Business Succession Planning

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, potentially at significant cost. Planning early helps ensure a smooth and successful transition of the business to the new owner or owners, as well as reduce the tax impact of ownership changes. A successful plan may also help enhance 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, 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 in which you may be able to 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.
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.

Learn with
TWM Group

Invest with TWM Group

Our clients and their families typically have a net worth of $2M or more. If you have an amount under the minimum, we still invite you to get in touch with us to discuss your options.

*Please note that TWM Group does not provide investment advice nor do we solicit or share personal information through public forums or platforms such as social media. Please communicate with us only through official channels like email, the client portal or your portfolio manager.