By Susan Yellin and the SunLife team
Are you thinking of handing over the helm of your business? This will help you draw up an effective and tax-efficient succession plan.
For most people, the past year has not been easy. For entrepreneurs, it was even worse.
Well done if you managed to survive and even thrive. But the stress of keeping yourself afloat may have made you think about retirement. This decision is up to you; you have the choice of the terms of your retirement. But, is it the right time to sell your business?
Chris Poole, CFPMD, CLUMD, CHSMC, is a SunLife Certified Financial Planner. It helps business owners take stock of their situation.
“The pandemic has locked us in a bubble. Everyone had to find their way out, says Poole. Some Clients have sold, others have expanded. Still, others have cancelled deals that would have been done without COVID. »
“An unexpected event can permanently derail a business sale. He adds that business owners need to be ready to seize the opportunity to sell as soon as it arises. These offers do not always come back. Why wait if your business is prepared to be sold and you are personally ready to hand it over? When the right deal comes along, you’ll want to know you can close it quickly.
Think before selling or transferring your business
Consider whether you want to go out of business entirely or work part-time. Do you want to sell your business outside the family, or do you like to gift it to an adult child? After you sell, what will you do with your time?
“It’s not usually a decision taken lightly,” says Poole. The best approach is to discuss this with your financial advisor early on. Keep your accountant close by for support and consultation. »
A qualified advisor can help you better understand your succession planning options. It will consider the unique circumstances of your business and your family. If you feel selling to a relative or critical employee, invite that person to the discussions.
“When planning succession with a client, I often play the role of mediator between the family and the business partners,” explains Mr Poole. Selling a business or gifting stock to an adult child can bring many emotions and expectations. Some various opportunities and risks can be easily overlooked. We help clients articulate their expectations while highlighting changes for everyone involved. »
A good advisor can show you different avenues to follow in succession planning. This will help you better understand the consequences of each scenario in the short and long term. This will help you choose the path that suits you best. You will think about your likes and dislikes in each scenario.
“It’s easy to get carried away with the numbers and forget to talk about the details. For example, what will happen to your employees, your customers and all your years of work after the sale? It is important to think about all these elements”, adds Mr Poole.
Make a financial plan.
A solid financial plan is the cornerstone of successful succession planning. Do you intend to sell your business to someone outside your family? If so, you need to balance your books (known as a “business cleanup”). It would help if you also had your business appraised.
“In planning for tax implications, it is important to weigh the benefits of an asset sale against those of a stock sale. It is a negotiation tool between the buyer and the seller, explains Mr Poole. For tax and liability reasons, the seller often wants to sell stocks, but the buyer wants to buy assets. Thus, negotiations on the price and the type of sale may lead to different tax results for you. Only a sale of shares will allow you to benefit from the lifetime capital gains exemption. »
What is the Lifetime Capital Gains Exemption (LCGE)?
A “capital gain” occurs when the price of the asset sold (for example, shares of a company) is more significant than what you paid. As such, it is taxable. However, the state exempts a “qualifying small business corporation” from capital gains tax shares. This is true up to a particular ceiling. The ceiling varies each year according to the consumer price index. The state, therefore, encourages Canadians to grow the economy by starting their own business.
In 2021, the lifetime exemption was 89
