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. In this article, we outline a few critical, often overlooked questions that can arise.
Do I really know what the business is worth?
We 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? Until recently, the taxation regime in Canada was arguably not fair to family sales. If a parent wanted to sell their business to children; either the child paid with after-tax personal money to purchase shares (so parents could use their Lifetime Capital Gains Exemption) or the parents received 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. Click here for more information on this bill.
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? Here’s an IG article for more information on tax and estate planning for business owners.
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. Having a collaborative team of tax, legal, and financial planning experts to help guide you through this journey is so important. Speak with your IG Consultant to begin your business succession conversation, while ensuring your retirement and estate planning goals are not overlooked.
* Source: Family Enterprise Foundation report 2021
Written and published by IG Wealth Management as a general source of information only, believed to be accurate as of the date of publishing. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on up to date withholding rules and rates and on your specific circumstances from an IG Wealth Management Consultant. Trademarks, including IG Wealth Management and IG Private Wealth Management are owned by IGM Financial Inc. and licensed to its subsidiary corporations.
