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SUCCESSION PLANNING FOR BUSINESS OWNERS
* * * [Updated - February 20, 2010]
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:
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.
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."