Business Owners: What's Your Succession Plan?
April 7, 2022
Nearly three-quarters of Canadian business owners are expected to exit their businesses by 2028
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If you are part of this group, have you given thought to your succession plan? While most entrepreneurs believe a transition process can be completed in two years or less, many experts suggest that succession planning can take up to five years to complete and — in the case of a family business — as many as ten
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Here are six questions to start the thinking process as you plan ahead for your business’ succession:
1. Who will be the potential successors? Where will you find potential buyers for your company? If you are considering passing the business along to family members, do they have the ability and interest to lead the company? Will they be a good fit? If not, can the needed skills and competencies be built prior to the transfer? Last year’s passing of Bill C-208 is great news for those looking to pass along businesses to family members, especially from a tax perspective.
2. Will successors need help funding the acquisition? Can successors afford the deal? The sale could potentially be managed by an equity-sharing arrangement, seller financing plan or by temporarily retaining partial ownership, as examples. Planning ahead can ensure that the transaction is structured for success.
3. What will be included within the sale? How will the business’ valuation be determined? A business’ assets are not only just the tangible ones — there may be intellectual property and other intangible assets to consider. The valuation of the business and the deal structure should take a comprehensive view of all assets. There are different ways to value a business, such as based on cash flow, return on capital or sometimes as a multiple of revenues or profits.
4. When is the right time to sell/transfer the business? The timing of a sale may impact the business’ valuation, perhaps as a result of market or economic conditions. In some instances, delaying a sale transaction until conditions become more favourable may yield a greater sale premium.
5. What planning tools can help within the sale? The way the sale is structured can impact the after-tax proceeds the owner personally retains. For instance, depending on whether you are selling the shares of your corporation or the company is disposing of its assets, the after-tax value can differ significantly even if the purchase price is the same. Using the lifetime capital gains exemption (LCGE) may provide significant benefits, but planning ahead is necessary. For the seller, the tax implications may be an important motivator.
6. Does your succession plan align with your personal objectives? The business’ succession plan should be aligned with your retirement, estate, tax and wealth planning goals, to ensure that you and your family’s financial needs and security are met.
These are just a handful of considerations that are intended to start the thinking process. Given our familiarity with your financial position, we can help recommend experts who can support your business succession planning. Please don’t hesitate to call. 1. www.investmentexecutive.com/news/industry-news/finance-department-faces-grilling-by-mps-over-tax-rules-in-sale-of-family-businesses/ ; 2. www.bdc.ca/en/articles-tools/change-ownership/plan-succession/family-business-succession-overcoming-barriers Business Owners & Family Succession — Changes as a Result of Bill C-208 Keeping a business in the family has become easier and less costly. Last year, Bill C-208 was passed.* Before this, the Income Tax Act treated the proceeds of intergenerational sales as deemed dividends to the vendor, whereas sales to third parties were treated as lower-taxed capital gains that could be used against the LCGE.** Bill C-208 eliminates this treatment and also enables corporate reorganizations among siblings to take place without being subject to anti-avoidance rules in certain circumstances.
*Bill C-208 received royal assent on June 29, 2021. **Lifetime Capital Gains Exemption. However, Bill C-208 reduces access to the LCGE if taxable capital involved exceeds $10 million; at $15 million or more, there is no access at all.
Here are six questions to start the thinking process as you plan ahead for your business’ succession:
1. Who will be the potential successors? Where will you find potential buyers for your company? If you are considering passing the business along to family members, do they have the ability and interest to lead the company? Will they be a good fit? If not, can the needed skills and competencies be built prior to the transfer? Last year’s passing of Bill C-208 is great news for those looking to pass along businesses to family members, especially from a tax perspective.
2. Will successors need help funding the acquisition? Can successors afford the deal? The sale could potentially be managed by an equity-sharing arrangement, seller financing plan or by temporarily retaining partial ownership, as examples. Planning ahead can ensure that the transaction is structured for success.
3. What will be included within the sale? How will the business’ valuation be determined? A business’ assets are not only just the tangible ones — there may be intellectual property and other intangible assets to consider. The valuation of the business and the deal structure should take a comprehensive view of all assets. There are different ways to value a business, such as based on cash flow, return on capital or sometimes as a multiple of revenues or profits.
4. When is the right time to sell/transfer the business? The timing of a sale may impact the business’ valuation, perhaps as a result of market or economic conditions. In some instances, delaying a sale transaction until conditions become more favourable may yield a greater sale premium.
5. What planning tools can help within the sale? The way the sale is structured can impact the after-tax proceeds the owner personally retains. For instance, depending on whether you are selling the shares of your corporation or the company is disposing of its assets, the after-tax value can differ significantly even if the purchase price is the same. Using the lifetime capital gains exemption (LCGE) may provide significant benefits, but planning ahead is necessary. For the seller, the tax implications may be an important motivator.
6. Does your succession plan align with your personal objectives? The business’ succession plan should be aligned with your retirement, estate, tax and wealth planning goals, to ensure that you and your family’s financial needs and security are met.
These are just a handful of considerations that are intended to start the thinking process. Given our familiarity with your financial position, we can help recommend experts who can support your business succession planning. Please don’t hesitate to call. 1. www.investmentexecutive.com/news/industry-news/finance-department-faces-grilling-by-mps-over-tax-rules-in-sale-of-family-businesses/ ; 2. www.bdc.ca/en/articles-tools/change-ownership/plan-succession/family-business-succession-overcoming-barriers Business Owners & Family Succession — Changes as a Result of Bill C-208 Keeping a business in the family has become easier and less costly. Last year, Bill C-208 was passed.* Before this, the Income Tax Act treated the proceeds of intergenerational sales as deemed dividends to the vendor, whereas sales to third parties were treated as lower-taxed capital gains that could be used against the LCGE.** Bill C-208 eliminates this treatment and also enables corporate reorganizations among siblings to take place without being subject to anti-avoidance rules in certain circumstances.
*Bill C-208 received royal assent on June 29, 2021. **Lifetime Capital Gains Exemption. However, Bill C-208 reduces access to the LCGE if taxable capital involved exceeds $10 million; at $15 million or more, there is no access at all.
Insurance products and services are offered by life insurance licensed advisors through Chevron Wealth Preservation Inc., a wholly owned subsidiary of Echelon Wealth Partners Inc. This material is provided for general information and is not to be construed as an offer or solicitation for the sale or purchase of life insurance products or securities mentioned herein. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please seek individual financial advice based on your personal circumstances. Please note that only Echelon Wealth Partners is a member of CIPF and regulated by IIROC; Chevron Wealth Preservation is not.
Forward-looking statements are based on current expectations, estimates, forecasts and projections based on beliefs and assumptions made by author. These statements involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Echelon Wealth Partners Inc. or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. These estimates and expectations involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements. Echelon Wealth Partners Inc. is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.
Forward-looking statements are based on current expectations, estimates, forecasts and projections based on beliefs and assumptions made by author. These statements involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Echelon Wealth Partners Inc. or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. These estimates and expectations involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements. Echelon Wealth Partners Inc. is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.
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Please note that only Ventum Financial is a member of CIPF and regulated by IIROC; Chevron Wealth Preservation Inc. is not. ** Insurance products and services are offered by life insurance licensed advisors through Ventum Insurance Services a wholly owned subsidiary of Ventum Financial Corp.