Given the human, financial, legal, and fiscal considerations involved, business owners are often hesitant about planning the transfer of their companies, particularly when it comes to questions about death, retirement, possible disability, and drawing up a will.

Nevertheless, planning can help ensure a company's survival by seeing that it's transferred to those capable of taking on the task, while at the same time guaranteeing financial security for the surviving spouse, providing fair treatment to family members not involved in the transfer, and minimizing tax payouts.

There are many examples of businesses that failed to survive the death of their owners and had to be liquidated due to a lack of planning.

What Is Financial and Estate Planning, and What are the Benefits?

The first step in the planning process is to draw up a complete financial profile of the owner, taking care to define his or her concerns and objectives, which generally include the following:
 

• Guarantee financial security for the surviving spouse
• Minimize death taxes
• Avoid leaving the spouse at the mercy of potential buyers
• Transfer the business to those children interested in taking it over, while remaining fair to the others to avoid creating family conflicts
• Maintain financial security in the event of disability
• Ensure retirement income
• Mitigate the financial losses the company could incur in the event of the death or disability of the owner, given his or her direct contribution to profitability
• Prevent the company from being sold at a loss due to a shortage of cash assets
   

Example

Let's take the example of the proprietor of an incorporated company who holds 100% of its shares. He's married and has two children who work for the company. His wife isn't interested in taking over, but the two children are both capable of doing so. The owner's main objective is to protect his spouse's financial security while allowing his children to assume his role.

As stipulated in the owner's will, his wife will inherit his shares. Using the proceeds from their father's life insurance policy, the children will then purchase his shares under an agreement of purchase and sale. This way, the children become owners of the company and the spouse has access to sufficient cash assets to generate a living income.

This is also a way of avoiding death taxes upon the owner's decease and maximizing use of the exemption on capital gains applicable to small business shares.

Benefits

This exemption reduces the amount of tax that would otherwise have been payable when the surviving spouse sold the shares to her children. Without the measures set out in the will and the agreement of purchase and sale, the survival of the company and the financial security of the spouse would have been compromised, and the tax bill would have been much higher.

Transfers Made During the Owner's Lifetime

Planning is not just a matter of transferring a business upon the owner's death. Transfers can also be made during an owner's lifetime, upon retirement or in the event of disability, for example.

A number of strategies can be envisaged, depending on the owner's particular situation. For instance, an estate freeze allows you to transfer future gains in the value of your company to the children in question without affecting your taxes or resulting in any substantial expenses. In addition, you can maintain control and a certain degree of authority over company operations, continuing to receive income throughout your retirement.

The company is generally the main source of income for the owner. If this is the case, a prolonged disability will affect the company's profitability and compromise the owner's financial security.

There are several possible options. First, the company must have the financial resources it needs to continue operating, notably by hiring a replacement. Second, a transfer by way of an agreement of purchase and sale could be planned to ensure the survival of the business and the financial security of the original owner.

An Important Step

Financial and estate planning is an excellent way to take the interests of all concerned into account while ensuring the survival of a company to which the owner and other family members have devoted a great deal of time and energy.

A sound financial and estate plan involves the help of trusted professionals. Please consult your accountant, lawyer, and insurance representative for more information.