Business succession: Planning to pass the torch

What is business succession planning?

Business succession planning is the process of carefully examining and strategically planning for the transfer of ownership and control of your business. If thoughtfully planned in advance, a business succession plan should maximize the value of the business and ensure a smooth handover of that value to a successor who is ready to take the reins.

Best practices

1. Plan ahead

It can take approximately three to five years to fully implement a business succession plan. For this reason, it is prudent to begin your business with the end in mind. How and when do you envision yourself exiting your business? Your succession plan should be a clear and comprehensive road map to achieving this goal.

2. Build a solid foundation

It is important to involve tax and legal advisers early to determine what type of business structure is most effective to achieve your long-term goals. In assessing your options, you should consider:

- exposure to tax on capital gains and the potential availability of the lifetime capital gains exemption;

- who are the likely successors – a third-party purchaser or family members;

- the long-term plans of any business partners and how those plans align with yours; and

- what other stakeholders are involved with the business and what obligations must be fulfilled prior to implementing the succession plan.

3. Transfer knowledge and relationships

Your succession plan should clearly set out steps to ensure that your business can eventually operate without your involvement. This will involve standardizing business processes and systems, and documenting and transferring your business abilities, skills, experience, contacts and relationships to your successor.

4. Encourage employee continuity

A key aspect of handing an intact business over to your successor and maximizing the value of that business is ensuring that your employees remain after you leave. Employee compensation incentive plans and carefully drafted non-competition and non-solicitation agreements will increase the likelihood of employee retention. You should also take the time to familiarize your successor with your employees and the business’ workplace culture to minimize business disruption during and after the handover.

5. Plan for contingencies

Although we are loath to admit the frailty of the human condition, it is important to recognize that there may be circumstances where you will have no choice but to make an unplanned exit from your business. Accordingly, your business succession plan should provide for contingencies that may disrupt the business, such as death, disability, critical illness and disputes among business partners.

For example, if your business partner suffers a relationship breakdown with his or her spouse, that partner’s business interest may be subject to legal division between the spouses. Similarly, if your business partner dies, a beneficiary of that partner’s estate may inherit that partner’s business interest. In both circumstances, you may be forced to operate your business with a stranger. A business agreement can and should provide for what will happen to a partner’s business interest in the event of a contingency. These business agreements typically take the form of a shareholders’ agreement or partnership agreement.

If you do plan to leave your business interest to your successor upon your death, you may consider how to do so in a way that limits the impact of probate fees. For incorporated companies in B.C., this may be accomplished through multiple will planning. Directors of B.C. private companies can create separate wills to transfer shares of the company to a successor without the requirement of probate. You should consult with a legal adviser to determine if multiple will planning is appropriate for your specific circumstances.

6. Engage professionals

Succession planning is a multidisciplinary process that can only benefit from the input and expertise of a team of professionals capable of helping you evaluate, formulate and execute each piece of your unique succession puzzle.