Business Succession Planning

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 need to get this done before it’s too late. Leaving succession planning to chance could allow someone else to decide what happens to your business, and potentially at significant cost.

Here are some issues you should 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. This means having 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 will also need a financial plan that addresses your cash flow and savings needs to ensure you have enough to pay current expenses or future needs such as your children’s education.

With your personal affairs in order, it’s time to look at your business needs.

Addressing your business requirements

It’s tempting to wait until retirement is near to start making succession plans for your business, but there can be substantial savings if you plan ahead. Additionally, your business succession plan is something that should be reviewed on a regular basis or whenever there is a major event such as birth, marriage, illness or even relevant changes in tax legislation.

Here are some additional questions to consider.

Is everyone on the same page?

Lack of communication can often lead to disputes. If you plan to pass on your business to family members, have they expressed a clear interest?

Is selling the business a better alternative?

Selling your business can create immediate value and also avoid family disputes. Have you considered this option?

Is your business plan part of your personal financial plan?

Your personal and business plans should be closely linked. For example, you may be able to enhance your retirement income with an Individual Pension Plan. This option can be integrated with your personal finances to create a superior overall retirement plan.

Does your will reflect your succession plan?

If your Will is not up-to-date and conflicts with your business succession plan, there could be consequences such as higher taxes, a forced business sale or even litigation.

Proper business succession planning can help you maximize the success of your business both today and in the future. Considered all at once, it can seem a bit overwhelming. So it’s important to get the right team of professionals to help you take it one step at a time.

Ensure your succession plan is part of your personal financial plan.

Your personal and business plans should be closely linked. 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

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 options. Make sure you get professional advice and expert help.

Insurance

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 the 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.

Preserving Your Estate

There are a number of steps you can take to protect your business assets. For instance, 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. 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 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.

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.

§        Maximize RRSP Contributions. If you receive a salary from your corporation, this salary will be earned income for the purpose of making RRSP contributions. You can contribute 18% of your previous year’s earned income up to a maximum amount for the current year, less your pension adjustment for the previous year.

Individual Pension Plans. It may be possible to set up an Individual Pension Plan (IPP) for yourself and other family members. For older business owners, the potential retirement benefits provided by an IPP can exceed the benefits provided by regular RRSP contributions.

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 what will be taxable on 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.

Working with your professional advisors, we can help ensure that your business plan and personal financial plan are closely linked to create a superior overall retirement plan.