Financial Safety Net:
How to protect your future
Geoff Garland, Tax Partner
On a building site, you focus on workplace safety, handling materials, and a myriad of issues that can affect everyone’s wellbeing. But how often do businesses actually evaluate their financial safety net?
If you operate your own business, you are likely counting on its value to serve as the foundation for your retirement or other future plans. Optimizing that value can take several years to plan, implement and reap the rewards from – which is why you should set up your financial safety net now.
Even if you’re not ready to retire or sell your business for many years, a safety net can help you finalize goals and provide direction on how to build and protect your company’s value. Options range from reducing the amount of time you spend working to maximizing sale revenues, each potentially requires a different strategy and each business and family’s plan will differ. Establishing a safety net will help reduce risk and protect your financial security, as well as reassure business partners.
Start by asking yourself what your long-term personal and business financial goals are, as these are interrelated to provide a secure safety net. Next, consider the value of your business. A professional valuation will determine more than a company’s worth based on revenue and assets, it will examine the company from a buyer’s perspective. Valuators examine goodwill, capital structure, competition, industry trends, etc. Most importantly, you should receive insights regarding the strengths and weaknesses of your business. If the result is not in line with what you expect, you will have time to address any issues to ultimately increase your company’s value.
If your goal is to pass along a business legacy to your children, you will need to assess the its feasibility. Are any of your family members who work in your business interested in succeeding you? If so, do they have the necessary professional qualifications, or are they interested in securing these? Would they be capable of running the business without you? Is the business capable of running without you? Should you determine that family succession is a valid option, you will need to develop and execute a plan that defines the role of your successor(s) and establishes a training process and a timeline for the eventual transfer of responsibilities. Where you have multiple children and not all children will succeed you have you considered how you will equalize your estate between children.
If you intend to sell the business one day, you also need to consider who may purchase it: partners, employers, family members or an outside party. Each type of potential buyer requires a different strategy in order to optimize sale proceeds and tax results.
There is also the issue of whether to sell shares or assets. If your company is incorporated, you may prefer to sell shares in order to access the capital gains exemption. If a company has as its shareholders family members, each may be eligible for the $750,000 capital gains exemption. Operating as a sole proprietorship or partnership does not allow you access to the capital gains exemption when you sell your business. However, prior to a sale, you may be able to transfer your unincorporated firm into an incorporated entity in order to facilitate the selling of shares and, thereby, utilize the exemption. This planning does not allow family members to access their capital gains exemption at this time however.
In some cases, an estate freeze may be advantageous to allow future growth in the value of your business to accrue to shares owned by other family members. A discretionary family trust can provide additional flexibility by enabling you, as a retiring shareholder, to maintain control of the business while its future growth accrues to the next generation.
When it comes to external buyers though, most prefer to buy assets rather than shares in order to reduce liabilities and to generate tax write-offs. It will be important to structure and position your business to address these issues.
There are a number of other important components of a safety net that provide valuable protection the earlier they are implemented, including Individual Pension Plans (IPPs). These defined benefit registered pension plans allow you the opportunity to potentially make greater tax-deductible contributions (in your corporation) than an RRSP. Prior to retirement, you may also be able to “top it up” by depositing a lump sum to your IPP. They work particularly well for individuals who are 45 years of age or older and earn more than $100,000. You can design your retirement benefits to suit your own needs and, like RRSPs, IPPs can hold a wide range of investments.
Insurance, of course, is another important component of every safety net. When it comes to building and protecting wealth, universal life insurance policies can be an essential consideration. These flexible products allow you to make supplemental payments to increase cash value, grow tax-deferred assets and ultimately build money for the future.
Your safety net will be as individual as you and your business. The most effective safety nets are set up early and integrate financial, tax and legal considerations. Contact your accountant to help you structure one that suits your specific needs.
Geoff Garland is a Tax Partner at BDO Dunwoody LLP, with over 8 years experience as a CA, and provides tax advice to entrepreneurial-minded businesses. With experience in general practice, Geoff is knowledgeable regarding tax compliance and planning services, and works out of the Winnipeg office. Over the years, Geoff has provided a range of tax and related services to a wide range of clients in the automotive, agriculture, manufacturing and construction industries. He works with clients to spark new ideas and find innovative solutions. He can be reached at 204.926.7263 or ggarland@bdo.ca.
