Succession planning for private businesses: what you need to know

The process doesn’t happen overnight, though; to successfully transfer your business requires time, the right expertise and a detailed strategy. These succession planning best practices can help you to successfully pass your business to either a family member, employee or third party.

What is a succession plan? 

For privately owned companies, succession planning is the process of preparing to pass the ownership and leadership of a company from the current owner to a new one. Successful succession planning is designed to ensure that:

• The change in ownership doesn’t adversely affect business operations.
• The business continues to be successful.
• The new owner is ready to take over the business by the succession date.
• The owner sells at a fair price and minimizes taxes on the sale.

Businesses are usually either passed on to family members, sold to employees or bought by third parties. Deciding on which of these courses of action to take is the first step in succession planning for businesses. Succession planning needs to be adaptable; situations could arise where neither family members nor employees are willing or able to take over the business.

This is why it’s so important to begin planning early and to seek advice from professionals experienced in succession planning. 

Passing on your business to a family member

In any succession planning (and especially when family members are involved), the selection process is particularly important. For some business owners it will be easy if they have a child who has worked in the business for years and is keen to take it over when their parent retires. If both parties agree, this kind of business succession could go smoothly.

However, this would be the best-case scenario. When business owners first approach their family members to discuss succession planning, there are several questions they should consider:

• Does the family member want to take over the business?
• Do they have the business acumen to make a success of it?
• Will they be capable of taking it over by the time the owner is ready to hand over control?
• Do they share the owner’s vision for the company?
• Do they have the necessary finances to buy it?

Only when you’re convinced that your chosen family member is the right fit (and that they really want this) should you move onto the next stage of succession planning.

You would then need to train your successor so that they know all aspects of the business and are fully equipped to take over the reins when you leave. This might entail them shadowing several other employees, as well as taking training courses to give them the skills they’ll need for their new role.

Many owners choose to have a phased succession plan, whereby they stay at the company while their successor gradually takes over the leadership, with the owner helping them to navigate any problems or potential issues they might face. The owner slowly moves into the background as their successor’s confidence grows and they feel capable of going it alone.

It’s also important to consider how your successor will finance the purchase of the business. If they’re not able to get a loan from a financial institution, you may want to consider allowing them to make payments over an agreed time period. However, be aware that this will increase the risk of not receiving full payment for your company. 

Potential issues with family succession planning

Having a family member take over your business can lead to some potential issues that you need to be aware of:

• Expect it to be hard: you’ve spent decades building this business, made some strong business relationships along the way and been able to work in a field you’re passionate about. Passing this on, even to a family member, won’t be easy. Give yourself time to get used to the idea and start the process early.
• Struggling to let go: once you’ve completed the process, provide guidance when asked, but try to step back and let them make their own decisions.
• Be careful about having multiple successors, as you’ll need to feel confident that they can work well together. If you do go down this path, make sure that you draw up a properly documented shareholders’ agreement.
• Being vague with the details: selling to a family member can feel less formal than selling to an employee or third party. However, you still need to be crystal clear on the details of the succession, so provide full details of the transaction.

Succession planning for an employee buyout 

Selling your business to an employee or a group of employees can be a good option, but only if there’s a candidate who’s keen to take it over, is passionate about the business and has the necessary entrepreneurial skills and business acumen to make it a success. As with family succession planning, the selection process is crucial. 

With employee/management buyouts, it’s important to begin the succession planning process early. If you leave it too late and get sick or are unable to keep working in the business, you could be forced into rushing through the process or selling at a lower price. Succession planning for businesses can take several years, so don’t leave it too long before starting.

When preparing an employee to take over your business, there are some key steps to take:

• Boosting their knowledge: your employee will be stepping up to run the company. It’s certain that there’ll be areas of expertise they’ll need to build up. Draw up a succession planning timetable to fill in those gaps, with learning opportunities such as secondment to different departments, taking courses and mentoring.
• Building a team: make sure that the management team is a good fit for the new owner and that they’ll be able to complement each other’s skills to help ensure success.
• Outlining processes: create a file that outlines the major processes within the business.  This way, your successor will feel more comfortable in taking over from you and will be more likely to succeed.
• Facilitating financing: how will the buyout be financed? Talk to your accountant, financial institution and financial planner to build a clear plan for financing the purchase.

Third-party succession planning

Many people would prefer to sell to a family member or employee, but in some circumstances, selling to a third-party could be the best option for everyone involved. Your accountant, financial planner and possibly a business broker may be able to help you find potential buyers. A Chartered Business Valuator can help determine the value of your business.

Here are some key strategies for making your company attractive to buyers and raising its market value:

• Maintain good bookkeeping: It’s always essential to have well-kept records. Buyers don’t want to have to dredge through badly kept books to gauge the value of your company. If need be, hire a chartered professional accountant (CPA) to bring your books up to shape and ready to be reviewed by potential buyers.
• Boost your cash flow: prospective buyers are typically interested in companies with healthy cash flow, so it can pay to focus on this as a priority for your succession planning.   
• Keep investing in your company: a business with up-to-date buildings and equipment will appear more successful. If the company looks like you’ve been draining it of cash and not keeping it well-maintained, it won’t be as attractive to potential buyers. 

Succession planning to minimize tax 

As with all other aspects of your succession plan, you need to start early to help minimize the taxes you’ll have to pay when you complete the sale.

When selling your business, it’s important to determine what is being sold. For example, if you own an incorporated business, are you selling the shares of your corporation or is your corporation selling its assets? The tax consequences of each option can be very different.

For example, if you sell (or gift) the shares of your incorporated business, from a tax point of view it’s treated as being sold at its fair market value. You would be taxed on half of the company’s gain in value (the difference between the price it’s sold for and the cost of the shares).

Owners of incorporated businesses may be able to claim a lifetime capital gains exemption if they’re selling the shares of the corporation, and certain conditions are met. This can greatly reduce the tax burden of selling a business. For 2024, the exemption is a maximum of $1,016,836 meaning that a gross capital gain of up to this amount could be tax-free.

To qualify for the exemption, there are several conditions to be met, so early succession planning is essential to make sure your company meets these conditions before you sell it. For example, the exemption is only available to companies that are incorporated, so it may be worth considering this as part of your succession planning. Find out more about the tax benefits of incorporating your small business.

Seek succession planning help

An important aspect of succession planning is seeking external advice to help facilitate the sale of your business. You should discuss your plans with your accountant, lawyer and financial planner, and ask for their advice on the best way to go about it.

Hiring a consultant who specializes in business succession can also be a wise move. They can take you through the whole succession planning process, help you optimize your business in preparation for the sale and work with your other advisors (tax, legal and financial planning) to bring the deal to a successful close. 

Your IG Advisor can help ensure that your succession planning fits in with your overall financial plan. Be sure to contact your IG Advisor well in advance of the time you expect to hand over the ownership of your company. If you don’t have an IG Advisor, you can find one here.