Succession planning - Tax but so much more

Eben Louw, Randall Hay, Reg Ens

October 15, 2008

Succession planning - The Business

Eben Louw

October 15, 2008

Chartered Accountants and Business Advisors

mnp.ca

Background

• Baby boomers retiring• Largest transfer of wealth in history• 1st to 2nd to 3rd generation – declining success• Significant part of retirement capital – sometimes

all of it• Generational differences

Chartered Accountants and Business Advisors

mnp.ca

…But how are we helping our clients navigate

We’ve all seen this…

Overlap, Confusion &

Conflict

Chartered Accountants and Business Advisors

mnp.ca

What is Succession Planning?

Succession is: Succession is not:• A process

• About family, people and relationships

• About ownership and management

• About what is fair

• Driven by the family values, wants and concerns

• An event

• One person’s problem

• About minimizing taxes

• About equality

• Driven by technical issues that are handled by lawyers and accountants

Chartered Accountants and Business Advisors

mnp.ca

Misconceptions

1. Succession planning means estate planning.

2. Professional advisors deal effectively with all family issues.

3. Families can complete their own succession plans without any professional assistance.

4. Expensive consulting teams must be created to deal effectively with family succession.

Chartered Accountants and Business Advisors

mnp.ca

The Process

• I need to get out of my business• Do I sell? Who to?

– Third party– Family– Management

• Or do I keep the business?– For my family– For myself

Chartered Accountants and Business Advisors

mnp.ca

The Process (cont.)

• What is it worth?• Who will buy it?• How will they pay?• Business plans and planning for

the business• Ongoing process and monitoring• Closure – moving on

Chartered Accountants and Business Advisors

mnp.ca

Timing

• The sooner the better• Industry cycles• Quick market analysis• Family inputs and delays• Most important – START!• Get right team together at outset

Chartered Accountants and Business Advisors

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Unlocking the value

• Strategic planning – build on strengths• Business plans – roadmaps• Performance measures• Formalize procedures (SOP’s)• Lock in key employees• Upgrade financial statements if required• Transfer of key relationships• Real estate – who keeps it?

Chartered Accountants and Business Advisors

mnp.ca

Chartered Accountants and Business Advisors

mnp.ca

Succession planning - The People

Reg Ens

October 15, 2008

Chartered Accountants and Business Advisors

mnp.ca

Special Challenges of Family Firms

Finding capital for growth

without diluting family

equity

Conflict between family’s vs.

business’ need for cash

Inability of next generation to pay taxes upon death

Inability of family CEO to

“let go” in time

Inability to attract and retain competent and

motivated family successors

Sibling rivalries, non-acceptance of

chosen successor

Inability to attract and

retain senior non-family

professional managers

Lack of ability to create

appropriate cultural

congruity

Chartered Accountants and Business Advisors

mnp.ca

Common Battlegrounds

Who gets what percentage of ownership, of voting shares?

How do I sell / buy shares and at what price?

Who represents the family as owners in the company?

What are his/her/their responsibilities and rights?

What are the ground rules for election to/tenure on the board?

Who gets to work in the business? who is family?

How are career decisions made for family members in the business?

Who decides how much people are paid?

Chartered Accountants and Business Advisors

mnp.ca

Let’s be clear on the players

Founder feels immortal

Spouse caught in the middle

Inheritors & In-laws parasites

Manager only one really contributing

Advisors predators

Chartered Accountants and Business Advisors

mnp.ca

Understanding – Selves and others

DIRECTS TOO MUCH

TALKSTOO MUCH

QUESTIONSTOO MUCH

AGREESTOO MUCH

Copyright © 1998. Target Training International, Ltd.

Chartered Accountants and Business Advisors

mnp.ca

Family Statements

Religious or cultural values

Relating to other family members

Relating to the outside world

Family personnel policies

Dividend policy

Board of Directors

Structure of the company

Business philosophy and objectives

Family Issues Family/Business Issues

Chartered Accountants and Business Advisors

mnp.ca

Governance in a Business Family

Policies

Procedures

Systems

Structures

Relationships

“The Process is more important than the end

Product”

That help the family realize their plans and objectives

Chartered Accountants and Business Advisors

mnp.ca

Ownership Stages of a Family Business

Owner-Manager

Sibling Partnership

Cousin Consortium

Chartered Accountants and Business Advisors

mnp.ca

Effective Family Governance

Maximize consensus around protocols

Encourage “fair process” – valuing consistency

Build clear supervisory system for each body

Have a process to make revisions

Maximize openness of communication.

Provide for appropriate and timely communication between the family, directors and management

Create a process to allow question workings of any body

Clarify objectives, process, authority, responsibilities

Avoid overlap between structures but encourage discussion

Be prepared to revise any mandate and have process for doing so

Use non-family advisors to increase effectiveness and efficiency of family governance bodies

Search for opportunities to learn from other families.

Adapted from - A.G. Lank & J.L. Ward, 2000

Chartered Accountants and Business Advisors

mnp.ca

“Henry the Horrible”

Succession planning - Tax considerations

Randall Hay

October 15, 2008

Chartered Accountants and Business Advisors

mnp.ca

Issues To Be Aware Of

Tax Specialists like to think it is all tax driven….

but it is not…

Chartered Accountants and Business Advisors

mnp.ca

Estate Planning Issues To Be Aware Of

1. Will

- Last time updated?

Result – All children – active and non-active – inherit all and business/farm no longer remains in family.

2. Irreversible Freeze Too Early

Result – “Windfall” appreciation quota - and split in the family.

Chartered Accountants and Business Advisors

mnp.ca

3. No Ongoing Purification – Small Business Corp/Family Farm Corp– 10% threshold non-qualifying passive investment

type assets exceeded.– Lose access to $750,000 Capital Gains

Exemption– Lose access to tax-free intergenerational transfer

family farm corporation.

Result: Dust off insurance policy.

Estate Planning Issues To Be Aware Of

Chartered Accountants and Business Advisors

mnp.ca

Estate Planning Issues To Be Aware Of

4. Breaking Up Is Hard To Do When Parents Gone

Parents Alive – relatively easy to carve off company assets into several companies with no immediate tax consequences.

Parents Not Alive – into much more restrictive “butterfly” rules.

Chartered Accountants and Business Advisors

mnp.ca

Estate Planning Issues To Be Aware Of

5. Loss of Grandfathered Insurance – Pre April 22, 1995.– Larger tax cost upon forming Alter Ego Trust/Joint

Partner Trust.

Result: Dust off insurance policy.

Chartered Accountants and Business Advisors

mnp.ca

6. Acquisition Control from Parents as a Consequence of Death– Special provision that allows “bump” to underly

non-depreciable capital assets (i.e. land).

Estate Planning Issues To Be Aware Of

Chartered Accountants and Business Advisors

mnp.ca

What to do??

DO NOT HESITATE TO

CONTACT A

SPECIALIST

Chartered Accountants and Business Advisors

mnp.ca

Wrap up