You’ve spent years building your business. Now you need a business succession plan to secure your company’s future. Kevin Quach, Business Succession Advisor, TD Wealth and Sébastien Desmarais, Tax and Estate Planner and Business Succession Advisor, TD Wealth, highlight the who, why and how when it comes to setting up a business succession plan.
*This is a French language video with English subtitles.
Print Transcript
Sébastien Desmarais:
Hello, I’m Sébastien Desmarais, tax and estate planning specialist. And I’m pleased to have with me my colleague, Kevin Quach, business succession advisor. Kevin, there's a lot of talk these days that we're in the midst of the greatest transfer of wealth in Canadian history, and perhaps even in the world. Could you perhaps enlighten us on what that means in concrete terms?
Kevin Quach:
Yes, of course. So when you look at Canada, the statistics tell us that there are over $2-trillion in commercial assets that are going to change hands in the next 10 years, with over three-quarters of entrepreneurs passing the torch. In Quebec, we’re looking at more than 34,000 Quebec entrepreneurs who are already in the process of transferring their businesses. But, Sébastien, what’s more worrisome in the statistics is that only one in ten entrepreneurs has a formal written succession plan.
I think that in practice, entrepreneurs often underestimate the time it can take to prepare for a business transfer, whereas in reality, we see that, sometimes, it can take even more than five years. So, I think it’s likely that many entrepreneurs will end up in stressful and even costly situations, due to a lack of planning. So, the objective today, I think, will be to clarify the objectives and importance of a succession plan. Sébastien, could you speak to us briefly about this?
Sébastien Desmarais:
Yes. So, for entrepreneurs, when we talk about a succession plan, we’re looking first at a transition in the management of the company and possibly also a transition in the company’s assets. The two essentially go hand in hand. And then we’ll look at implementing a transition plan with timelines, so that we have a good idea of when the transfer could take place. You also need to know ... Who are the parties involved? Are we talking about the next generation? Are we talking about selling a company to a third party or perhaps even to the employees?
But we shouldn’t minimize the importance of tax planning, because for entrepreneurs, minimizing taxes on the transition of their business is a key consideration. Now, let me... We’re talking about the parties involved. Could you perhaps elaborate a little on what... Who should be involved in these transactions?
Kevin Quach:
Yes, of course. So, you mentioned them, I think I’m going to focus on the three most popular options. There’s the option of selling to an existing shareholder. Or selling to family members. And finally, selling to a third party. So, for the option of selling to a current shareholder, we’ll generally recommend having a shareholder agreement in place. And if it already exists, it’s really a matter of reviewing the clauses to see the buy-sell options.
As for selling to family members, there we’re talking about an intergenerational transfer. So the next generation will take over. And generally, family harmony is a very important point for entrepreneurs.
Finally, selling to a third party. There may be several parties involved. It could be a strategic buyer, who sees an opportunity to acquire a bigger market share. We also see some opportunistic buyers. They’re going to make some unexpected offers, too good to refuse. And finally, it could be people who have been involved in the business for many years, like employees, or even a management buyout.
In all situations, I think it’s important for entrepreneurs to also involve their lender, to see the financing options of selling the business as well.
Sébastien Desmarais:
And speaking of financing, could you also elaborate a little on how we determine the price of a business?
Kevin Quach:
Yes. In fact, it’s important for entrepreneurs to know the value of their business. Whether it’s with a formal or informal valuation, the key is to stay informed. Valuing a business is both a science and an art. Basically, the more profit a company generates, the higher the value. And then there are earnings multiples that you’re going to hear about.
So, depending on certain factors in the business, there can be a direct impact on the valuation. We’re talking… We’re talking about client diversification. We’re talking about the perceived risks of the business. We’re also talking about the autonomy of the company’s operations. So these are all important factors.
And it’s important for entrepreneurs to talk to experts about the valuation methods that buyers will use when they look at their business. This way they can prepare ahead of time and even maximize the exit value.
Sébastien, speaking of preparing to sell a company, could you give us some concrete examples of what an entrepreneur should do to prepare?
Sébastien Desmarais:
For me, any preparation for the eventual transfer of a business should include looking at the company documents and, above all, ensuring that they’re updated. I’m referring to the company’s minute book, ensuring that all the information is up to date, and also accurate. The company’s financial statements, for example, should be confirmed and possibly certified. And most importantly, make sure your tax account with the Canada Revenue Agency and Revenu Québec, and also the GST account, the QST account, are up to date and that there’s no tax amount owing. Otherwise, it can really be problematic.
So, to facilitate a transition, having up-to-date and accurate documents can make a big difference for entrepreneurs.
