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CONVERTING YOUR BUSINESS INTO A SOURCE OF RETIREMENT INCOME

6/2/2014

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Your business is a part of your legacy and a part of you. It’s very likely your business is the most valuable asset you own. There’s also a good chance you’ll want to pass it on to one or more members of your family. Succession planning, however, raises a number of difficult questions. What will become of your business when you retire and how does your business fit into your retirement plan? Even if you think you’re years away from slowing down, the need to address these questions is a pressing one – you need to put an exit strategy in place today.

Perhaps you intend to pass your business on or maybe you’d be content to sell to the highest bidder? If you’re not a sole proprietor, perhaps you’d like your interest to be bought by co-owner(s), partner(s), other shareholder(s) or certain key employees and use the sale proceeds to fund your retirement or create an estate?

There are countless factors to consider as you develop a strategy to leave your business and it’s essential you have a plan to convert the value of your business to cash when the time comes. There are a few basic ways of doing that.

Selling the business as a going concern to an outsider
While finding a potential buyer for a successful business is seldom difficult, finding the right buyer – that is, someone who either has enough cash or access to financing to be able to afford the purchase – is often more difficult.

Selling a business is not straight forward. It’s critical you work with experienced, professional advisors to weigh the myriad of tax, legal and accounting considerations.

Eventually you’ll have to address a number of questions;

- If your business is incorporated, will you sell your shares or the assets?

- Can you use your capital gains exemption?

- Will you have to remove non-active investments from your business in order to qualify for the capital gains exemption?

- Will you have to extract operating assets such as accounts receivable to reduce the purchase price?

- Are you willing to accept a promissory note or mortgage to finance the sale?

- What is your business actually worth?

Passing on your business
You may have relatives, co-owners or key employees who want to take over when you’re ready to retire. Facilitating this kind of transfer can be the most satisfying option, but it can also be the most complicated, particularly if other family members are excluded from the process. You’ll need to establish a value for your business and develop the confidence your successor(s) will be successful without you. This may require involving these individuals in ownership concerns sooner rather than later.

No matter how you choose to dispose of your business, it’s critical you make provisions for its disposition in your will. This is especially important if you plan on passing the business on to a family member. You’ll need to clearly delineate the means by which they will acquire the business. Will they purchase your share in it, with the proceeds going to your estate? Will they inherit ownership or a share in the business?

And what about other members of your family? Have you ensured the distribution of your estate is equitable? To avoid disputes, you’ll want to ensure everyone – including those who won’t be brought into the business – is taken care of in some way.

Managing the proceeds of your sale
Should you sell your business, you’ll likely find yourself with a large sum of money in hand. The question is, how can those proceeds be invested to balance the need to minimize future tax concerns and still deliver respectable returns? We can help you construct a properly diversified portfolio with the proceeds based on your objectives and tolerance for risk.

VR Business Brokers would like to thank Joel Bray CFP for his contribution as a Guest Blogger on our site. Joel is a financial planner and Division Director with Investors Group in Calgary, Alberta, where he has been named Financial Planner of the Year for 2011, 2012 and 2013 for the Calgary Centre Region. Joel can be reached at Joel.Bray@investorsgroup.com or (403) 229-0555.


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3 KEY QUESTIONS FOR EXIT PLANNING

5/13/2014

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By Ryan Jorden

It takes an incredible amount of time and energy to deal with the never ending challenges of running a successful small business. As a result, it's fairly common to lose sight of the fact that there will come a day when it's time to move on. This often ends up with the business run in a way that's effective for the day to day operation, but not geared towards optimizing value in a sale. There are often many changes required to prepare it for a successful transition, so the time to start exit planning is now.

These key questions need to be addressed today for an orderly transition in the future. Financial professionals in particular can perform a great service for their business owner clients by helping them clarify their retirement goals and how the future sale of their business fits into these plans.


1. WHEN DO YOU WANT TO RETIRE?

When are you planning on selling your business? If you aren't actively thinking about this question at the moment, chances are your answer is, "When the right price comes along," or "In a few years." Even the best laid plans can't foresee the curveballs life throws our way via illness, injury, a change in market conditions or even death. In addition to the extensive personal financial planning necessary in advance of the sale, you may have significant changes that need to occur within your business to attract a serious buyer and maximize your value. Common issues we encounter are inventory management concerns, missing or outdated systems & processes, or the lack of key staff in place that can assist the new owner after your departure. These are all matters that can be fixed, however they can take a varying degree of time to address and correct. 
 

