Succession Planning Tips for Small Business Owners

As a business owner, you devote a significant amount of time, energy, and in some cases your own money to developing your business. The exit from your business should raise questions such as: Will the business be sold? At what price? Will the children, or someone else continue to run it? What will happen to the employees? Who will service regular customers? These are important questions that are often overlooked, yet they form the basis of a formal succession plan. Without a succession plan, it stands to reason that many small business owners simply plan to walk away from their businesses once they retire, and only a small minority plan to pass the business on to others¹.

Lack of Succession Planning by Small Business Owners


Planning Continues To Be a Key Driver of Success

Starting the succession planning process early is important, as it is a long-term process. It may take years to develop a plan and put it into place. A formal succession plan ensures a smooth transition into retirement for you, as well as continuity of the business for the employees and customers. Business succession planning involves knowing the value of the business, identifying potential purchasers both inside and outside of the company and determining the best time to sell. Moreover, it helps you identify the options available to you when you make the transition out of the business.

As a business owner, you may have a significant amount of your financial assets invested in the business. It is important to consider whether you have other financial assets or your business will be your primary source of retirement funding. Hence, it is critical for you to assess available options as you exit the business. If you plan to pass the business to a family member, it would be wise to discuss the matter well in advance of your retirement, because the individual may not have the required skills, or even the desire to run the business. On the other hand, if you are selling your business to a competitor or a partner, or bringing on a new employee who can be groomed to take over the business, it would be in your best interest to extract maximum value from the sale of your business.

10 questions to address when retiring from your business:

  1. What is the fair market value of my business?
  2. What significance does the business have to my family and myself?
  3. Whom would I choose to take over the business?
  4. Could one of my children take over the business?
  5. How would this decision affect other family members?
  6. When am I planning to retire?
  7. How much time would I require to groom a successor?
  8. What role will I take in the business post-retirement?
  9. Have I spoken to my tax advisor to understand some of the possible tax strategies available when the transition occurs?
  10. Do I know what my retirement income needs are to maintain my lifestyle?

Business Exit Strategies
There are financial and tax strategies that can be incorporated into your succession plan to ensure the most profitable exit from a business. For instance, if you plan to transfer the business to family members, you may consider an estate freeze, which allows you to retain an interest in the business that could generate retirement income for you, while passing any future growth in the value of the business to the next generation. If the business is incorporated, you may be able to claim a capital gains exemption of up to $800,000 when you dispose of the shares. This could result in considerable tax savings for you.

There are additional strategies for maximizing retirement income from your business and transition into retirement. For example, you may consider establishing an individual pension plan (IPP) or a retirement compensation arrangement (RCA). There are also tax-efficient and cost-effective insurance strategies designed to generate supplementary retirement income yet still preserve money for your heirs. Or you could continue as a consultant to the business for a number of years. For those who are self-employed or who are small business owners, lack of planning can have a negative impact on retirement income, causing them to miss the opportunities available through exploring potentially lucrative and personally rewarding options that maximize all the potential benefits.

1BMO Wealth Institute study conducted by Research Now with a random survey sample of 301 Canadian business owners, conducted between August 29 and September 9, 2013.

This blog post is for informational purposes only and is not and should not be construed as, professional advice to any individual. Individuals should contact their BMO representative for professional advice regarding their personal circumstances and/or financial position. The information contained in this report is based on material believed to be reliable, but BMO Financial Group cannot guarantee the information is accurate or complete. BMO Financial Group does not undertake to advise individuals as to a change in the information provided. All rights are reserved. No part of this report may be reproduced in any form, or referred to in any other publication, without the express written permission of BMO Financial Group. ®/™ Registered trade-marks/trade-marks of Bank of Montreal, used under license.