A mature couple attentively consults with a financial advisor, going over documents and digital data for retirement planning.

Sailing into the sunset: Succession planning for a successful retirement

July 18, 2022

As a small business owner, you spend your working life building a legacy and pouring countless hard-working hours into your business. Understandably, as you approach retirement age, you might be wondering “now how do I retire?”

Here are some tips for crafting a successful succession plan that allows you to retire worry-free and content in knowing that your legacy will be carried on in good hands:

Start the conversation

As advisors, we often see business owners delaying the building of a succession plan, which is understandable given the time, energy and passion they have put into making the business what it is today. While it can be difficult to consider handing over the reins to the next generation, it is important to start the discussion early on. Ensure that you have identified the right successor, and start passing on your “tricks of the trade” to solidify a smooth transition for you, your business and your customers. Your decades of experience cannot be downloaded and transferred overnight—they require time and patience to be understood and internalized by your successor.

Determine your exit strategy

Consider what your exit strategy looks like. One common method is a transition to children or grandchildren that is structured as an estate freeze, allowing you to “freeze” your current value and exchange your common shares for preferred shares at the value of the company upon transition. In this situation, you can have the new owners purchase common shares to participate in any new growth of the company. This allows you to redeem your shares over time, setting you up for a steady income stream through retirement and any reduce overall wealth prior to death.

Another option would be to sell the common shares in phases over several years, allowing you to decrease your ownership percentage while still maintaining some direction and control of the company. In this situation, you can phase the new owner(s) in while also participating in the profits over the phase-out period. Again, this option provides an income stream for several years; however, typically this option would be done over a shorter time period and would require a secondary plan for retirement living, which may include contributions to RRSP’s, TFSA’s or investing in a market-based portfolio.

You also may find that the next generation isn’t interested in taking over, but you still want your customers to be in good hands. As such, you may consider the opportunity to sell your business to a third party. Sometimes these will be other business owners looking to expand their business and bring on your location or services, or this may be a new entrepreneur looking to establish themselves. There are two options more options for succession in this case, which include selling all the shares or selling the assets of the company:

When selling the shares, the buyer assumes all of the assets and liabilities of your company, as well as your customers and any goodwill you may have generated. This provides for a smooth and final exit; however, likely the highest tax implications as you would get a larger lump sum for your shares in that first year. However, the lifetime capital gains exemption may be available to curb some of this effect.

When selling the assets of the company, you would retain the company and only sell the components of the business to the buyer. This allows you to leave the profits of the sale in the company and slowly draw them out over time, or convert the company to an investment company and derive investment income. This option results in no lifetime capital gains exemption; however, there is the ability to pay a capital dividend tax free from the company to the shareholder.

Each of the above options for exiting your business come with pros and cons—they are not one size fits all.

Engage the correct advisors

Lastly, it’s important to engage professional advisors throughout your succession planning journey. These advisors may include accountants, business valuators, lawyers and business brokers depending on the nature of your situation.

Our business and succession planning team handle these conversations with great sensitivity and also offer facilitation services to help mitigate any issues. If you, or someone you know is looking to successfully transition to retirement, connect with your DMCL advisor to see how we can help you.

Article written by Amy Duncan, CPA, CGA.