Business owners are passionate, hardworking individuals who pour their heart and soul into their enterprise. Some of which spend their lifetime sacrificing to build successful operations that support their own families alongside the livelihood of their employees. Nonetheless, time takes its toll and eventually necessitates the exit of the owner from the business. In practice, this process is often overlooked or contemplated without proper planning as owners struggle to confront the realities of transitioning their business and entering a new stage of life.
The Canadian Federation of Independent Business (CFIB) states that three in four small-and medium-sized Canadian business owners plan to exit their companies in the next decade. Those combined businesses are worth approximately $2 trillion. The urgency and need for a business owner to have an exit strategy has never been more pressing, yet 90% of business owners lack a formal succession plan to ensure a smooth transition.
Owners list stress or burnout as the main reason to exit their business, while more than 20% state the opportunity to reduce daily responsibilities as another push factor. The financial impact of the COVID-19 pandemic has also accelerated the desire for many owners to exit their business.
Regardless of the underlying motivation, succession planning has several moving parts. Starting an exit plan several years before the actual exit will ensure a better chance of departing a business successfully, which can mean selling to an arm’s length party, transitioning to family members or employees, or winding-up operations.
The proceeds from the sale of a business can be a significant portion of the owner’s life savings and retirement plans, so maximizing the after-tax proceeds via pre-sale tax planning is vital to the sale process. In a transition to family members, an estate freeze can ensure that taxes on the value of the business are deferred to the next generation.
Regardless of the type of exit, the level of involvement a former business owner has post-transaction can vary significantly from a 100% sale with no future involvement, to a scenario with continual involvement over several years to ensure the business is transitioned properly, and sale proceeds are maximized.
In addition to the selling price of a business, qualitative factors to a business exit are also important, such as the impact on employees and the level of involvement a business owner will have post-transaction.
Family-run businesses add another layer of complexity as business owners must navigate both the emotional and financial considerations of a sale with additional family dynamics of proper succession planning to ensure a smooth transition.
The next series of articles will explore each exit option for a business owner and discuss the advantages of disadvantages of each option including the various levels of involvement a business owner can have with their previous business.
Business owners should seek professional advice on complex issues of succession planning, including determining the value of the business, minimizing taxes, the sale or transition process, and retirement savings plans.
At Grewal Guyatt LLP, our experienced professionals can assist you throughout the entire process by providing tax planning, valuation, and other support services. We function as a “one-stop shop” that can manage the entire succession plan, from initiation to completion. We are always available to discuss how we can assist and provide guidance for each step of the way. Do not hesitate to reach out for more information.
