Passing Down Your Family Business
Passing a business down the family tree is often difficult, especially with a business owned and operated by a company. Two out of three family businesses don’t survive the transition from the first generation to the next; only one in 10 makes it to the third generation.
But with proper succession planning, you can pass on ownership and management of your carefully built business to younger family members – without conflict and with minimal tax consequences.
Consider which of your offspring are best able to take over the business. Who wants to take on this challenge? Who has the vision to grow the business and the smarts to keep it profitable? Equal ownership isn’t always best. You’re better off to transfer ownership and management to those family members most capable and interested in making the business succeed, than to transfer equal ownership to all family members and risk having the business fail because of family squabbles.
Understand also that just because you’re a successful first-generation owner/manager doesn’t mean your children will be. You may need to separate the roles of owner and manager and recruit outside help to manage the business.
There are basically three ways to transfer a company-owned family business during your lifetime:
- through a sale,
- through a gift of shares
- through an estate freeze
If selling the business, the sale must be at fair market value. But to reduce the cash payable, the purchasing family member can (in addition to making a small down payment) sign a promissory note for the balance of the purchase price, which you can forgive in your will.
If giving away company shares, you can keep non-participating but voting shares so you don’t lose control over the company until you’re ready to pass on the torch.
The third method – an estate freeze – is like the gifting of shares but more sophisticated. It’s often the cornerstone of successful family business succession planning. A legal tool for minimizing the capital gains tax due after your death, it freezes an asset’s value and passes on future growth or profit to the next generation.
A shareholders’ agreement between shareholders can be particularly helpful in ensuring the smooth transfer of control to the next generation. Clauses may include the right of the company to buy back your shares on your retirement or death (so surviving shareholders’ interests are preserved), options to buy or sell the shares of those family members not active in the business (so only those involved are entitled to control the business), and a right of first refusal requiring each shareholder to offer their shares to other shareholders before selling to an outside person (to keep control of the business within the family).
Gracefully letting go of the business you’ve painstakingly built is challenging. But taking appropriate steps to ensure its survival can be your ultimate legacy. Income tax implications arise on the transfer of any business – so get accounting and tax advice plus legal advice from your lawyer on any business transfer plan.
Peak Law Group has decades of experience helping businesses of every size. We're in the business of helping you achieve your goals. Please give us a call at 604-465-9993, or email us at info@peaklaw.ca, to schedule a free initial consultation.