplier base
• Reduction of operating costs
• Evaluation of discretionary expenses
• Tax minimization strategies, including potential business re-structuring
• Development of good management infrastructure to reduce reliance on yourself and ensure that knowledge is not overly concentrated
• Removal of non-operating assets

D) The Role of Key Employees

Key employees are critical to the success of ownership transition, as they provide continuity in the day-to-day operations of the business. They can also offer real help in the planning process and involving them will help prevent the rumours and innuendo that might otherwise arise on the employee ‘grapevine’ in the absence of official information.
You can protect your business against the risk of these employees suffering from premature death, by insuring them with key person insurance. Your business would purchase life insurance on the employee, pay the premiums and become the beneficiary of the policy. In the event of a key person’s death, the business would receive the insurance proceeds, which can provide the funds necessary to help survive the tragic occurrence.

E) Business Valuation

In order to receive a fair price from the sale of your business, you need to establish its value accurately. While you may have a good idea of what your business is worth, you should still consult with a professional business valuator to confirm or determine this crucial figure. A professional valuator will help you examine what it is you have to sell (eg. inventory, equipment, customer lists, contracts), whether your business is worth more whole or in pieces, how much of the value is dependent upon you being at the helm, and what actions you can take to improve value between now and sale.
In Canada, professional business valuators are governed by The Canadian Institute of Chartered Business Valuators (CICBV). Members of the CICBV are financial professionals who have met rigorous professional and education standards and received the designation of Chartered Business Valuator (CBV). Businesses of all sizes rely on CBVs to provide expert valuations for many kinds of business transactions.
Valuators use a variety of measures to establish value and will consider factors such as:

• Nature and history of the business
• Outlook for the business and the industry in which it operates
• Financial position and capital structure of the company
• The company’s historical earnings record and estimated future earnings
• Comparable businesses and sale transactions

F) Financing and the Mechanics of Sale

Whether your strategy involves family succession, management buy-out or sale of the business, financing the change of ownership should be a key part of your succession plan.
The key elements you need to determine are:

• What is being sold – assets of the business or shares (which include the ongoing rights and obligations of the business)?
• Purchase price – may be affected by the payment structure and type you negotiate
• Timing and method of payment – for example, lump sum, periodic payments, regular dividends?
• Purchaser’s arrangements for financing the transaction

Finding the right financial structure for the transfer or sale of ownership in your business will depend on your own objectives and the different tax and legal considerations of each alternative approach, which must be weighed along with lifestyle considerations. The success of your deal often relies on your ability to involve the right financial, legal and succession planning advisors to help you sort through and evaluate the different options available.
For the Purchaser, the key considerations are:

• Identifying the sources and amount of financing which will be available
• Being able to raise required financing on favourable terms

The Purchaser’s financing may come from a variety of sources, including but not limited to:

• A line of operating credit secured by the operations of the business
• A long-term loan, often to finance fixed assets such as real estate, machinery and equipment
• A vendor take-back, through which you, as the seller, provide a loan or become an investor in the business
• An equity investment
• Outside capital

As a seller of your business, it is important that you evaluate your purchaser’s ability to invest in the business early in the process. If the buyer is unable to raise the necessary financing, the closing of the sale could be delayed or even jeopardized. If the purchaser has difficulty raising the necessary financing, it may be advisable to move on to another purchaser, even it you have to accept a lower sale price.

G) Taxation and Legal Considerations

There is a wide range of tax and legal issues you will need to consider when selling or transferring ownership of your business. While there are common methods of dealing with these considerations, each situation is unique and your tax specialist and lawyer can advise you in the context of your own particular circumstances.
If your business is a qualifying small business corporation, your shares may be eligible for a capital gains exemption of up to $500,000. If your business is larger or does not qualify for the exemption, the disposition may trigger a sizable capital gain. Fortunately, there are several strategies you can use to minimize the tax impact and your tax advisor can help determine which of these may be appropriate for you.
Your lawyer will need to prepare several legal documents to give effect to your succession plan. Some of these relate directly to the transfer of ownership – such as the purchase and sale agreement – while others – such as your Will and power of attorney – relate to your personal financial and estate planning.

It is important that you consult with your tax and legal advisors early in the process to make sure that your plan achieves your objectives. Do not attempt to undertake a tax planning strategy, enter into an agreement or sign a legal document without first seeking the appropriate financial advice.

H) Retirement and Estate Considerations

It is important to ensure that your personal retirement and estate goals are coordinated with your business succession plan. Since your investment in your business is probably your most significant asset, there are a number of important retirement and estate planning issues that should be addressed, including:

• Freezing the value of your shares / estate
• Insurance
• Retirement planning
• Preserving your estate

All of these items require considerable thought and a good knowledge of understanding of your options. This is why it’s particularly important to obtain expert advice from specialists in tax, legal, investment, estate management and other disciplines in developing your succession plan.

