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Ask the Experts - Exiting your Business


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Exiting your business is a common obstacle for many entrepreneurs. You are ready to sell but how do you develop an exit strategy that meets your
needs? Preview our slides to learn how you can get your business ready for sale, develop your exit plan and be mindful of tax and legal considerations.

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Published in: Business, Economy & Finance
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Ask the Experts - Exiting your Business

  1. 1. Ask the Experts – An Advice Series for Entrepreneurs Exiting Your Business
  2. 2. AGENDA RBC Royal Bank: • Introduction and Considerations in Establishing the Top Line Speaker: John Abbenda Welch LLP: • Readying Your Business for Sale, Tax Considerations, Who is going to buy and how? Speakers: Candace Enman, Zoran Vranjkovic
  3. 3. AGENDA Perley-Robertson, Hill & McDougall LLP/s.r.l. • Family Trusts and other legal structures/Considerations Speaker: Anthony McGlynn
  4. 4. Planning for Your Personal and Business Retirement: John R. Abbenda, CFP, TEP, CPCA Financial Planning Ontario East 4
  5. 5. What is Business Succession? • Business Succession is the transition of a business asset to family or another owner. It could also involve the windup of a business. • Business Succession is often confused with Business Owner Retirement. Lets look at Business Succession in a different light… 5
  6. 6. Business Owner Retirement Personal Retirement Goals or Legacy Goals minus Personal Retirement Assets equals Business Succession Needs 6
  7. 7. Retirement Planning Process Visualize and Quantify a Life Plan Identify/quantify business assets Identify/quantify personal assets CONSTRUCT the Plan Implement solutions 7
  8. 8. STEP 1 Visualize and Quantify Your Future 8
  9. 9. Visualize and Quantify Your Future We believe there are 7 key areas of your life (in addition to your business) that need to be visualized and discussed in order to develop a solid financial plan. None of these areas is about money – but they all have a significant financial impact now and into the future. 9
  10. 10. Life Planning Family • How will your spouse and children factor into your transition plans? • How will your business retirement affect your family life? Health • How do you plan to change your lifestyle after you sell your business? • What will you and your spouse do to keep active in retirement? 10
  11. 11. Life Planning Home • How do you see your current home fitting into your future? • Have you thought about purchasing a vacation home? Lifestyle • What activities will you replace work with? • How will you replace the social contact your business provided you? 11
  12. 12. Life Planning Work • What did you like about business ownership? Is there a way to carry this beyond retirement? • How will the new owners engage your expertise? Legacy • How do you plan to give back to the community that supported your business? • How do you plan to share the fruits of your success with others? 12
  13. 13. Life Planning Your Mind & Spirit • How will you replace the mental challenge that running a business offered? • What are some adventures that you put on hold while running your business that you would now like to pursue? 13
  14. 14. Summary It’s not only about the money! • Visualizing your future and sharing that vision with your spouse, family, business partners and other loved ones is probably the most difficult and overlooked step in planning for retirement. • When you have developed definition around what you want your future to look like, the next step is to quantify your dreams and goals. • Your Financial Planner can help you attach values to these and begin the financial planning process. 14
  15. 15. What we can do with you. Help you identify what you want the future to look like. Facilitate the discussion. Identify personal and business assets that will be used within the financial plan. Work with your professional advisors to develop an integrated personal and business retirement plan. Work with your professional advisors to put solutions in place to accomplish the plan. Re-visit the plan regularly to monitor progress and make changes as needed. 15
  16. 16. Thank you! This presentation has been prepared for use by RBC Dominion Securities Inc.*, Royal Mutual Funds Inc., RBC Private Counsel Inc. and RBC DS Financial Services (Quebec) Inc., Member Companies under RBC Investments. The Member Companies, Royal Bank of Canada, Royal Trust Corporation of Canada and The Royal Trust Company are separate corporate entities which are affiliated. In Quebec, financial planning services are provided by Royal Mutual Funds Inc. or RBC DS Financial Services (Quebec) Inc. and each is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RBC Dominion Securities Inc., Royal Mutual Funds Inc. or RBC Private Counsel Inc. Insurance products are only offered through RBC DS Financial Services Inc., RBC DS Financial Services (Ontario) Inc., RBC DS Financial Services (Quebec) Inc., subsidiaries of RBC Dominion Securities. *Member CIPF. The strategies, advice and technical content in this presentation are provided for the general guidance and benefit of our clients, based on information that we believe to be accurate, but we cannot guarantee its accuracy or completeness.This presentation is not intended as nor does it constitute legal or tax advice. Clients should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. This will ensure that their own circumstances have been considered properly and that action is taken on the latest available information. Interest rates, market conditions, tax rules, and other investment factors are subject to change. ™Trademark of Royal Bank of Canada, used under licence. RBC Investments is a registered trademark of Royal Bank of Canada, used under licence. ©Royal Bank of Canada 2003. 16
