By JoAnne Sommers
As a small business owner you’re probably so busy with the day-to-day demands of running your operation that you haven’t given much thought to planning for retirement. If so, you’ve got plenty of company.
A recent Scotiabank poll found that one-quarter of Canada’s small business owners haven’t thought about what they want to happen to their businesses when they retire, while only 19 per cent say they have formulated a succession plan.
Entrepreneurs delay retirement planning for various reasons. Some love their work so much that they never want to retire. Others decided to stay in business longer than they’d originally intended because of the economic uncertainty resulting from the 2008-09 recession.
But even if you have no plans to retire in the near future, you need an effective succession plan to help ensure that you can achieve your retirement objectives when the time comes.
Tina Di Vito, director of Business Succession withScotiabank in Toronto, recommends that you maximize the financial benefits of selling your business by creating a succession plan early. “A lot of planning can be done with an eye to minimizing taxes or maximizing the sale price but it must be done years in advance of retirement. If you wait until you’re ready to sell, you’ll miss out.”
The first step in planning your exit strategy is to create a proper buy-sell agreement, says Di Vito. This is especially important if you have a business partner.
“A buy-sell agreement spells out what happens with your ownership share, either on your death or when you exit the business for other reasons. If you don’t currently have such an agreement, you should put one in place immediately.”
Here are some additional succession planning tips:
• Have a Tax Strategy
There are many tax implications of a small business sale and it takes time to ensure that the company and its ownership are structured to maximize after-tax proceeds.
You need to determine if you’re eligible for Canada’s $800,000 lifetime capital gains tax exemption on proceeds resulting from the sale of shares.Also, discuss with your family whether they are interested in taking over the business when you leave. If so, it may be possible to structure the takeover in a tax-efficient manner. A professional tax practitioner can help you to structure the sale as advantageously as possible.
• Maximize the Value of your Business Before Transitioning
It’s important to maximize the value of your business to potential buyers by ensuring that it is a profitable, viable entity, says Di Vito.
“Many business owners who are planning to exit their businesses go into pre-retirement mode and start letting things go. It’s important to keep sales and revenues growing even if you’re planning to exit because that will add value to the business and boost the sale price.”
• Structure Retirement Income to Meet Your Needs
Succession planning is more than selling your business, says Di Vito. Your succession plan is an integral part of your overall financial plan, which means you need to take both your personal and business finances into consideration.
“Think about how the two can work together to help you reach your retirement goals,” says Di Vito. “Consider how much income you will need your business to generate to fund your retirement. How will you generate it: through dividends, share redemption or an outright sale?”
• Revisit and Refresh
Conduct an annual financial review to make sure you’re on track with your retirement and succession plans. And discuss your plans with your financial advisor and other trusted professionals to determine your progress and make adjustments as needed.
Small business people frequently find it difficult to think about leaving the business they’ve created, says Di Vito. “They often feel that their business is their life. But once they understand the process and start planning for it, they discover that it relieves a great deal of stress.”
The following tips can help ensure the best results from the sale of your small business:
• Have a well-thought-out and clearly documented plan that integrates your personal financial situation, the business and ownership structures, both currently and in the future.
• Create contingency plans to deal with unplanned, catastrophic circumstances that could jeopardize your business and your family’s finances.
• Establish a target date to transfer ownership of your business and begin to prepare the business and yourself for that event.
• Know the current value of your business and establish a target value for the ultimate sale price.
• Consider your exit strategy. Will you be transferring your business to a family member or selling to a third party?
• Have a plan in place that will maximize the value of your transferrable assets and protect that value up to the planned transition date.
• Assemble a team of trusted experts to help with the various aspects of ownership transfer. It should include a small business advisor/business banker, a wealth advisor/personal finance advisor, a lawyer and an accountant.
(Source: Tina Di Vito, Scotiabank)