Your Business Succession Plan 1

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Presentation given November 2, 2010 at Hampton Inn through West Island Chamber of Commerce

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Your Business Succession Plan 1

  1. 1. Elaine Rosenberg, West Island Legal Resource Center Inc.
  2. 2. Your Business Succession Plan  A succession plan is a detailed roadmap that provides direction on how the ownership of your business will be transferred.  One in four business owners are considering exiting their business in the next five years.  45% of business owners planning their succession intend to have a continuing role in their business. Elaine Rosenberg, West Island Legal Resource Center Inc. Quantitative Study of Business Succession Market in Canada (March 2007) Statistics Canada, The Daily, July 17, 2007
  3. 3. Your Succession Plan Should Include:  Business strategic vision, goals and plans for current and future operations;  Your personal and family goals;  Your preferred exit option including potential or identified successors;  A valuation of your business;  A timetable for events and transition;  A communication plan for advisors, family members, shareholders and key employees;  Information to ready your successor;  A financing outline for the succession plan; and,  A Comprehensive Review of Taxation and Legal issues. Elaine Rosenberg, West Island Legal Resource Center Inc.
  4. 4. Where Do You Start? There are three main exit options for business succession: 1. Transfer the business to a family member; 2. Sell to a Partner or your employees (often referred to as « Management Buy-Out »); or, 3. Sell to a third party on the open market. Elaine Rosenberg, West Island Legal Resource Center Inc.
  5. 5. Is a Family Succession Feasible?  Are there one or more family members who want to take over the business?  Does the family successor have the skills to operate the business, guarantee your retirement income and grow the business?  How would employees, suppliers and customers react to a family-based succession?  Can a family successor finance the purchase?  What is the most tax efficient way to pass ownership to family members?  What will be your continued role in the business?  How will this succession option affect the rest of the family? Elaine Rosenberg, West Island Legal Resource Center Inc.
  6. 6. Management – Partner « Buyout »  Which employees or business partners would be best suited to purchasing your interests?  Do the purchasers have access to sufficient funds to buy you out entirely or will you have to finance part of the purchase price?  Do employees have the vision and management capability to assume an ownership role through the transition period and run the business profitably long term?  Is your management team prepared to assume the risk of ownership? Elaine Rosenberg, West Island Legal Resource Center Inc.
  7. 7. Management – Partner « Buyout »  Can the business take on additional debt to support the management in financing the acquisition?  If you have to finance part or the entire purchase price, can the purchaser profitably run the business to ensure your repayment?  Will the purchase price be paid from future profits or employees’ own capital?  Are employees able to provide personal indemnities and assume successor obligations? Elaine Rosenberg, West Island Legal Resource Center Inc.
  8. 8. Sale to a Third Party  Where can you find an interested buyer?  Who might be likely candidates within your industry, or amongst related industries, i.e. upstream or downstream?  Do you want to sell the whole business or part of it?  Is it important that a potential buyer have the entire financial resources necessary to purchase the business, or would you be prepared to partially fund their acquisition?  What is the most tax-efficient way to structure the sale? Elaine Rosenberg, West Island Legal Resource Center Inc.
  9. 9. What is your Business Worth?  Key factors that influence the value of your business  Historical earnings performance  Future earnings potential  Accounts receivables  Contracts  Assets (such as inventory, equipment and real estate)  Patents and trademarks Elaine Rosenberg, West Island Legal Resource Center Inc.
  10. 10. What is your Business Worth?  Capital restructure  Reliability of supply chain  Supplier relationships  Company reputation  Customer concentration  Strength of management team  Market factors  Industry outlook Elaine Rosenberg, West Island Legal Resource Center Inc.
  11. 11. Business Valuation  There are three common methods used for business valuation: 1. Cost or asset-based approach totals all costs and investments dedicated to the business. This method is simple and straightforward. However, it doesn’t take into account things such as the business’ competitive reputation, market share, expertise or future earnings. 2. Market Value compares your business to those recently sold. While reasonably accurate, it may be difficult to find comparable businesses. 3. Earnings-based approach is most commonly used. A price is calculated based on historical and future earnings. This approach relies heavily on management predictions of performance and normalized events. Elaine Rosenberg, West Island Legal Resource Center Inc.
  12. 12. BUSINESS SUCCESSION STRATEGIES BREAKDOWN  Sell to third-party 34%  Pass business to family members 29%  Sell to management/employees 15%  Sell to partner 11%  Don’t know 10%  Wind down business 1% Elaine Rosenberg, West Island Legal Resource Center Inc.
  13. 13. Have you Established Your Advisory Team?  ACCOUNTANT  Develops financial statements  Provides taxation advice  Assists in estate planning  Provides advice for business restructuring  Assesses business value Elaine Rosenberg, West Island Legal Resource Center Inc.
  14. 14. Have you Established Your Advisory Team?  LAWYER  Negotiates and drafts any necessary agreements, such as a shareholders’ agreement, share subscription agreements or share redemptions  Provides tax planning advice  Prepares wills and powers of attorney  Advises on existing and proposed business structures and implements any needed corporate restructuring  Negotiates and drafts any necessary purchase and sale agreements Elaine Rosenberg, West Island Legal Resource Center Inc.
  15. 15.  FAMILY MEMBERS  Support family interests;  Provide an opportunity to understand each member’s perspective about the business and their future roles in it.  MANAGEMENT TEAM  Manages ongoing operation of the business;  Needs to “buy-in” to successfully execute business plans;  Provides operational advice and expertise for new owners;  Enables business continuity.  MENTOR  Provides guidance on the development of the succession plan. Elaine Rosenberg, West Island Legal Resource Center Inc.
