Succession Planning: Now is always to time to plan
Maxime Theoret April 20, 2021

Succession planning, in itself, is a difficult and complicated subject. For business owners, the stakes are even higher. It often happens that as an entrepreneur you work extremely hard at the day-to-day tasks of running a business without ever taking the time to plan for the future, your future, your businesses future and your accumulated wealth. 

Financial Aspect 

After spending your life building a business and accumulating capital, it is important to plan the process of transferring your assets in a methodical fashion. It is not uncommon for enterprise value to represent the vast majority of an entrepreneur’s net assets. The starting point is to fully understand this value and assign it between real estate assets owned by the company and tangible and intangible assets. Establishing the value of the business will allow important decisions to be made about succession planning, allocation of estate to successors and taxation. 

Fiscal Aspect 

Taxation is a central issue in succession planning. This is probably the most complex aspect, yet it will have the greatest financial impact. It is therefore essential to call in an expert who can help you establish whether it is possible to benefit from a capital gains tax exemption. They will be able to analyze the possibility of establishing a trust or other means of minimizing taxes and allocating property and assets to the estate in a logical manner. An estate freeze is often recommended in the context of business succession. The estate freeze allows the freezing of shares in a company on a given date. The value of the shares held is therefore crystallized on this date and the future capital gains is transferred to the estate. This strategy allows for the planning of the taxes applicable upon death and allocates the growth in value after the freeze to the succession. This strategy transfers a tax burden into the hands of children therefore usually in a more distant future. This strategy also helps maintain control of the business if desired. 

Legal Aspect 

Have you recently reviewed your shareholder agreement? What happens in the event of the death of a shareholder? And in case of disability? Who will control the business and who will sell it if necessary? The shareholder agreement is a key document that becomes even more important when there are several shareholders in the company; it is essential. These are discussions that are sometimes difficult to have, but too important to avoid or wait until later. 

In the event of death, there often are provisions for the redemption of shares by the surviving shareholders. It is essential to know the approximate value of the shares in order to plan how to finance the buyback. A very effective strategy is to purchase life insurance that would cover the value of the shares. We must also consider that many are sole shareholders of their company, and in this case, it must be determined who can take over the management of the company and manage its liquidation, if necessary. 

Family Aspect 

Beyond financial issues, family considerations are often at the forefront in the succession planning process. The first step is to clearly define what are the goals and ambitions of each family member. This seems obvious, but in reality, is very complex. Too often, we do not take the time to ask the right questions, and sometimes, more difficult subjects are not addressed. 

The family taking over is often considered and can be of great benefit. The main considerations are usually related to equity among children. Their skills, experiences and ambitions are usually different, so you have to align the process with everyone’s goals. Among other things, one must consider whether the business remains in the family equally among all the children. We must also discuss the financing of the acquisition and the financial impacts for each. 

When the entrepreneur does not have a succession plan, a successor must be chosen for the company. A rigorous planning process to identify the right candidate is required. The main motivation for the entrepreneur at this stage is often to protect the business he or she has built, by passing the reins to a buyer who is aligned with the values and culture of the company. Second, it is obvious that financial and fiscal considerations will influence this process. 

When to Start?

Three in five small and medium-sized business owners are currently aged 50 and over, however, the majority neglect to properly plan for the succession or takeover of their business and lack an emergency plan. Now is the time to take action. In conclusion, one word is needed: Plan. Do not wait until the last minute to put together a good succession plan and to discuss the issues described above with your professional advisers, but especially with your family.