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How to successfully transfer your business - DFSIN - SFL

How to successfully transfer your business

Are you one of the thousands of Canadian business owners planning to leave your company over the next few years? Here are 6 tips for a successful business transfer.

May 16, 2024

According to the Canadian Federation of Independent Business, 76% of business owners say they want to move on from their business in the next 10 years.1 Lots of different factors can affect business transfers, including the business sector and the company's fair market value, age and corporate structure.   

Once an owner has decided to transfer their business, they have to settle on the terms and conditions. Here are the most common arrangements:  

  • The owner sells their shares in the company, which creates a capital gain. They have the option of using the federal government's new $1.25 million federal gains exemption, which comes into effect on June 25, 2024. 

  • The company buys back the shares, which creates a dividend for the seller. 

  • The company sells off its assets, ultimately resulting in a dividend for the seller, which is likely to come from the capital dividend account. 

  • The company could also opt for a combination of these 3 options, or decide to draw the transaction out over a longer period of time. 

When selling to a third party, the main objective is usually to maximize the value of the business. The goal could be very different if the business was being sold to a family member, for example. Either way, having a succession plan is key.  

What's a succession plan? 

A succession plan helps ensure a smooth transition when the time comes for a business to change hands. It sets out the strategy for selling, transferring or even dissolving the company. The strategy aims to maximize the value of the transaction for the owner and make sure the business continues to prosper under new ownership. 

Succession planning can be very complex because it has to factor in a long list of organizational, personal, family, legal, accounting, financial and tax considerations that could make or break the transfer. That's why you need advisors who can provide solid support on all fronts. Contrary to popular belief, business transfers can take years to complete, so it's important to plan ahead. Generally speaking, it's a good idea to start thinking about your succession plan at the end of your company's growth phase or the beginning of it's maturity phase. 

Six tips for a successful succession plan 

  1. Identify potential buyers
    Maximizing the value of your business isn't always the primary objective. Things like preserving corporate culture or keeping staff employed can be just as important. Depending on your goals, you'll need to identify potential buyers or people who can carry the torch. You won't necessarily meet your goals by selling to the highest bidder.  

  2. Establish a timeline
    There's no magic formula. The important thing is to have an exit plan that's based on a predetermined timeline. Compared to third-party transfers, internal ones can take a lot longer. Plus there are a lot of external factors, like illness or death, that can impact the timeline.  

  3. Determine the company's value
    When selling to a third party, the main goal is usually to maximize the company's value. But people who are selling internally might want to go with terms that reflect the ties between the owner and their successor. It's a two-way street and the buyer and seller often have to work together to find the best solution. It's always a good idea to seek out expert advice. 

  4. Be tax smart 
    Make sure to optimize your corporate structure so you can use the capital gains exemption when the time comes. The federal government recently rolled out measures that make it easier to qualify for family transfers. You should also review your tax accounts, including your capital dividend account2 and general rate income pool. Make sure you're up to date on all tax, accounting and legal obligations. 

  5. Plan for a comfortable retirement 
    Budget out your yearly expenses so you know how much you need to make on the sale to enjoy the lifestyle you want. If your estimate is below the company's value, you'll have some flexibility on the financial terms of the transfer.  

  6. Develop a new investment strategy 
    Selling your business could free up a lot of capital. You could go from having most of your capital concentrated in your company to having an investment portfolio that's diversified based on your investment objectives and horizon. Plus any profits you make on the sale are taxable. Talk it over with your advisor so you have a carefully planned strategy ready when the time comes.

 Transferring your business can be exciting, but it can also be a source of stress. The secret to success is finding a team that can give you sound advice.  



[2]: That way, you'll be able to declare a non-taxable dividend paid out of your capital dividend account.