Kevin Quach:
Definitely. Thank you, Sébastien. I think we covered a number of things today that point up the importance of a succession plan. I think it’s never too late to start. The important thing is really to talk to a specialist and prepare accordingly.
Sébastien Desmarais:
Thank you.
Hello, I’m Sébastien Desmarais, tax and estate planning specialist. And I’m pleased to have with me my colleague, Kevin Quach, business succession advisor. Kevin, there's a lot of talk these days that we're in the midst of the greatest transfer of wealth in Canadian history, and perhaps even in the world. Could you perhaps enlighten us on what that means in concrete terms?
Kevin Quach:
Yes, of course. So when you look at Canada, the statistics tell us that there are over $2-trillion in commercial assets that are going to change hands in the next 10 years, with over three-quarters of entrepreneurs passing the torch. In Quebec, we’re looking at more than 34,000 Quebec entrepreneurs who are already in the process of transferring their businesses. But, Sébastien, what’s more worrisome in the statistics is that only one in ten entrepreneurs has a formal written succession plan.
I think that in practice, entrepreneurs often underestimate the time it can take to prepare for a business transfer, whereas in reality, we see that, sometimes, it can take even more than five years. So, I think it’s likely that many entrepreneurs will end up in stressful and even costly situations, due to a lack of planning. So, the objective today, I think, will be to clarify the objectives and importance of a succession plan. Sébastien, could you speak to us briefly about this?
Sébastien Desmarais:
Yes. So, for entrepreneurs, when we talk about a succession plan, we’re looking first at a transition in the management of the company and possibly also a transition in the company’s assets. The two essentially go hand in hand. And then we’ll look at implementing a transition plan with timelines, so that we have a good idea of when the transfer could take place. You also need to know ... Who are the parties involved? Are we talking about the next generation? Are we talking about selling a company to a third party or perhaps even to the employees?
But we shouldn’t minimize the importance of tax planning, because for entrepreneurs, minimizing taxes on the transition of their business is a key consideration. Now, let me... We’re talking about the parties involved. Could you perhaps elaborate a little on what... Who should be involved in these transactions?
Kevin Quach:
Yes, of course. So, you mentioned them, I think I’m going to focus on the three most popular options. There’s the option of selling to an existing shareholder. Or selling to family members. And finally, selling to a third party. So, for the option of selling to a current shareholder, we’ll generally recommend having a shareholder agreement in place. And if it already exists, it’s really a matter of reviewing the clauses to see the buy-sell options.
As for selling to family members, there we’re talking about an intergenerational transfer. So the next generation will take over. And generally, family harmony is a very important point for entrepreneurs.
Finally, selling to a third party. There may be several parties involved. It could be a strategic buyer, who sees an opportunity to acquire a bigger market share. We also see some opportunistic buyers. They’re going to make some unexpected offers, too good to refuse. And finally, it could be people who have been involved in the business for many years, like employees, or even a management buyout.
In all situations, I think it’s important for entrepreneurs to also involve their lender, to see the financing options of selling the business as well.
Sébastien Desmarais:
And speaking of financing, could you also elaborate a little on how we determine the price of a business?
Kevin Quach:
Yes. In fact, it’s important for entrepreneurs to know the value of their business. Whether it’s with a formal or informal valuation, the key is to stay informed. Valuing a business is both a science and an art. Basically, the more profit a company generates, the higher the value. And then there are earnings multiples that you’re going to hear about.
So, depending on certain factors in the business, there can be a direct impact on the valuation. We’re talking… We’re talking about client diversification. We’re talking about the perceived risks of the business. We’re also talking about the autonomy of the company’s operations. So these are all important factors.
And it’s important for entrepreneurs to talk to experts about the valuation methods that buyers will use when they look at their business. This way they can prepare ahead of time and even maximize the exit value.
Sébastien, speaking of preparing to sell a company, could you give us some concrete examples of what an entrepreneur should do to prepare?
Sébastien Desmarais:
For me, any preparation for the eventual transfer of a business should include looking at the company documents and, above all, ensuring that they’re updated. I’m referring to the company’s minute book, ensuring that all the information is up to date, and also accurate. The company’s financial statements, for example, should be confirmed and possibly certified. And most importantly, make sure your tax account with the Canada Revenue Agency and Revenu Québec, and also the GST account, the QST account, are up to date and that there’s no tax amount owing. Otherwise, it can really be problematic.
So, to facilitate a transition, having up-to-date and accurate documents can make a big difference for entrepreneurs.
Kevin Quach:
Definitely. Thank you, Sébastien. I think we covered a number of things today that point up the importance of a succession plan. I think it’s never too late to start. The important thing is really to talk to a specialist and prepare accordingly.
Sébastien Desmarais:
Thank you.