It's Your Money  

Lots to be considered when passing on a business to family members

Passing on a business

Are you planning to sell your business or pass it down to family? If so, are you sure you’re ready?

According to a family enterprise foundation report published last year, 64 per cent of business owners want to transition their business in the next 10 years. However, 51 per cent feel the next generation is not ready and 39 per cent worry the next generation is uninterested.

Whether you plan to keep your business in the family or sell to a third party, how can you ensure your business is ready for the sale?

Ensuring your house (and business) is in order now is key to sustaining your family’s financial well-being. Keep in mind, there are many factors and steps involved when structuring an effective, tax-efficient transfer of a family business.

This week, I want to outline a few critical, often overlooked questions that can arise.

Do I really know what the business is worth?

I can’t emphasize enough how important it is to have a professional, objective valuation of your business. Imagine you were starting a similar new business – what is the current and future marketplace, and competitive landscape?

Look at different scenarios and crunch the numbers. For example, might timing factor into the valuation of your business, whether negative or positive? What about the intangibles on your balance sheet – are you being honest about how these elements might impact you maximizing the value of your business?

Am I properly planning for retirement?

You may assume that if you sell your business, it will provide your desired retirement income stream. However, have you considered the debt and tax obligations that could impact the proceeds of your business sale?

The anticipated proceeds may be sufficient for retirement if the sale is to a third party but what about a sale to family?

The tax regime in Canada is arguably not fair to family sales. If a parent wants to sell their business to children, either the child pays with after-tax personal money to purchase shares (so parents could use their Lifetime Capital Gains Exemption) or the parents receive dividends on the repurchase of their shares (paying more taxation at dividend rates on the transition).

Bill-208 recently made it through Royal Ascent and is now law that provides relief for some family successions. However, it’s important to note that this bill is still under scrutiny from the Department of Finance.

Is my family aware and prepared?

Whether you’re planning to sell to a third party, keep the business in the family, or still considering both options, do not delay these conversations. Is the next generation prepared professionally and personally for this transition – are there any skill or financial literacy gaps?

Also, don’t assume, for example, that your children want to take over the business. Or if you plan to sell to a third party, will your loved ones still be involved, and in what role? Open, early communication with family members is important to ensure a smooth transition, as well as for your peace of mind and long-term family harmony.

Lastly, are you aware of all the financial, tax, and estate planning considerations that could impact and benefit your family?

Do I have the right team in place?

Don’t discount all the questions and concerns you will experience. The right advisor can help you balance emotions with the practical decisions you need to make. There are many complex financial and legal considerations, and it will take time to work through them all.

Having a collaborative team of tax, legal, and financial planning experts to help guide you through this journey is so important.

Speak with your financial planning professionals to begin your business succession conversation, while ensuring your retirement and estate planning goals are not overlooked.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and took over as board chairman in 2019. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected]

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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