Remarkably, seventy percent of all family-owned businesses in Canada do not take advantage of business succession to ensure their business is succeeded to the next generation. Business owners often avoid planning due to the number of emotionally charged issues that are associated with passing on the torch, however, retiring from a business does not have to be a difficult or uncomfortable experience.
In order to prepare for a company’s continued future success, it is vital to both prepare an effective business exit plan as well as provide a sufficient amount of time for proper implementation of the plan. By proactively taking the right steps in the present you will help to ensure a smooth transition in the future which ultimately leads to greater financial security for retirement.
First and foremost, a business owner must decide what exit strategy would best suit his or her retirement objectives. If you choose to sell your company, your business must be structured in advance to maximize its value as much as possible. This means grooming management and replacing an owner’s day-to-day involvement with clear policies. Accordingly, this demonstrates to potential buyers that the company has the capacity to succeed well-after the owner has left the picture.
Similar to selling a business, when succeeding a company to the next generation of family members or employees, it is also important to maximize the company’s value before its transference. Developing sound procedures and ensuring that the successor is proficient in all realms of the business are also necessary. Just as it takes a company’s founder many years to discover the best methods of business operation, a substantial amount of time must also be afforded to a successor; an average of ten to fifteen years at least. This further stresses the importance of advance planning to guarantee a company’s continued success.
Although business succession gives owners more choices in regards to how much involvement they would like to have in retirement, it may also leave them more open to undo risk if they are not empowered with the right information. Without the necessary knowledge, many owners will unintentionally make choices that are to their companies’ detriment.
To illustrate, when a business owner gives shares of a company directly to a successor, that owner is putting their financial security in harm’s way, especially if they are relying on the revenue generated by the company for retirement. Should their successor divorce, go into bankruptcy or be sued, these shares will inevitably be lost. However, by giving a successor shares indirectly, by way of a trust, a business can be properly protected against such unforeseen circumstances.
Essentially, a trust is a private legal vehicle that holds ownership of an asset on behalf of a beneficiary. Trusts offer a remarkable sum of benefits, such as matrimonial and credit protection. Moreover, when an owner puts a company into trust, he or she can continue to exercise control over the business. To add an additional element of security, a trust can be used in conjunction with an estate freeze. When both mechanisms are utilized within a succession plan, not only are assets protected, but unnecessary taxes may also be deferred or avoided completely.
Finally, when planning for your company’s future, it is important to select an expert that is well-versed in the structures that govern business transfers and successions. A professional who has a Trust and Estate Practitioner designation is a particularly good choice. Awarded by the Society of Trust and Estate Practitioners, professionals holding this title are recognized as the most qualified experts in the estate planning field. By consulting with a qualified expert, a business owner can determine the best approach within the scope of his or her unique circumstances.
