Planning For Your Business' Future Must Include A Succession Plan

Last Updated:
March 22, 2019
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Not all of us will maintain good health and live to be 100, so should we bother with a succession plan? Unfortunately, we all know someone close to use that has either suffered a sever illness, injury, or worse; passed away too soon.

A well-thought-out succession plan is also a great contingency plan! Even if you don't think your kids or key employees are ready to take over any time soon, many things can be prepared well in advance, no matter what the future holds.

Business succession planning is the art of planning for two things:

  1. The future management of the business
  2. The future ownership of the business

Those who end up managing the business may very well be different from those who own the business. Most business owners delay this type of planning because they are reluctant to let go of the business, are afraid of making the wrong decision, don't want to upset family, or are simply too busy to think about it.

The following are important questions to initiate the planning process:

  1. In an ideal world, what does your business look like in 5 years?
  2. What are your views and expectations with respect to the future management, leadership, and ownership of your business?
  3. Have you had substantial conversations with relevant family members or key employees?
  4. In the event of your death, disability, or retirement, will your family members be able to continue to manage the business profitability?
  5. In the interest of maximizing shareholder value, is your business prepared to be sold to a third party?
  6. Ultimately, what would your role be after succession of your business?

The best time to focus on succession planning is at least five years before transition.

There are four choices when it comes to transitioning your business:

  1. A family transition, where the family members take over the ownership and management of the business, whether you gift it or sell it to them.
  2. Employee transition, where employees take over management and typically some or all ownership.
  3. Third-party sale.

4. Wind-up of the business, makes the most sense, in many situations.

Your game plan could include one or a combination of these options. You could also cash out a percentage - while you still own and run the business.

Business succession planning is a process. Especially if unfortunate circumstances were to prevail, consider setting up a trust. It can often make sense to freeze the current share value and complete a tax-deferred rollover (often called a section 85 rollover) and set up a trust to hold the future shares that may pass on to family member, other individuals, or holding companies.

The advantage is you don't have to decide today who will ultimately own the business. Furthermore, you can protect the value of those shares from creditors and multiply use of the capital gains exemption, among other things.

Also, this would be a great time to review and perhaps update certain important documents including your personal will, business will, powers of attorney, and shareholder's agreement.

There is no quick and easy solution. However, owners who take the necessary business succession and estate planning steps minimize conflicts, minimize estate and income taxes, and ensure the business ends up in the best hands to maximize future success. Engaging a professional for comprehensive business succession and estate planning is the best way to improve the odds your company succeeds after you are gone.

If a family member is not going to run the business when you are gone, then plans must be in place for the business to be sold, either upon your death or when you exit the business.

As members of the Canadian Association of Family Enterprise (CAFE), Scrivens can help you get started today.