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Succession planning for a successful retirement

Planifier sa retraite en tant qu'entrepreneur

Written by Amy Duncan, CPA, CGA from DMCL for the Canadian Overview of Q3 2022. A newsletter published by Canadian member firms of Moore North America. This article about succession and succession planning is part of our mission to become partner of your success by keeping you informed of the news. If you are a business owner, thinking of succession now could be useful for later.

Sailing into the sunset: Succession planning for a successful retirement

Retirement planning

As a small business owner, you spend your working life building a legacy and a succession and pouring countless hard-working hours into your business. Understandably, as you approach retirement age, you might be wondering “now, how do I retire?”

What is succession planning in business?

Here are some tips for crafting a successful succession plan that allows you to retire worry-free and content in knowing that your legacy will be carried on in good hands.

 

Succession planning process

Start the Conversation

As advisors, we often see business owners delaying the building of a succession plan, which is understandable given the time, energy and passion they have put into making the business what it is today. While change is scary and it can be difficult to consider handing over the reins to the next generation, to the right candidate, it is important to start the discussion for a seamless succession planning process early on. Ensure that you have identified the right successor candidate, and start passing on your “tricks of the trade” to solidify a smooth transition for you, your business and your customers. Your decades of experience cannot be downloaded and transferred overnight — they require time and patience to be understood and internalized by your successor.

 

Determine your Exit Strategy

Make an assessment on your succession plan. Consider what your exit strategy looks like. One common long term method is a transition to children or grand children that is structured as an estate freeze, allowing you to “freeze” your current value and exchange your common shares for preferred shares at the value of the company upon transition. In this situation, you can have the new owners purchase common shares to participate in any new growth of the company. This allows you to redeem your shares over time and change your role within the companies, setting you up for a long term and steady income stream through retirement.

Another long term option would be to sell the common shares in phases over several years, allowing you to decrease your ownership percentage while still maintaining some direction, leadership roles and control of the company. In this situation, you can phase the new owner(s) in while also participating in the profits over the phase-out period. Again, this option provides an income stream for several years; however, typically this option would be done over a slightly shorter time period and would require a secondary plan for retirement living, which may include contributions to RRSP’s, TFSA’s or investing in a market-based portfolio.

 

Why is succession management important?

You also may find that the next generation and your initial candidates aren’t interested in taking over, but you still want your customers to be in good hands. As such, you may consider the opportunity to sell your business to a third party as a succession planning process. Sometimes, these will be other business owners looking to expand their companies and bring on your location or services, or this may be a new entrepreneur looking to establish themselves with new companies. There are two options for succession planning process in this case, which include selling all the shares or selling the assets of the company:

1. When selling the shares, the buyer assumes all of the assets and liabilities of your company, as well as your customers and any goodwill you may have generated. This provides for a smooth and final exit; however, likely the highest tax implications as you would get a larger lump sum for your shares in that first year. However, the lifetime capital gains exemption may be available to curb some of this effect.

2. When selling the assets of the company, you would retain the company and only sell the components of the business to the buyer. This allows you to leave the profits of the sale in the company and slowly draw them out over time, or convert the company to an investment company and derive investment income. This option results in no lifetime capital gains exemption; however, there is the ability to pay a capital dividend tax free from the company to the shareholder.

Each of the above options for exiting your business come with pros and cons — they are not one size fits all.

 

Company succession planning — Who can help?

Lastly, it’s important to engage professional advisors throughout your succession planning journey. These advisors may have the role of accountants, business valuators, lawyers and business brokers depending on the nature of your situation.

Business and succession accountants handle these conversations with great sensitivity and also offer facilitation services to help mitigate any issues. If you, or someone you know is looking to successfully transition to retirement, connect with your CPA to see how they can help you.

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