I want to share this article found in the National Post, Monday, November 17, 2014, edition written by Bev Johnson. I have transcribed it for the most part.

Handing over keys to your business requires careful succession planning.

If you have built a business thinking you will pass it on to the next generation or a family member to carry on its legacy there may be some concerns to address before doing so.

You want to be sure the next owner has the interest and knowledge to carry on your business’s legacy. And since there are tax concerns you need to consider, it’s absolutely essential you clearly communicate with your family your plans and expectations well in advance.

Family business succession is the process of transitioning the management and ownership of your business to the next generation.

Here are tips and tools.

1. Management succession comes first: While things can happen simultaneously this is the first step.

2. Plan for a transition phase of 3-5 years: This period is helpful for your successors who may need time to acquire the skills and experience to run the business and gives you, the owner, time to get used to relinquishing your “control” and feeling comfortable in handing over the reigns. It also gives you time to think about the best way to sell your business to a family member who you trust.

3. If a family member can buy through an outright sale that is great. Most often, these people are not in a financial position to do so. Owners usually pass on their businesses to their family through an estate freeze. An estate freeze fixes the value of your business at its present value, so that any future growth will benefit others and not taxed to you on your death.

To implement a freeze, you have to value to current value of the company and then exchange your shares for new freeze preferred shared. Then, the new intended owners would be issued a new class of ownership shares (common shares) in a proportion you consider fair. At this point, the future growth of the business – as well as the tax liability – accrues equally to the new owners.

If your business already has multiple owners, including other members of your family, enacting the freeze can be more complicated.

3a. If you freeze your preferred shares you can have voting rights, which will allow you some control of the company after you retire, even though it is the next generation that will deal with the daily operations. With this route you can also control the timing of when the family business can redeem a portion your freeze preferred shares, especially if you need the funds for retirement.

3b. Consider what will happen upon/after your death. The new family owners may be able to obtain a corporate life insurance policy which can be used to buy out your remaining freeze preferred shares and retain control of the business upon your death.

4. Alternative to estate freeze: Sell your business directly to a family member. Because you are selling to someone who is not at arm’s length, there are special tax considerations. You’ll have to determine the fair market value of your shares even if you plan on selling the shares for less than that, or even gifting the shares, since you’ll be taxable on this value, not proceeds you actually receive. A valuation is also useful so that the rest of your family knows exactly what the business is worth.

4a. A price adjustment clause in the sale can also be helpful should the tax authorities challenge the sale price of the shares. And, as with a sale to an outside party, you may be able to offset any capital gains normally subject to up to 25% tax with the $800,000 capital gains exemption.

5. When meeting with the family members the next generation’s ideas and philosophies may be different from your own. Listen. Make sure the potential new owners are able to make informed decisions about their future role in the business.


6. Hold family meetings so that the different generations can air their thoughts, concerns, ideas, etc.
Not only can regular get-togethers help you ease into the transition, they can also help you reach consensus on sensitive issues such as the timing of the transition, who owns shares in the family business, compensation, and funding the ownership transfer.

6a. If the meeting become contentious consider using an agreed to outside facilitator trained in understanding family dynamics. This can ease tensions and also help set and enforce meetings are productive and less confrontational. It’s also a good idea when a family is first learning to hold meetings.

7. When there will be more than one owner of the business, its necessary to draft a shareholders’ agreement to formalize and legalize your succession plan. A shareholders’ agreement is really a rule book for your family that can help the next generation understand the guidelines and expectations. The agreement should not only reflect the decisions made during family business meetings, it should also contain any family business rules, such as who has input on crucial business decisions or restrictions on areas including expansion, employment of spouses and in-laws, conflict resolutions, loans to family members, dividend policies and the like. You can also set limits to your own involvement during the transition period.

Your shareholders’ agreement can stipulate how each family member gets compensated for their role and contributions to the business. For example, you may need to determine how to reward a family member that is an owner but not part of the management team, or vice versa.

Selling a business leads to hard decisions. This is more so when family is involved. It’s important to make sure that all parties are satisfied with the details. Setting regular family meetings will help provide comfort for a successful family succession. Integrating family members into the planning process can make sure your business is still here for years to come.

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