Business succession planning

As we celebrate Small Business Week in Canada, it is an opportunity to remind business owners of the benefits of tax, retirement and estate planning.

As Canada’s population ages and business owners retire, the successful transition of small businesses continues to be important to the Canadian economy. While large businesses (500+ employees) are key contributors to Canada’s gross domestic product (GDP), small (less than 100 employees) and medium-sized businesses (100-499 employees) are also important in that they make up 48% of Canada’s GDP and provide 63.7% of private sector jobs. In addition, 98% of Canada’s 1.1 million businesses have less than 100 employees.

Against this backdrop, the Canadian Federation of Independent Business (CFIB) conducted a 2022 national survey of business owners that found 76% of Canada’s business owners plan to exit their business within the next decade. That means over $2 trillion worth of business assets could change hands during this period.

The safe and orderly transition of assets upon retirement is critical to businesses, their owners and the economy as a whole. For these reasons, it is important for business owners to define and implement an appropriate succession plan. Doing so often avoids premature sales and closures, a lack of services for communities, job losses and a weakened economy.

The benefits of planning

Planning provides time to think about an appropriate exit strategy and potential challenges that may arise at the time of transfer. The challenges might include:

• Defining an appropriate valuation and purchase price for the business.
• Identifying a suitable buyer or successor.
• Figuring out financing options for the deal.
• Agreeing on post-retirement involvement by the exiting owner.
• Navigating competing objectives of both buyer and seller from a tax perspective.

Solutions often get resolved through negotiation. Business owners who are familiar with potential sticking points can adjust to reduce impact.

Identifying a suitable buyer

According to the CFIB, of the barriers encountered by business owners when developing a succession plan, 54% of survey respondents indicated that finding a buyer or suitable successor was their top obstacle. For example, family members might be the preferred successor, but they might not have an interest in taking over the business. Similarly, entrepreneurs may be interested in starting a business from scratch rather than purchasing an existing one.

Source: “Succession Tsunami – Preparing for a decade of small business transitions in Canada,” CFIB.

When looking for a successor, business owners often consider the following priorities:

• Protecting current employees.
• Getting the highest possible price.
• Maintaining the priorities and objectives of the business.
• Maintaining the business in the community.

Sometimes it is possible to achieve all objectives, and sometimes not. The type of successor chosen would determine the extent to which priorities are met. Generally, there are five categories to choose from when deciding on a business successor.

Elements of this table are sourced from The Advisor’s Guide to Business Succession Planning, by Malcolm Scarratt.

Of course, there is no one solution that works best for all businesses. The details of the business and the parties involved would determine the most appropriate successor. Having a team of advisors — a succession planning team — to help throughout the planning and implementation processes can go a long way in carrying out an efficient business transfer.

The succession planning team

Given the potential investment, tax, legal and estate planning implications associated with running (and thereafter, exiting) a business, business owners would be wise to seek knowledge and advice in these areas.

Having a team of qualified financial, tax, accounting, legal, insurance and banking specialists can bring clarity to the financial and legal aspects of running a business, and comfort and direction when major occurrences — such as the transitioning of the business — is to occur.  Having advisors involved early in the planning process would allow time for relationships to develop, which can be helpful in carrying out transactions and making the business attractive to a potential successor.

Financial advisors can help business owners piece together the many aspects of wealth management for their businesses and families, leading to strengthened relationships, trust and loyalty along the way.

Wilmot George

Tax & Estate

Wilmot George, CFP, TEP, CLU, CHS, is managing director, tax and estate planning at Canada Life, Wealth Distribution. Wilmot can be contacted at wilmot.george@canadalife.com.