2. DO YOU HAVE A SUCCESSION PLAN?

What is your plan to move the money from your corporation to your personal bank account or investment portfolio? Do you have a financial planner and tax attorney working within your trusted circle of advisors to assist you in keeping more money in your pocket after the sale? Do you have unneeded items within your corporation such as real estate, personal investments or shareholder loans that require your attention? If you want to create a wealth preservation vehicle such as a family trust, this may take you up to two years of planning before you'll even be able to entertain the thought of selling your business. Are you going to sell to family, a trusted employee, a competitor or a budding entrepreneur? Your plan needs to reflect the choice of who you disperse your business to.

 

3. DO YOU KNOW WHAT YOUR BUSINESS IS WORTH?

We rarely meet a business owner that has a concrete answer to this question. The truth is that the market will ultimately decide and the value is largely governed by cash flow. An ill-informed expectation of value will waste time and cause frustration as you watch buyer after buyer move on to more reasonable options. Getting a certified business valuation completed now will help you gauge where things are at so you can be advised on how to get to where you need to be. You'll learn what your business is doing well and which areas have opportunities for improvement. A certified valuation will help your broker in establishing and justifying the value of your business to a buyer, their accountant and the bank. This will allow you to maximize the value present and minimize the time and stress required to sell.

Regardless of what you've envisioned for succession timing, it's never too early to start planning the successful exit from your business. It's a complex process completed in simple steps by experienced professionals working together to help you accomplish your goals. Let's get started!




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Ryan Jorden is the Managing Partner with VR Business Brokers in Calgary, Alberta, where he specializes in valuating and facilitating the sale of privately held businesses. You can reach him confidentially at ryan@vralta.com or visit our website to learn more. We can also connect on Twitter and Google+.
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THE "KIDDIE TAX" HAS A GROWTH SPURT

3/25/2014

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In what was considered in many ways an economically quiet budget, on February 11th, 2014 the Federal government proposed little more than targeted changes to existing programs and policies. This included an expansion of the “kiddie tax”, or taxation at the top marginal rate, of income allocated to minor children through corporate structures to also include partnership and trust income generated by third parties, where the rules only applied to non-arm’s length relationships previously. This was a further extension of the “kiddie tax” rules introduced in 2000 and expanded since to prevent the use of arrangements for splitting income with minor children.

The popular method of legal income splitting entailed issuing a specific class of shares of a private corporation directly to children or to a family trust of which the children are named beneficiaries. The company would then declare dividends on these shares to take advantage of each child’s basic personal tax credits and the dividend tax credit, resulting in the children paying little to no tax on the income.

The “kiddie tax” eliminated the use of personal tax credits and taxed the income at the top marginal tax rate; the dividend credits and foreign tax credits remained available for reducing the tax payable by the child. This tax was initially on taxable dividends and shareholder benefits received from a private corporation, and income from a partnership or trust whose income is derived from business carried on by a relative or non-arm’s length person. The Income Tax Act holds parents jointly and severally liable for their child’s “kiddie taxes”, giving the Canada Revenue Agency more power to collect on tax debts owed by the children.

As tax strategies shifted to adjust to these rules the “kiddie tax” was extended in response. In 2011 the tax was expanded to include capital gains on the sale of private corporation shares to a non-arm’s length person. These gains are now treated like a dividend on the child’s return for tax purposes, but without the benefit of a dividend refund for the corporation.

The 2014 budget further expanded the reach of the “kiddie tax” to include income derived from trusts and partnerships where the income comes from third parties, citing the example of a partnership’s adult partner providing services to a third party and then allocating a disproportionate amount of partnership income to a minor partner. The rule also includes third party rental income generated by the partnership or trust.

For the time being, these tax rules will not apply to capital gains realized by minor children from sale of publically traded stocks, or gains realized from the sale of private corporation shares to an arm’s length person. Paying a market rate wage to a child that works in your family business remains an option as well. The government will continue to monitor the effectiveness of the “kiddie tax” rule as a method to minimize income splitting, and can be expected to continue proposing rule changes as necessary where avoidance of the tax is found.

The use of corporations, trusts and partnerships remains valid for purposes outside of tax minimization. These structures may still provide protection of assets from creditors and division under matrimonial property rules. Use of corporations to create an estate freeze remains a viable way to shift the tax on future appreciation of corporate assets into the hands of children. Flexibility of dividend distributions among varying classes of shares is also a valuable benefit of corporations. Trusts permit control of how assets are managed and distributed, bypass the risk of court challenge to your Will, the cost of probate, and the public disclosure of assets due to probate being a public court record.