  16. 16. $ $ $ $ $  BUSINESS VALUATOR  Estimates fair market value of the business;  Provides credibility to asking price;  Provides advice and suggestions on how to maximize business value.  BUSINESS BROKER  Finds a buyer;  Provides market insights;  Provides insights on enhancing business value. Elaine Rosenberg, West Island Legal Resource Center Inc.
  17. 17. What Can be done Now to Ensure You get the MAXIMUM Value?  Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled.  Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed.  The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include employees, customers, creditors, suppliers, regulators, and the community at large. Elaine Rosenberg, West Island Legal Resource Center Inc.
  18. 18. Corporate Governance (cont’d.)  In A Board Culture of Corporate Governance, business author Gabrielle O'Donovan defines corporate governance as: “An internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity, accountability and integrity. Sound corporate governance is reliant on external marketplace commitment and legislation, plus a healthy board culture which safeguards policies and processes”. Elaine Rosenberg, West Island Legal Resource Center Inc.
  19. 19. Corporate Governance (cont’d.) O'Donovan goes on to say that 'the perceived quality of a company's corporate governance can influence its share price as well as the cost of raising capital. Quality is determined by the financial markets, legislation and other external market forces plus how policies and processes are implemented and how people are led.  External forces are, to a large extent, outside the circle of control of any board.  The internal environment is quite a different matter, and offers companies the opportunity to differentiate from competitors through their board culture.  To date, too much of corporate governance debate has centred on legislative policy, to deter fraudulent activities and transparency policy which misleads executives to treat the symptoms and not the cause.'[2] Elaine Rosenberg, West Island Legal Resource Center Inc.
  20. 20. Shareholder Rights The rights provided to shareholders under corporate statute can be broadly divided into three categories: 1. voting rights; 2. rights with respect to meetings; and, 3. rights pertaining to access to information. Elaine Rosenberg, West Island Legal Resource Center Inc.
  21. 21. Corporate Statutes  Articles of incorporation and by-laws set out the types and classes of shares the corporation is authorized to issue and the rights of shareholders relative to both the corporation and to owners of other types of shares.  They may set out voting rights, rights to dividends and rights upon dissolution of the company.  They may also contain restrictions on the ability of the shareholder to transfer shares. Elaine Rosenberg, West Island Legal Resource Center Inc.
  22. 22. Shareholder Agreements  Shareholders' agreements may take many forms, from a simple agreement to vote shares in a particular way to unanimous shareholders' agreements, which restrict the powers of the directors of the corporation and transfer those rights and responsibilities to the shareholders.  Such agreements may embellish or supplement rights provided under corporate law statute. For example, shareholders' agreements could include provisions such as buyout mechanisms, pre-emptive rights, or drag-along and tag-along provisions on sale of shares.  They may also set out definitions of who can be a shareholder and provide for restrictions on transfer of shares. Elaine Rosenberg, West Island Legal Resource Center Inc.
  23. 23. How Shareholder Agreements Can Help You through the Succession Transition  In closely-held corporations, shareholder agreements often include provisions describing or limiting the scope of some shareholders' management functions; plans for succession and undertaking of new corporate opportunities.  Abuse of these provisions by shareholders active in the management of the corporation form the genesis of assertion of shareholders' rights by the minority or other aggrieved shareholders.  How the assertion of rights by minority or aggrieved shareholders is limited by a mandatory arbitration clause is an important consideration which will not be considered in this presentation. Elaine Rosenberg, West Island Legal Resource Center Inc.
  24. 24. TAX STRATEGY DESCRIPTION KEY BENEFITS CAPITAL GAINS EXEMPTION  The seller may be able to claim a lifetime capital gains exemption of $750,000 on the sale of shares;  Potential tax savings on sale of shares.  ESTATE FREEZE  Original common shares exchanged for new fixed value preferred voting shares;  Family members (or trust) issued new common shares with nominal value;  New common shares have potential to grow in value in the future;  Tax liability of original shareholder is capped at value of newly received preferred shares;  May reduce tax liability of original owner on death;  Owner and/or family members may each be able to use the $750,000 capital gains exemption;  Allows for greater span of ownership;  Facilitates income splitting. Elaine Rosenberg, West Island Legal Resource Center Inc.
  25. 25. Tax Strategy (Cont’d.)  HOLDING COMPANY  Places a layer between individual owner(s) and the operating company;  Often a key component of an Estate Freeze;  Used to hold non-operating assets such as excess cash / investments outside the operating company;  Often used to distribute the ownership interest more broadly among family members;  Potential for income splitting with adult family members;  May qualify for the $750,000 capital gains exemption;  May be helpful in asset protection from creditor claims against the operating company. Elaine Rosenberg, West Island Legal Resource Center Inc.
  26. 26. Tax Strategy (Cont’d.)  FAMILY TRUST  Often used in conjunction with an Estate Freeze to allow family members to have an indirect ownership of a business;  Provides trustee with control over business and distributions to beneficiaries;  Potential for income splitting with named beneficiaries or defined classes of beneficiaries;  Useful for eventual family succession planning;  May reduce probate fees. Elaine Rosenberg, West Island Legal Resource Center Inc.
  27. 27. Elaine Rosenberg, West Island Legal Resource Center Inc.

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