There are many benefits to being your own boss. Because you’re in charge, you may have greater flexibility around when and how you decide to retire. You can pass on your business to a family member or sell it to a stranger.
Maybe you’ve built your business on your own or with a partner. Either way, there are things to consider before handing over the reins.
1. Take your time
Think long and hard about whether you want to retire or work part-time. Do you want to sell your business or gift it to a family member?
“It’s not a snap-your-fingers approach,” says Chris Poole, a Toronto-based Sun Life Financial advisor whose practice focuses on business. “The best approach is to open a conversation with your financial advisor. Let him or her customize your succession planning around your unique business and family needs. Consideration for your employees can often also be factored into the mix.”
2. Make a financial plan
A solid financial plan is the cornerstone of successful succession planning. If youplan on selling to a non-family member, clean up the balance sheet and get a business valuation. “When tax planning, it’s important to weight the merits of an asset sale vs. a sale of shares,” Poole says. “Only a sale of shares will give you access to the lifetime capital gains exemption. To do this, your business needs to become a Qualified Small Business Corporation.
3. Look into ways to minimize tax
In some circumstances, you can gift business shares to your children. You can do this by using a share freeze and an Income Tax Act rollover. This strategy, which is best followed with professional advice, lets you sell your business to your children. It also lets you take back a preferred set of shares that can give you retirement income. This defers triggering capital gains tax, says Poole. You can then leave any remaining shares in your will. And cover the cost of the known capital gains with corporate life insurance.
4. Get customized solutions from the professionals
“There are other ways to minimize taxes when selling a business,” says Patrick Fitzgerald, an Ottawa-based Sun Life Financial advisor. Work with a financial advisor, accountant and lawyer to address tax efficiency. Together, determine if the owner and additional shareholders, including family members, can access the lifetime capital gains exemption ($866,912 per individual in 2019). Since each business is different, each situation will needs a customized solution. Consider your business’ corporate structure, family trusts, wills and powers of attorney.
5. Talk to others
“A number of resources are open to entrepreneurs,” Fitzgerald says. “Discuss what could be included in your succession plan.” for information and advice.