These structures should not be entirely discounted due to recent changes, but should be examined within the context of your personal financial plan and your estate plan. Regular review and update of your personal plans with an eye to changes in legislation and its interpretation by the courts is a key benefit of a wealth management engagement with a certified tax planning professional. We welcome the opportunity to meet with you and discuss whether a comprehensive examination of your personal circumstances and existing arrangements is warranted.

VR Business Brokers will like to thank Nicholas J. Miazek CFP for his contribution as a Guest Blogger on our site. Nick is a Vice President and Financial Planner with Fiera Capital Private Wealth in Calgary, Alberta, where he provides customized wealth management solutions and implementation services. Nicholas can be reached at nmiazek@fieracapital.com or (403) 699-9000.



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The Onset of the sell curve

12/30/2013

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Are we on the onset of the sell curve of small businesses in Alberta?  

At some point, business owners will be either selling, giving or closing down their business. And many entrepreneurs looking to increase the value of their business or increase growth in their business or find synergies will be looking to acquire a company.  So how is the current market situation for buyers and sellers today? 

1) One common theme we are seeing is more and more larger businesses and Private Equity groups looking to acquire small businesses worth $3 million or less. This has not been the case in the past where most Private Equity groups or public companies only looks at deal of $5 million in revenues and up. Most buyers today realize that there are good businesses with long track records available in the small deal sizes as well. Plus there are lots of opportunities for this larger businesses to step in and implement some of their systems and processes to further increase efficiencies and profitability. 

2) There are more sellers today trying to sell their business than there are qualified buyers available. VR offices in Alberta, receive about 130 - 150 buyer inquiries a month on the businesses available for sale, but only a fraction of these buyers are deemed qualified or serious. Buyers today need to be educated on the process of buying a business. Individual buyers have no clue what to look at and their advisors - accountants and bankers - does not have sufficient information and knowledge on valuing a small business. You cannot value a small business the same way you value a publicly traded company.

3) The time it takes to close a deal is taking much longer than before. Buyers today are exposed to lots of information and they take their time to complete their due diligence process. The business that is better prepared and uses a Certified Business Intermediary (CBI) to assist with the sale of their business typically enjoy much success since CBI's are well prepared and follows a detailed process of completing a transaction.


So the better prepared a seller is in preparing his or her business for sale the better the chances of closing the transaction smoothly.  It is more crucial than ever for business owners to plan ahead to maximize the value of their company.


For more additional information on how to prepare your business for sale, read our post on Identifying the Value in Your Business. 

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Do You Have an Exit Strategy?

6/19/2013

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Identifying the right time to exit your business is an important landmark in any entrepreneur’s life. Unfortunately, what many don’t realize is the importance of planning their exist strategy and end up paying for it significantly. Some important aspects of understanding when to exit a business include:
·         Identifying the best time to realize your business’s value
·         How your business is changing
·         Whether you have outgrown your business

The Right Timing:
The most common form of exit strategy is selling the business to a new owner. Important factors to consider when deciding to sell include the state of the economy, particularly the sector your business is operating in, and the health of the business itself. Both of these factors can be addressed by being aware of changes that is happening in your industry and proper planning. 

By being informed you will be able to identify the right opportunities for your business, and it will allow you to plan accordingly. What many business owners don’t realize is that selling a business takes time, and trying to sell at last minute might have a tremendous impact on the price of your business.  Start planning early and look to sell when your business is healthy and performing optimally – this will ensure
 maximum returns for your business. If you try to sell your business during slower periods, you may have a challenge in getting the highest price for it. 

Adapting to Change:
The face of business is always changing and depending on the industry, your company will likely not be immune to this. Unfortunately many business owners do not realize or do not accept this reality and fail to adapt – to their great detriment. 

If you are unable to face these changes it may be time to consider passing the torch before your business gets crushed, and all the hard work you’ve put into it fails to pay off. Recognize the signs telling you it’s time to exit your business. 

Outgrowing Your Business:
After a while, some business owners may lose the motivation they once had to see their business thrive. If this applies to you, it’s important to identify this boredom and loss of enthusiasm before this begins affecting your performance and ultimately the value of your business. 

Identify whether this is still the right business for you, or whether you are still the right person for this business, and take action. The solution to this issue may be change – for you to move on from the business, and for someone else to take over the business from you. Planning ahead for this will allow you to make the right choices for the future of both you and your business.


Written by Alexandra Ciungan.
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