Every October, the Business Development Bank of Canada (BDC) celebrates BDC Small Business Week, an annual celebration of entrepreneurship. While family businesses account for a significant portion of our gross domestic product (GDP), many family businesses have no formal succession plan. While we may find the number shocking, it is not surprising many small business owners are consumed by the myriad responsibilities of running their businesses.1
Nevertheless, owners ignore succession preparations at their peril and possibly at the peril of their heirs.
There are a number of reasons for business owners to consider a business succession structure sooner rather than later, and let's take a look at two of them.
The first reason is taxes. Upon the owner's death, estate taxes may be due, and a proactive strategy may help manage them better. Failure to properly prepare can also lead to a loss of control over the final disposition of the company. We don't talk enough about death and taxes in Canada. In addition to taxes at death, there may be various other costs, including probate, final expenses and administration fees.
Second, the absence of a succession structure may result in a decline in the value of the business in the event of the owner's death or an unexpected disability.
The process of business succession is comprised of three basic steps:
- Identify your goals: When you know your objectives, it becomes easier to develop a plan to pursue them. For instance, do you want future income from the business for you and your spouse? What level of involvement do you want in the business? Do you want to create a legacy for your family or a charity? What values do you want to ensure, perhaps as they relate to your employees or community?
- Determine steps to pursue your objectives: There are several tools to help you follow the goals you've identified. They may include buy/sell agreements, gifting shares, establishing a variety of trusts, or even creating an employee stock ownership plan if you wish employees to have an ownership stake in the future.
- Implement the strategy: The execution step converts ideas into action. Once it's implemented, you should revisit the strategy regularly to make sure it remains relevant in changing circumstances, such as divorce, changes in business profitability, or the death of a stakeholder.
Keep in mind that a fundamental prerequisite to business succession is valuing your business.
As you might imagine, business succession is a complicated exercise that involves a complex set of tax rules and regulations. Before moving forward with a succession, consider working with legal and tax professionals familiar with the process.
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