Business Succession Planning / Exit Planning

Business succession planning, or exit planning, is absolutely critical if you want to retire, get value out of the business you’ve built, and see the business survive in the future. By going through the exit planning process, you can actually increase the value of your business and minimize the risk of not being able to transition the operation.

Succession planning is a series of steps implemented to ensure that the next generation—whether it’s your own kids or someone else—will be able to step into your shoes and effectively run your business. Tax planning is part of it and you can trust that our team has the tax knowledge to help you ensure you can minimize tax liabilities. But there is a whole set of financial and non-financial issues that needs to be considered when developing your succession plan.

 Succession planning services are available to our clients under our Unleashed service.


Family Business Succession Planning

Is your business going to be transitioned to your adult children? If so what exactly is that going to look like and how do we structure the transition so it’s fair for all your children, including those who don’t work in the business?

It’s interesting that family members often have assumptions about how the intergenerational transfer will take place but never talk about them. Discussions can be quite interesting, uncovering differing expectations that need to be addressed if the transition is going to succeed.

Managing Tax on Sale of Business

If you’re planning to sell your business, you need to sit down with an accountant who has tax knowledge at least 2.5 years before you are ready to put the business on the market.

It’s important to set up a corporate structure that minimizes your taxes whether you’re transitioning to your family or selling to a third party. The corporate structure should be in place at least two years before the sale. Strategies may include issuing shares to your spouse, setting up a holding company, separating operating assets or divisions into separate companies, creating a family trust, or doing an estate freeze.

Another consideration is whether it’s a share sale or an asset sale. In a share sale, you are selling the shares of your company and the net proceeds of the sale may be eligible for your lifetime capital gains exemption. In an asset sale, your company is selling its assets and realizing the gains. The proceeds of the sale stay in your company and are not eligible for your lifetime capital gains exemption. If your spouse also owns shares, he or she will also benefit from the lifetime capital gains exemption in a share sale. The share structure should be in place two years before the sale.

It’s also important to consider what happens if you die still holding your shares. If your company is worth half a million today and you originally paid $100, upon death you would be deemed to have a $499,900 capital gain, half of which will be taxable. Your family will inherit the shares but at a value of $499,900, and any money they take out of the company over $100 will be treated as a dividend and not as a capital gain, creating the potential for double tax. There are several strategies that will allow your family to access the full value of the company without double tax applying but this type of planning should be considered well ahead of time.

Other Business Exit Planning Considerations

Although tax planning is extremely important in business exit planning, there are a number of other issues that need to be considered and planned for:

  • Do you need to modernize your business before putting it up for sale? In a normal business where there is tight access to capital, the business owner has to look at how to make the business better for the next generation before they sell it.
  • Are you planning to sell the business to your employees? Selling to employees generally involves a significant portion of owner financing, meaning you won’t be able to extract your money right away.
  • Do you have life insurance in the event of a critical illness or death? A life insurance policy can be set up so it’s deemed to be a purchase of your shares, which can be very useful if you have shareholders other than your spouse.
  • If you have partners or shareholders other than your spouse, do you have a partnership agreement or Unanimous Shareholders Agreement (USA)? These documents, properly drafted, will address all of the issues to ensure there’s no misunderstanding among the partners or shareholders.
  • Do you have a charitable goal? Life insurance can be used to double or quadruple the amount of funds that go to a charity even at late stage of life.

Wills & Business Exit Planning

The exit planning process is the perfect time to take a fresh look at your will (or create one if you don’t have one). Many people create a will and simply leave it as is even though their lives and financial situations change substantially over time.

When creating your will, make sure it either spells out how to handle the transition of your business or businesses, or that it gives the executor the flexibility to achieve your objectives.

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