You are now so busy with your business that you probably have had no time to think of the future. Every minute counts in the day-to-day management of your business but it is important to stop now and consider what would happen if a stranger came to see you one day with an offer to buy your business which you could not refuse. Alternatively, let us suppose that you have a seriously debilitating accident, which disables you to the extent that you cannot continue, or, worse than that, you die from the effects of the accident.
The time to consider these issues is when your business is "up and growing". Having a business plan includes having a selling plan for your business in good times and in bad. Setting up an estate freeze may help you in either instance. In the normal estate freeze if you are the owner of the company you will receive preference shares in return for the shares that you already hold in the business. The preference shares will be valued based upon the assets that are already in the business and this will fix or "freeze" the fair market value of the shares at this level. These shares usually have the voting rights to continue to allow you to assert control of your business. A second class of shares is created for your children and these are usually common shares which will have a nominal value at the time that they are created but which will grow in value with the expansion of the business. These shares can be held by other family members with each having the shares held in a separate trust or holding company. Thus, if somebody wants to buy your business you have already put in place a plan which limits your capital gain and passes on the tax burden of the ongoing expansion of your business to other members of your family who may be in a lower marginal tax bracket. It also places assets in the hands of your heirs which do not have to pass through your estate. If you die, then the same principles will apply to the deemed disposition of your assets on death as required by the Income Tax Act.
Your life insurance requirements should be reviewed at all times to ensure that your business succession plan is properly funded if your heirs are intended to carry on after you and the same applies to partners in your business. You need to look at this issue while your business is "up and growing" because buying life insurance at an affordable premium means buying it while you are younger and while your health is good. You may get to an age where you no longer are insurable. It is way too late to contact your insurance broker after you experience your first chest pains. You also need to consider disability insurance to protect you if you cannot continue in your present position because of ill health.
The time to look at these needs is when you can take advantage of them at the lowest cost and highest availability. If you do not do so, you will place your successors in a financial hardship situation, which they may not be willing or able to assume, thus forcing the unwanted and premature sale of your business.
(Originally published in the EntrepreNews Newsletter – January 2005)
