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Before you hand over the keys: Five steps for a smooth business succession plan

August 13, 2021

Owners of small to medium-sized private businesses will have to hand over the reins at some point. Here are the main things you need to consider about business succession planning and a summary of your main options.

1. Realize business succession needs planning

If you’re like many business owners, you might not consider succession planning at all and leave it to your estate’s executors to realize the value of your business and find a suitable buyer. The alternative is a planned succession. This gives you control. It allows you to extract the most value, in the most tax-efficient way. This is the best way of ensuring your preferred custodians continue to manage your business after you cease to be involved.

2. Define the timeline

From a tax perspective, you’ll need to begin planning at least two to three years before your desired succession date in order to ensure eligibility for the Enhanced Capital Gain Exemption on the sale of shares of a qualifying Canadian Controlled Private Corporation. The exemption is $883,384 in 2020 which is indexed for inflation annually.

Succession doesn’t have to happen at a single point in time. You may wish to stagger the transition, staying involved in the business to ensure that the goodwill is transferred to the new owners.

3. Determine the successors

You may have family members involved in the business who you have been preparing for management. There could be talented key employees to whom you want to transfer ownership. Indeed, the prospect of part or full ownership post-succession could be a way of incentivizing the retention of key people. Alternatively, you could be considering an outright sale to a third party.

4. Agree how you’ll value the company

This is a key part of succession planning. You’ll need a determination of the value to check that it’s one that will make you happy and reflects your investment of time and energy in the business. If you have other shareholders or partners, there should already be a defined methodology for valuation in the event of your exit.

5. Decide funding

How will the share sale be funded? For the planned succession, there’s a range of financing alternatives including acquisition loans as well as vendor financing for the outright sale of shares or redemption over time.

How we can help

As you can see, succession planning presents many options and rewards early preparation. Contact your DMCL advisor today to check you have a solid business succession plan in place that is on track to achieve your goals.


Article written by Fraser Ross, CPA, CA.