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Entrepreneurs: how to plan for retirement

Article written by
Amy Duncan, CPA, CGA
of DMCL, in the quarterly overview of Canadian news, a newsletter published by
Canadian member firms
of
Moore North America
. This article on how to plan for retirement is part of our mission to become your partner in success by keeping you informed. If you own a business, thinking about succession now could be a good idea.

Setting sail: succession planning for a successful retirement

Retirement Plan

As a small business owner, you spend your working life building wealth and countless hours of hard work. Naturally, as you approach retirement age, you may be wondering how to go about it.

Here are a few tips for developing an effective succession plan that will enable you to retire worry-free, safe in the knowledge that your estate will remain in good hands. Your years of work should be recognized and ended in good hands.

 

Start the conversation

As advisors, we often see business owners delay developing a succession plan, which is understandable given the time, energy and passion they’ve devoted to making the business what it is today. While it may be difficult to envisage handing over the reins to the next generation, it’s important to start the discussion right away. Make sure you’ve found the right successor and start passing on your “tricks of the trade” to solidify a smooth transition for you, your company and your customers. You can’t pass on your years of work and experience to your successor overnight – he or she needs time and patience to fully understand and assimilate this expertise.

 

Determine your withdrawal strategy

Think about your exit strategy. A transition to children or grandchildren that is structured as an estate freeze is a common method. This allows you to “freeze” your current value and exchange your common shares for preferred shares at the company’s value at the time of transition. In this situation, you can ask the new owners to purchase common shares to participate in any further growth of the company. This allows you to redeem your shares over time, providing a steady income stream until retirement.

Selling common shares in stages over several years would be another option. In this way, you can reduce your stake in the company while maintaining a degree of control. In this situation, you can phase in the new owner(s), while sharing in the profits as your interest in the company is phased out. Once again, this option provides a source of income for several years. Note, however, that this transition normally takes place over a shorter period and requires a secondary pension plan for the retirement years that follow, which could include contributions to an RRSP or TFSA, or market investments.

It could also be that the next generation doesn’t want to take over, but you want your customers to remain in good hands. As a result, you may want to consider the possibility of selling your business to a third party. Sometimes it’s other business owners who want to expand and take advantage of your location or services. It could also be a new entrepreneur looking to establish himself. There are two succession options in this case, consisting of either the sale of all the shares or the sale of the company’s assets:

  • When the shares are sold, the buyer assumes responsibility for all your company’s assets and liabilities, as well as your customers and any goodwill you may have generated. This solution allows for a smooth final exit. However, it’s also likely to have the greatest tax impact, as you’ll receive a larger lump-sum payment for your shares in the first year. However, you may also be able to take advantage of the lifetime capital gains exemption to mitigate the effects.
  • When you sell your company’s assets, you sell only the components to the buyer, and keep the business. This allows you to leave the profits from the sale in the business and withdraw them slowly over time, or to convert the business into an investment company and draw investment income from it. This option does not give rise to any lifetime capital gains exemption; however, the corporation may pay the shareholder a tax-free return of capital.

The options presented above are not universal, and they all have their advantages and disadvantages.

Who can help me with my retirement?

Call on the right advisors

Last but not least, it’s important to use professional advisors throughout the succession planning process. This can include accountants, business appraisers, lawyers and commercial real estate brokers, depending on the nature of your situation.

Business and estate accountants treat these conversations with great sensitivity. They can also offer facilitation services to reduce problems, if necessary. If you or a loved one is looking to make a successful transition to retirement, contact a Chartered Professional Accountant to find out how they can help. The years of work you’ve accomplished in your working life should continue to proliferate, despite your absence.

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