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By JoAnne Sommers
Vision Magazine
July/August 2006 Issue
For many Canadians, retirement is a fast-approaching reality. But before indulging in thoughts of lazy days spent puttering in the garden or exotic vacation plans, it’s wise to consider how you’ll dispose of your business. Indeed, next to starting a business, deciding how you will exit may be the most important decision of your working life.
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, “You must qualify for 24 months before you can realize the capital gains exemption on the first $500,000 when you sell. This alone could save you well over $100,000, depending on the provincial tax rate.”
An estimated $1.2 trillion worth of business assets in Canada are expected to change hands by 2010, thanks to the impending retirement of millions of baby boomers. In its 2005 survey of small and medium-sized enterprises, the Canadian Federation of Independent Business (CFIB) found that 41 per cent of owners wanted to leave their firms within the next five years and 71 per cent expected to do so.
Since, by definition, increased supply means reduced value, it’s wise to start planning your succession now. That’s true whether you’re planning to sell your business to an outside party or have your children succeed you.
Start by asking yourself some personal questions: “What would I like to do next with my life?” “Do I want to retire completely, move on to another venture, or stay on in a consulting or transitional capacity?” Then ask: “How long will it take me to plan my succession and where can I get help with it?”
It may take less time to arrange for a family takeover than it would for an outside sale — it depends on how much work has gone into choosing and working with your successor ahead of time.
“It’s probably never too soon to have an exit strategy,” says Shelagh Rinald, leader of the National Succession and Estate Planning Team at Grant Thornton, a national accounting and tax consulting firm. “Most owners have a lot of wealth tied up in their businesses and they need to think carefully about how to extract that value in the future.”
In cases of family transition, Rinald says business owners should ideally begin their succession planning 10 years in advance so family members can start to work through the challenges involved. “Three-quarters of transitions to the second generation and fully 90 per cent to the third generation fail, so there’s clearly a need for considerable forethought,” she explains.
Early planning will also enable a business to take advantage of tax breaks, regardless of the type of takeover. Adrian Mastracci, president of Vancouver-based KCM Wealth Management Inc., helps clients qualify as small businesses under federal tax laws. “You must qualify for 24 months before you can realize the capital gains exemption on the first $500,000 when you sell. This alone could save you well over $100,000, depending on the provincial tax rate.”
All shareholders in a small business can qualify for the exemption, Mastracci adds, so it’s to your advantage if several family members own shares.
Advice and workshops on succession planning for business owners are available through the Business Development Bank of Canada (BDC). BDC Consulting currently offers workshops in Quebec and over the next few months it plans to host similar programs in other regions.
The initial workshop runs for 40 hours spread over four group sessions, and includes 15 hours of individual counselling, says Michel Bergeron, director of strategic and business solutions. For a flat fee the owner can bring up to three registrants.
The BDC approach focuses on the human side of defining, developing and implementing a plan that aims at ensuring the ongoing growth and success of the business, says Bergeron.
“We cover transfers of ownership and management. People often fail to focus on the softer aspects of succession, like how to manage for a smooth transition. That’s a mistake because, in many cases, success depends on making sure the new buyer fits within the corporation or industry culture.”
BDC can also help to finance transitions. Whether you’re passing on the company to a family member or selling it to outside interests, assistance is available for costs such as consulting fees, implementation and buy-sell solutions. BDC also offers a higher percentage of financing on fixed assets, which frees up working capital for transitional costs such as human resources planning and management coaching.
It’s regrettable when events such as poor health or partnership dissolution force succession before the necessary planning has taken place, says Bergeron. “Entrepreneurs don’t always plan ahead because their strength lies more in the execution of business strategies,” he notes. “They have to see a net return for the effort involved. So we created these programs to help business owners look at where they are, where they’d like to be, and who will be there to make it happen.”
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