It is not an uncommon situation for an individual who started a business to reach the point in one’s life when he or she wants to retire, but finds him or herself in a position where a member of the family who was supposed to take over is not willing or able to do so. In family run businesses, the dreams of the family member who started the business may not necessarily be the same dreams of other family members who were expected to continue running the business. Even if the next generation of family members is prepared to take the reins, it can be difficult for the soon-to-be retiree to simply “let go” and give up control entirely of something that may have taken many years to develop.

Succession planning – which is the passing of your business on to the next generation, whether it is to your children, another relative, a friend, or even to a stranger - is not only a financial decision but an emotional one as well. Retirement is not simply a matter of not going to work the next day – you need to know if you have enough money to live on after you retire. In addition, consideration needs to be given to the future of the business itself – both from a management perspective and an ownership perspective. Management, or the transfer of power, is the change of control in the operation of the business from you to a person or persons best suited to exercise it. Ownership is the transfer of assets wherein the wealth in the business is handed over to the next generation or to those who will have the power to run it.

Because of these considerations, succession planning is not something that happens on a single day. It is a process and one that should be given careful consideration. The key is to start planning well in advance. As an owner of a family business you are probably very busy and developing a succession plan may be the last thing you want to think about at the end of a long day. However, businesses are more successful with proper planning.

The first step is to accept that once you retire you may no longer be an active participant in the daily running of the business. Letting go of the reins after being the chief decision maker for so many years can be difficult. After you have acknowledged that someone else will be running your business, one of the first considerations will be whether or not business succession within your family is an option. Do you have children that are interested in taking over the business? Are your children able to run the business after you retire? Even if you are a great businessperson, it does not necessarily mean that your children will also have the same strengths. Succession within the family works best with those children who have the skills to run the business, not just those with an interest. Consideration should also be given to utilizing key people within your business who have the skills, knowledge and experience as part of a smooth ownership transition.

When you have several children and are considering passing the business to one or more of them, it is important to recognize that one parent may feel that the children should be treated fairly, while the other believes that the children should be treated equally. Leaving your business equally to your children may not be an option if they each have differing ideas of the direction the business should take. On the other hand, leaving the management to one child and the ownership to the other may not work either as the value of the business increases. In addition, the marriages of your children may have an impact on the succession planning of your business. A break-up of a marriage can threaten the viability of the business as shares in a family business could conceivably pass to the child’s (soon-to-be) ex-spouse. There is no easy answer, but it is important for there to be open and honest communication between you
and your family about where the business is headed in the next few years and what each person’s expectations are. It may be helpful to use an advisor to facilitate such discussions as it can be difficult for families to discuss the issues of planning for retirement and death.

Effective tax planning is also another factor to be considered in the succession planning process. Finding a way to reduce, or at least defer, tax on death is very important if the business is to remain a family business. The use of insurance is a realistic option for dealing with income tax that is payable on death. Another tool is the use of an estate freeze whereby capital assets whose continued growth creates escalating tax and succession concerns are exchanged for similar assets that are fixed in value. However, tax planning should not necessarily dictate how the succession plan is implemented and must be balanced with your ultimate personal goals and objectives.

At the end of the day, the best option may be to simply sell the business, either to your employees or even to a third party. In this option, planning becomes an issue of when to sell and at what price. You could sell either the actual assets of the business or sell your shares in the business (if incorporated). It is important to have your business valued properly to maximize what will be your retirement fund.

Then, having properly drafted estate planning documents (i.e. a Will) will assist you in developing a plan that extends well beyond your retirement. A Will can help provide for your loved ones, protect you in the event of a marriage or divorce, help to minimize both income and estate administration taxes and help prevent costly court actions. Without a Will, provincial law, not you or what you told your spouse or relatives you wanted done with your estate, dictates who is entitled to your estate and in what proportions. Relying on the right people in their areas of expertise to assist in the process is key. Succession planning involves both tax planning and estate planning, so the involvement of advisors including a good accountant, investment advisor, insurance advisor and lawyer are important. This article does not discuss all of the issues and options to consider when developing a succession plan, but hopefully it will encourage you to start thinking about the direction of your future and that of your business.

Jennifer Searle practices law with McLean & Kerr LLP in the areas of corporate/commercial law, substitute decision-making and mental incapacity planning and estate planning and administration.