Business Succession Planning

You may have heard the phrase "succession planning" and weren't really sure what it meant. Well, quite simply, ask yourself the following question:

Have you made plans to pass on your business in the event of death, disability or retirement?

This is the crux of succession planning. It may involve the decision to bring in family members or employees to run the business, plan for eventual sale to a third party, or even discontinue your business once you are out of the picture. In any case, the planning takes time. It shouldn't be something left until, say, a new recruit backs over you with a forklift or the night of your retirement party. If you want to groom a new manager or position your business for sale, you need a time line over which to do it. Things left to the last minute are done in haste and are usually not done as well as one would like.

Our professional business advisors are well versed in the process of succession planning for clients and our advice is based on years of experience. It is a multi-faceted exercise. Here, we will brush lightly on the process involved. For a more in-depth analysis of your situation please feel free to contact one of our professional advisors.

Creating a Written Plan

In the same way you wouldn’t build a house without blueprints, you can’t transfer your business without a plan. It is human nature to procrastinate on issues that do not affect our everyday life. By sitting down with one of our professional advisors, we can help you generate ideas and outline a timeframe for the methodical transfer of your business. We can also assist you with implementing the long-range plan and coordinating the other professional expertise necessary to carry out the plan. This would likely involve your lawyer and insurance advisor.

The written plan should be flexible to allow for changes in circumstances. It can always be updated to allow for these inevitable changes.

Valuing Your Business

If you are going to sell your business, you will have to put a price on it. Don’t be fooled into thinking someone will pay you more than it’s worth. It is very important to set a realistic price to enhance the likelihood of the sale given that there may be a limited number of buyers for your particular business.

How do you go about valuing your business? A critical issue to address is whether you will realize more by selling your business as a “going concern” rather than liquidating the assets and distributing the net proceeds. Key factors that affect this decision are:

  • Will the business have a sufficiently adequate level of annual maintainable earnings in the future?
  • Can this level of earnings be maintained without you, the driving entrepreneur?
  • What problems and opportunities presently exist?

If you want to maximize the sale price you must enhance the income earning potential of the business. This could take a few years. Furthermore, you may need to strip redundant assets from the business and / or train existing employees to run the business. In any case, this takes time. Our advisors can estimate the value of your business and provide guidance to enhance its income earning potential.

Sell Assets or Shares?

During the valuation process we will help you determine whether your business should be sold as a “going concern” or whether it would be better to liquidate the assets and distribute the net proceeds.

A vendor will generally prefer a share sale that will result in a capital gain. This is especially the case where some or all of the gain will be sheltered from tax by the enhanced capital gains exemption. A purchaser will prefer an asset sale since the purchase price can be allocated to assets to provide write-offs for tax purposes over time. In addition, an asset sale allows the purchaser a ‘clean start’ – they will not be inheriting any potential ‘skeletons in the closet’ that can occur with a share purchase.

The business advisors at Powell Jones can assist you in determining what is best for your business and may be able to assist you in locating potential buyers. We can also assist both you and the purchaser with a review of financing alternatives when traditional bank financing is not sufficient.

Review of Qualified Small Business Corporation Status

As mentioned above, the gain resulting from the sale of shares can be completely or partially sheltered from taxation due to the enhanced capital gains exemption available for shares of a Qualified Small Business Corporation. The gain resulting from the sale of such shares by an individual is eligible for up to a $750,000 exemption. In order for the shares to qualify for the exemption, the corporation must meet certain tests both at the time of the sale and during the two years prior to the sale.

A corporation’s status should be reviewed annually to ensure that the shares would qualify upon eventual sale. Planning techniques can be implemented in order to qualify and perhaps provide multiple access to the exemption by accessing the capital gains exemption of other family members.

Tax Planning for Families

With a plan in place, we can implement tax-planning techniques to involve other family members and gain access to multiple capital gains exemptions. One such technique is an Estate Freeze, whereby the value of certain shares is ‘frozen’ at today’s value, allowing future growth in value to accrue to shares owned by other family members. By implementing this type of plan, and ensuring that the corporation meets the tests to qualify as a Qualifying Small Business Corporation, each shareholder can shield up to $750,000 of gains.

By utilizing a discretionary Family Trust, further flexibility is provided to the existing shareholder while still providing multiple opportunities to access the $750,000 capital gains exemption. In a family business scenario, the retiring shareholders can maintain control of the business while the future growth of the business accrues to the next generation.

Our business advisors have extensive experience in family business planning. We are an independent third party that can provide advice for some of the most difficult and emotional business decisions. We can help you determine an equitable solution for active and non-active family members.

Family Law Considerations and Will Planning

Any time the transfer of wealth, shares or other business assets occurs, both a lawyer and a professional tax advisor should be involved. These professionals can advise on both the legal and tax implications of such transfers to ensure that there are no surprises. We have considerable experience working with lawyers to coordinate asset transfers and revisions to Wills.

By utilizing Spousal and Testamentary Trusts, income taxes can be minimized or deferred. Multiple Wills can also be utilized to reduce Estate Administration Tax (probate fees) where a large portion of an individual’s wealth is comprised of shares of one or more private corporations.

Life Insurance

In the event of your passing, your loved ones, shareholders and employees could be left in peril if there is insufficient life insurance in place to ensure that the business can be carried on or to ensure that your tax liabilities are paid. Life insurance should be put in place to allow for liquidity in the event that your Estate requires funds to pay the tax liability resulting from your death. If other shareholders are required to purchase your shares on your death, where are they going to obtain the funding? Such a liability could unexpectedly put an end to your business.

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Succession planning is an involved, detailed process that requires the assistance of knowledgeable business advisors who can facilitate coordination with the other professionals necessary to implement the plan. Powell Jones has been assisting clients for years in the various aspects of business succession and family business planning. We would be happy to discuss your business with you and provide you with the assistance you require.

"Information contained herein is of a general nature. No action should be taken without seeking professional advice that takes into account current developments and the specific facts of a particular situation."


Powell Jones | Chartered Accountants and Business Advisors

121 Anne Street South, Barrie, Ontario L4N 7B6 | (705) 728-7461 |

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