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While most entrepreneurs believe a transition process can be completed in two years of less, many experts suggest that succession planning can take up to five years to complete, and in the case of a family business, as many as ten. As you contemplate the succession of your business, here are six questions to start the thinking process.<\/p>\n
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1. Who will be the potential successors?\u00a0<\/b><\/h3>\n
Where will you find potential buyers for your company? If you are considering passing\u00a0the business along to family members, do they have the ability and interest to lead the company? Will they be a good fit? If not, can\u00a0the needed skills and competencies be built prior to the transfer? As indicated below, the passing of Bill C-208 over\u00a0the summer may be great news for those looking to pass along businesses to family members, especially from a tax perspective.<\/p>\n
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2. How will the sale be funded? <\/b><\/h3>\n
Will successors need help funding the acquisition? Can successors afford the deal? The sale\u00a0could potentially be managed by an equity-sharing arrangement, seller financial plan or by temporarily retaining partial ownership, as example.<\/p>\n
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3. What will be included within the sale?<\/b><\/h3>\n
How will the business\u2019\u00a0valuation be determined? A business\u2019 assets are not only the\u00a0tangible ones and there may be intellectual property and other intangible assets to consider. The valuation of the business and the deal structure should take a comprehensive view of all assets. There are different ways to value a business, such as based on cash flow, return on capital or sometimes as a multiple of revenue or profits.<\/p>\n
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4. When is the right time to sell\/transfer the business?<\/b><\/h3>\n
The\u00a0timing of a sale may impact the business\u2019 valuation, perhaps as a result of market or economic conditions. For instance, the pandemic has created economic hardship for many small businesses and delaying a sale transaction until conditions become more favorable may yield greater sale premium. Conversely, other businesses have thrived under recent conditions which may position them for a timely and profitable exit.<\/p>\n
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5. What planning tools can help within the sale?<\/b><\/h3>\n
The way the sale is structured can impact the after-tax proceeds the owner personally retains. For instance, depending on whether you are selling the shares of your corporation or the company is disposing of its assets, the after-tax value can differ significantly even if the purchase price Is the same. Using the lifetime capital gains exemption (LCGE) may provide significant benefits, but planning ahead is necessary. For the seller, the tax implications may be an important motivator.<\/p>\n
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6. Does your succession plan align with your personal objectives?\u00a0<\/b><\/h3>\n
The business succession plan should be aligned with our retirement, estate, tax and wealth planning goals, to ensure that you and your family’s financial needs and security are met.<\/p>\n
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