I) Timetable

When you deliver your plan, you should ensure that there is a clear timetable, so those involved know exactly what will be expected of them and when. Vague time references should be avoided. For example, if your plan is to continue working until the day-to-day responsibilities become too much to handle, this could mean that your successor is waiting for the inevitable – illness or death.
As a minimum, dates should be set for the following:

• Retirement of the business owner
• Transfer of share ownership
• Transfer of voting control

One final point to keep in mind is that once you have set a specific timetable, you should stick to it. If the timetable is not followed, the credibility of the entire plan will suffer greatly in the eyes of all involved.

J) Monitoring Process

Finally, your succession plan should include a process for regular reviews of scheduled activities to ensure that things are on track. It is also important to communicate your plan with key stakeholders and keep them informed of progress and any changes along the way. Be sure to update and adjust your plan as necessary if and when there are changes to your business and/or personal situation.
Even the ‘best laid’ plans do not always foresee every eventuality or prevent disagreements between key stakeholders from occurring. Your plan should include methods for resolving disputes between stakeholders, family members and other relevant stakeholders, if and when they arise.

K) Contingency Considerations and Risk Management

Your succession plan should include a contingency or back-up plan. If illness or death meant that you were suddenly unavailable to manage the business, who would take over your responsibilities?
A contingency plan provides guidance on how the business should carry on in the event of your sudden death or disability. It sets out who would take charge in your absence in order to keep the business running. The contingency plan also takes into consideration how the succession process would be affected and how it should continue if you are no longer there to manage it.
Insurance can be an effective tool in managing risk prior to business ownership transition. Some of the key items and effective insurance plan can address include:

• Key person protection
• Buy-out funding
• Funding of capital gains tax
• Estate equalization

Using insurance strategically within a succession plan can be complex, so it’s important to work with an insurance expert who can recommend the best approach for you.  When developing your succession plan it’s important to assemble the right team of professionals. Whatever you do, don’t go it alone. Working with our team of experts from across the Scotiabank Group, we can help you get started on a plan that is right for you.  Contact us at (604) 535-4749, or use our contact page.

Business Succession Planning

Maximize the success of your business, today and in the future, with proper succession planning

If you’re self employed or the owner of a business, planning for business succession can be like writing a Will – you know it needs to be done, but you don’t really want to do it.
However, like a Will, you’ve got to get it done before it’s too late. Leaving business succession to chance could allow someone else to decide what happens to your business, and potentially at significant cost. Here are some of the issues you need to consider when planning for the future of your business.

Personal needs first

If your business is your primary asset and main source of income, it’s critical to take care of immediate, day-to-day planning issues first.

On the personal side, you need adequate life and disability insurance to make sure you and your family can sustain your current lifestyle in the event of illness or death.

You also need a personal financial plan that addresses your savings and cash flow needs. Will you have enough to pay for current expenses, such as your children’s education, and still be able to buy that cottage or take that trip you’ve been thinking about?
With your personal affairs in order, it’s time to look at your business needs.

Taking care of business

It’s tempting to wait until retirement is near to start making succession plans for your business, but there can be substantial savings when you plan further ahead.

According to Todd Herzog, Managing Director, Financial & Estate Planning Group at Scotiabank, “Business owners need insurance to protect their business property, but that’s only part of the story. What if their business can’t function because of the loss of a key employee or some other unexpected interruption? And what happens when the business owner eventually passes away? Insurance can provide ways to plan in advance for these situations.”

Your business succession plan is something that should be reviewed on a regular basis or whenever there is a major event such as a birth, marriage, illness or death, family member entering the business, or even a relevant change in tax legislation.

Here are some additional issues that you should consider:

Is everyone on the same page?

Many of the disputes that lead to business and family breakups come about due to a lack of communication. For example, if you plan to pass your business on to family members, have they expressed a clear interest? Surprisingly, this is a common area of miscommunication.

Who will run the business when you’re no longer doing so?

Is your family prepared to inherit the business, or do they need training? Don’t forget – ownership and management are two different things. You may be able to handle both, but your family members may be better off retaining ownership only and leaving business management to others.

Is selling the business a better alternative?

Selling your business can create immediate value and also avoid family disputes. Have you fully considered this option? Don’t let emotions get in the way of making a sound business decision.

Are there other ways to unlock the value in your company?

Has your business been valuated? Are you aware of the potential tax cost of selling it? You have choices when it comes to maximizing your company’s value and minimizing tax, such as financing, life insurance strategies, and special corporate structures.

Is your business succession plan part of your personal financial plan?

Your personal and business plans are closely linked. For example, you may be able to enhance your retirement income using a Retirement Compensation Arrangement (RCAs) or Individual Pension Plan (IPPs). These options can be integrated with your personal finances to create a superior overall retirement plan.

Does your Will reflect your business succession plan?

Is your Will up to date? If it conflicts with your business succession plan, there could be consequences such as higher taxes, a forced business sale, or even litigation. Setting up trusts and executing multiple Wills are two ways to minimize these risks, and potentially reduce taxes and probate fees on your estate.

Do It Now

Proper business succession planning can help you maximize the success of your business both today and in the future. It can also protect you and your heirs against losses from unexpected illness, death, and taxation.

Considered all at once, business succession planning can seem overwhelming. However, The Butler / Laing Group has the knowledge, resources, and team of experts to help you take it one step at a time. The best time to take that first step is now.  Contact us at (604) 535-4749, or use our contact page.