  17. 17. Readying Your Business for Sale Candace Enman, CA, CPA President, WelchGroup Consulting
  18. 18. Owner’s Mindset • View their businesses as assets • Think like an Owner • Build your business to last decades, but prepare to sell it tomorrow
  19. 19. Demographic Wave 6.0M Private Businesses +70% owned by BB & WWII Generation 4.2M Must Change Hands in the next 5-20 Years The most important Demographic Wave of the 21st Century
  20. 20. Owner’s Value Challenge 1 out of 4 – Middle Market Companies sell when taken to market Company Value $ Investment Survival Cash Flow Wealth Time Most Private Businesses have Zero Economic Value
  21. 21. Value ≠ Revenue or EBITDA • Profitability trend • Analysis of risk Value = Profit that is Sustainable & Transferable • • • • • • • • Company Customers Employees Operations Infrastructure Processes Legal IP
  22. 22. Due Diligence 1. Can you survive a due diligence? 2. Would you like the results if you performed a due diligence on yourself?
  23. 23. Business Value Drivers
  24. 24. Red Flags can Erase all your Value Top 5 Red Flags 1. Do it all Business Owner 2. Strategic direction 3. Talent management 4. Financial management 5. Quantifiable advantage
  25. 25. What’s your Value Scorecard?
  26. 26. Stage your Business for Sale  Know your value  Think like a Buyer  Turn weaknesses into opportunities  No surprises at due diligence
  27. 27. For More Information Candace Enman, CA, CPA President, WelchGroup Consulting (613) 236-9191 x195
  28. 28. Tax Considerations Who is going to buy & how? Zoran Vranjkovic, CPA, CA, CFP, TEP Senior Tax Manager, Welch LLP
  29. 29. Agenda • Asset sale vs. Share sale • Corporate structures • Earnouts
  30. 30. Asset Sale • Corporate tax  Recapture  Capital gains • Personal tax on distributions • Purchase price allocation • Purchaser – step-up in tax basis • Purchaser will generally prefer asset deal • HST election
  31. 31. Share Sale • Lifetime Capital Gains Exemption ($750,000/$800,000+) • Personal tax at capital gains rates • Due diligence process • Indemnification by vendor • Vendor will generally prefer share deal
  32. 32. Share Sale – Capital Gains Exemption • $800,000 lifetime capital gains exemption  at time of sale, CCPC all or substantially all (90%) of assets used principally (50%) in an active business carried on primarily (50%) in Canada;  shares were not owned by an unrelated person in 24 months preceding sale; and  in 24 months preceding sale, CCPC with more than 50% of assets used principally (50%) in an active business carried on primarily (50%) in Canada • Potential tax savings – up to $185k - $198k per exemption • Trust planning to multiply access to CGE
  33. 33. Share Sale – Capital Gains Exemption Considerations • Timing of planning • Alternative Minimum Tax • Foreign activity/foreign subsidiaries • Non-resident purchaser • Business real estate
  34. 34. Hybrid Sale • Sale of shares by individual/trust – Capital Gains Exemption • Corporation sells assets • Consider where: •  capital gains exemptions fully use;  significant intangible assets; and/or  compromise with purchaser. Purchaser – step-up in tax basis
  35. 35. Corporate Structures CGE Questionable Family Principal Family Trust Common shares Holdco Common shares Opco •Holdco may have excessive nonbusiness assets •CGE only available to individuals (sale must be by trust or individuals)
  36. 36. Corporate Structures Multiple CGE’s Principal Family Common shares Family Trust •Trust may sell Opco shares •Principal and family may access CGE •Surplus funds may accumulate in Holdco Common shares Opco Holdco
  37. 37. Corporate Structures Foreign Activity Principal Family Common shares •Canadian Opco may qualify for CGE (business primarily in Canada) •Foreign Opco may be sold at same time – capital gain Family Trust Common shares Foreign Opco Holdco Common shares Canadian Opco
  38. 38. Corporate Structures Business Real Estate Principal Family Common shares •Allows for sale of Opco and retention of real estate •May sell Opco and Realtyco •Sale of Realtyco may qualify for CGE Family Trust Common shares Realtyco Holdco Common shares Opco
  39. 39. Earnouts • Option #1 – Include value of earnout in proceeds at time of sale  Cashflow issue  Risk if not received after more than 3 years • Option #2 – Cost recovery method      • Arm’s length capital transaction Due to difficulty in valuing goodwill No longer than five years Notify CRA Vendor is Canadian resident Goodwill – earnout component fully taxed
  40. 40. For More Information Candace Enman President, WelchGroup Consulting (613) 236-9191 x195 Zoran Vranjkovic Senior Tax Manager, Welch LLP (613) 236-9191 x282
  41. 41. Family Trusts and other Legal Structures / Considerations Anthony P. McGlynn Perley-Robertson, Hill & McDougall LLP/s.r.l. Welch LLP, 151 Slater Street, Suite 1100, Ottawa Thursday, November 14, 2013, 2:00 p.m. – 3:00 p.m. (Networking 1:30 p.m. – 2:00 p.m.
  42. 42. Business Structures • • • • Corporations Partnerships Limited Partnerships Sole Proprietorships
  43. 43. Family Trusts • • • • Shareholder of a corporate structured business Income Splitting Maintaining control Capital gains tax issues
  44. 44. QUESTIONS