Business Succession in Canada

The famous Baby Boomer

Baby Boomers are well into late middle age and many are elderly. Many of them are business owners and are now looking at how they will exit that business. There are many ways that they, and any business owner at any time, can plan their succession:

• sell the company to heirs,
• sell company to employees through an ESOP (employee Share Ownership Plan) or through an EOT (Employee Ownership Trust),
• sell the company to private third parties (competitor, supplier, etc.),
• sell the company to a Private Equity firm, or
• wind up the company.

The course an owner takes is a function of how well he or she has planned their succession, the current financial state of the company, their personal estate, their personal philosophy on life, the quality of life, and the relationship of the meaning of work within that philosophy. The biggest risk facing an owner is waiting too late to plan.

Recently, one company presents an example of this when their founder suddenly died without a succession plan in place. A very successful company for over 20 years it suddenly found itself in chaos. Most the family wealth was tied up in the value of the company and the loss of its leader caused a dramatic decline in sales and a management team left in panic mode. Eventually the company was forced into bankruptcy.

Conversely, a client who planned shows a completely different outcome. ESOP Builders’ client founder was 60 years old and had built up a successful business over 25 years. He had decided when he was 55 years old that he wanted to phase out of his business life into a life of serving the community. To do this he planned his exit to allow this to happen. His solution was to determine which of his 5 children were interested and capable of taking over. He put them into various positions in the company and tested their desire and ability to learn and succeed in the company.

After 5 years, it became clear that only one of his children, his youngest son was interested in succeeding in the business. Once this was established, a support team was put in place to work on the transition including selling shares in the company to key persons. This client now goes into work once a week and still owns control of the company but his family and employees own a substantial piece of the company as well.

To arrive at a suitable succession plan, these key issues have to be addressed by the owner:

• Emotions and Lifestyle,
• Timing,
• Income Taxes,
• Financing, and
• Ownership.

Emotions and Lifestyle

It is generally very difficult to detach oneself from one’s life work, especially true for a founder of a Company. The relationships built up over decades with valued customers, suppliers, and employees are not so easily released. The adrenalin and excitement of doing battle everyday takes time to work its way out of a person’s physical and emotional being. A succession plan should not be decided based upon the pressures of today but on the anticipation of the future. A business succession plan is just that, a plan of action. It is a decision where most owners need some professional help from trusted and experienced  advisors such as accountants, lawyers and independent life broker and financial planner.

Timing

Once a decision has been made to implement a succession plan. The next important step is to estimate the timing. This is a critical step because a balanced and harmonious plan will benefit not only the owner buy his or her family, business and employees. Conversely, a poorly timed plan can have a negative effect on the people dependent upon the continuation of the business. Timing must take all this into consideration.

Income Taxes

Throughout the planning process, two elements will be key drivers in how the technical aspects of the plan are to be set up; 1. income taxes and 2. maintenance of the personal net worth of the individual and family. Both are inseparable and require the highest quality professional expertise. The transfer of business assets gives rise to many types of income minimization plans. There are capital gains taxes, retirement allowances, capital gains exemptions, employee benefits, trust taxation which have to be meshed into a workable tax plan.

Financing

A proper plan will include a methodology suitable to meet the financial concerns of the owner. Therefore, how the plan is financed is key to putting the owner at ease with the plan. Sources of financing can be traditional or non-traditional. Traditional sources include banks, trust and insurance companies, private equity groups, venture capitalists, and third parties. For many owners a non-traditional approach makes more sense. These sources include ESOPs (employee share ownership plans), EOTs (Employee Ownership Trusts) and vendor takebacks.

Ownership The final key question relates to the hardest part of the plan. Can the business owner give up ownership? This takes much soul searching and in the end is a very personal decision. For many owners leaving a legacy is very important and that is a main reason the owner looks to non-traditional methods which involves selling the company to their employees. One caveat is that generally if the goal of the owner is the sell the company within 12 months, then more traditional methods are used. If the sale can be over time (i.e. greater than 12 months), then non-traditional methods can be employed.