Succession planning for your family business: Are you prepared?

Succession planning for your family business: Are you prepared?

For many family business owners, succession planning has never been more urgent. A recent KPMG poll of Canadian business owners found that 37% of owners are interested in retiring, transitioning, or selling their business. The pandemic has certainly influenced these numbers, but many businesses are not yet prepared to start the long and thoughtful process of transitioning their business.

The many considerations and the succession planning process can be overwhelming as it requires sensitivity, transparency and expertise that can create paralysis – particularly as you need to focus on running your business. It is true, the process is complex and unique to every business, but it is a worthy, if not necessary, endeavour that benefits your business, family and income.

Where to begin will depend on your personal timeline, family structure and how quickly successors (family members, employees, or other individuals) can effectively fall into place. Often the value of your company is based on the value of your contribution. We must plan to capture and pass along that value to the next generation.

Succession planning examples

There are many possible scenarios and tax implications in succession planning but let us look at one where there are three adult children of a business owner. The owner wishes to split the estate into three equal parts. The first consideration is confirming if any of the three children are interested in taking over the business. Assumptions must be tested and confirmed before any planning begins.

This conversation is often best facilitated by a lawyer for several reasons, and one example early in the process is to present the opportunity accurately by balancing the dinner table conversations of the business stresses and other negatives with the positives of getting involved in the family business.

When one adult child is interested in the business

Identifying a timeline and the scale to which the adult child wishes to be involved and, potentially, take control will lead to a planning framework. The financial planning component can include a family trust where this adult child, and perhaps the other children, is an income beneficiary but has no control over the company. Flowing money from the company through the family trust to the children must be done carefully to ensure no one pays a high rate of tax on income received.

The rate at which the transition occurs will largely depend on two key factors:

(1) When the parent is ready to give up any degree of control. You might want your successor to learn skills in the process of grooming to succeed you, but educational and other milestones could be important factors too before you pass over control.

(2) When the successor demonstrates the skills, experience, and readiness to take over. What involvement has the child had in the business to date?

A child wishing to take over the business often takes place when the parent is ready to release control and/or when the adult child demonstrates an ability to manage the company effectively. Control of the company can include voting shares, becoming a director, or positioning him/her as shareholder.

Two adult children who are not interested in family business

To equally split the business, careful considerations should be made for the adult children who will not work in the family business as there are significant tax implications that require planning. An owner could issue common shares to the two children or name the children as additional beneficiaries of the family trust, but they will each pay a high tax rate on any dividends or income received since they are not active in the business.

To split evenly three ways, one should consider the value each child receives over time regardless of their involvement in the business.

Other early considerations

Be realistic about the value of your business by discussing the value with your accountant. Too much cash, investments or non-business assets in the company can impact the transition and the ability to use your lifetime capital gains exemption.

Your valuation should consider what a third party would pay for your business. Part of this valuation process might include cleaning up excess cash, investments and non-business assets that should not be in the company. Careful succession planning with a business law lawyer and accountant is needed to ensure the transfer of these assets is done properly.

Again, it is imperative to plan early to maximize your income and the long-term success of your family business.

If you’d like help with succession planning

Call us today at 250.565.8000 or contact us online to request a call-back. Our business law lawyers are here to help.

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