Bob Gauvreau breaks down how to structure a business exit. Only 20% of businesses successfully exit. A share sale in Canada can save roughly $1M in tax using the lifetime capital gains exemption, versus an asset sale. An estate freeze lets you transfer future growth to the next generation without immediate taxes or cash.
Questions this video answers
About 20% of businesses.
About $1 million of tax (on the gain of the sale of shares).
Plan at least two years in advance ("two years before" sale).
Chapters
So a great question is how to structure a successful succession or exit from your business. And before we even jump into how we can do it, I think we all need to be aware that it's not as regularly common for a successful exit as we think it is. In fact, only about 20% of businesses successfully exit and sell their business, with 80% of businesses not being saleable or people not wanting to take over that particular operation. So it's not as common as we like. But there are eight factors to help support a successful sale. I'm not going to go into them now, but make sure you check out our info about the eight ways to build value in your company. But in this particular question, we want to talk about exit strategies and how we can do it. So really, there's a few ways that we can create access for an exit. One is to have an external buyer, right? That could be somebody who is either an internal employee or private equity, or a competitor or an external party who is just looking at getting into the business. This would require us to come up with a value and sell assets or shares to a potential buyer. Now, there's benefits to doing an asset sale and a share sale. So if you're in a particular business and you want to sell everything, that's part of it. We want to try and structure a share sale. Part of the reason is there's a lifetime capital gains exemption, specifically in Canada, that will allow us to save about $1 million of tax or $1 million in tax on the gain of the actual sale of shares. Alternatively, if we sell assets, we don't get that same access to a tax deduction. So we want to be aware of that. And it typically becomes a negotiating factor with the buyer and seller on the purchase price. Usually, as someone who would sell shares, we might accept a little bit lower offer because we're likely going to get a $250,000 tax benefit by selling the shares versus the assets. And then there's other ways that we can structure a succession plan. So say, for example, you've got your kids that are in your business, or you've got somebody in your business that wants to take over. You want to see them succeed. Maybe they're internal to the business, but they don't have the funds to come up with to pay you. And then, like in many instances, that's our kids. So our kids, as they're starting out working in our business, they want to take over the company. They don't have millions of dollars to pay you for you to exit. So what we can actually do is we can take the company value, let's say it's a million dollars, and we can freeze the value at a million dollars and that becomes your share ownership. And then what we can do is we can introduce new shares which would be the next generation. Whether it's employees or family members, we introduce them to come over and take over the value creation in the business. So the business goes from being worth a million dollars to 2 million. They're going to benefit from the increased growth in that you have the million dollar value, they have any increased growth value attributed to them. So a really great way to introduce the next generation without triggering tax implications and also without needing financing requirements. In fact, you're helping support the financing of them growing your business. And then over time, what we can do is create a buyout arrangement where the business's success can pay you out your original million dollars. That's more of an estate plan estate freeze concept, but allows a succession plan to take place without any cash exchanging hands. You may want a hybrid situation to those two, but just know that regardless of how you want to structure your succession plan, we need to do so in advance. And there's tax reasons why we need to do that. So the, the benchmark is really two years before we have to have some element of your business structured within two years or prior to two years before you sell. So we need a little bit of time in advance to make sure that you can maximize your tax efficiency or on this type of succession. So not every business exits. There are a few ways that we can do it successfully. This is where you need to work closely with your tax advisor and your accountant to help guide you on a successful succession plan.
