It’s been said that the best time to plant a tree was 20 years ago; the second-best time is today. The same can be said for business succession planning—the sooner you start, the better.
As a business owner, you’ve probably dedicated significant resources—including time, money, stress, or physical energy—to growing your business. You’ve nurtured your business and made sacrifices for its well-being. You’ve watched it grow until it could eventually stand on its own feet. But most business owners (90%, believe it or not) stop short of helping their business reach true maturity—they avoid the important step of business succession planning.
Without a proper business succession plan, everything is at risk. Key employees, who hold critical information, are more likely to leave. Clients who experience a disruption of service are more likely to take their business elsewhere. Studies show that without a valid business succession plan, companies can lose an average of $1.8 billion in shareholder value.
Here are some business succession planning tips to help your business retain value while moving to the next stage of its life.
1. Start early
Business succession planning can feel like a daunting task, easily avoided in favour of managing day-to-day activities. But the sooner you start, the better the chance all scenarios and hurdles can be addressed. At a minimum, start your succession plan five years before your planned exit.
2. Bring in the right partners
- Engage with an accountant, a lawyer, an insurance advisor, and a financial advisor who are familiar with business succession planning and can help you identify potential issues you may encounter
- Having the right partners in place can help you address foreseeable challenges quickly, and mitigate risk for unexpected issues, like the death or disability of a business owner
3. Determine the best exit strategy, knowing that each option has pros and cons
- Pass the business to a family member
- Sell the business
- Management buyouts or employee buyouts
- Takeover or phased exit
4. Take stock of personal and business assets
- Make sure your financial statements are up to date
- Have appraisals done on land/equipment/goodwill, etc. for proper valuations
5. Understand your business succession options
Consider an estate freeze
- Allows you to lock in capital gains tax
- Transfers the ownership of the business to the next generation while retaining control of the company
Consider a holding company
- Similar to an estate freeze, this strategy can move the capital gains from the operating company to a separate entity
- Assets in the holding company become part of your income for retirement
Consider incorporating
- Incorporating your company can help you take advantage of options like the Lifetime Capital Gains Exemption (LCGE) and estate freezes
6. Sell shares, not assets
Only the sale of shares qualifies for LCGE.
At some point, 100% of business owners will need to exit their business. If only 10% take business succession planning seriously, 90% of Canadian businesses are at risk of lost jobs, bankruptcies, or loss of business stability.
The Canadian Federation of Independent Business recently reported that over $2 trillion in business assets could change hands in Canada over the next decade. Using these tips to help you with business succession planning will give your business its best chance to continue to the next generation.
To start business succession planning, talk to a Meridian financial advisor.
Get helpful information and advice with our Business Succession Planning Tool.
Learn more about business succession planning
Transitioning your business
A 6-step checklist for selling your business
How to build cash reserves for your business
