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This article was originally published by Business Examiner Vancouver Island and has been reproduced with permission.
It’s one of the ironies of being a business owner: once you’ve made the decision to get into business, it becomes your job to determine how you will get out of business. For many business owners, however, day-to-day operational demands make it hard to sit down and engage in a planning process that takes life after business into consideration.
As the regional leader for succession services with MNP, Wendy Lewis has worked with business owners for more than 15 years and has guided many clients through the exit planning process. She notes it’s often the spouse of a successful business owner – not the business owner themselves – who starts the conversation about when and how to begin stepping back from the business.
“The fun thing about succession planning is it’s all about you,” Lewis explains. “You get to look into the future and say, ‘What do I want my life to look like after I’m finished with my business?’ This often evolves into a family discussion about the possibilities.”
Once you have a clear vision, the next step is to assess the reality of your current situation and create a process to help you get from where you are to where you want to go.
How can you tell if your business is ready to transition?
Lewis advises: “Ask yourself one simple question, or if you want a true answer, ask your spouse: ‘Am I so vital to the operations of my business that I can’t step away?’ If the answer is yes, then you have some planning to do.”
“In general, the more valuable an owner is to their business, the less valuable the business is to a potential buyer. In order to sell, we need to take the owner out of the equation so the buyer can step in and successfully run the company on their own.”
Whether your goal is to sell the business to a third party, transfer it to a family member or sell to an employee group, there are many steps that need to be taken to prepare the business for a transfer of ownership. That’s why Lewis recommends you start planning for business succession three to five years before you think you’ll want out.
“The good news is the time and energy you put into your exit plan will actually make your business more profitable and operate more smoothly today, while also making the business more valuable and putting more money in your pocket when it’s time to walk away.”
Among the many aspects of a sound succession plan, tax considerations are critical – especially if you want to maximize the proceeds of your sale.
“Depending on how your business is structured and exactly what you sell, taxes could account for upwards of 40 percent of the value you have built,” cautions Mike Hughes, a taxation specialist with MNP. “Fitting into the Canada Revenue Agency’s rules is key and some rules require your company to be onside for a few years prior to exiting the business.”
Hughes offers these questions as a starting point:
“Any tax strategy will be unique to your situation, and good tax planning usually requires time so it’s important to start early,” Hughes advises.
Lewis says a good exit plan must be flexible enough to deal with uncertainties, while providing you with a clear path to the future. And having a plan doesn’t mean you have to sell the company tomorrow.
“If you’ve done a really good job and made yourself less central to the day-to-day operations, you may find you can take the time off your spouse really wants and still have a business that is building in value and working for you,” she concludes.
“Then, when you decide you want out, or if something unexpected happens and you need to get out, you are ready. The work is done and you get to exit on your own terms.”
For more information, contact Wendy Lewis, CPA ,CA at 778.225.7226 or [email protected]
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