Retirement planning for business owners means creating and telling a good story for the sale of their company. Transitioning into the sale of a company and into retirement also means having a great long-term plan. In this episode, Bob Gauvreau, founder, and CEO of Gauvreau Accounting Tax Law Advisory, joins us to lend us his wealth of knowledge on retirement planning for business owners.
Listen in as Bob takes us through a comprehensive look at retiring as a business owner. We discuss the importance of structuring your company to be ready for sale, demonstrating its value, maneuvering through tax structures and capital gains, sale and succession planning, and working with family.
What You’ll Learn in Today’s Episode:
- Creating a strong business structure
- Building and demonstrating the value of your business
- Structuring a business that can operate without you.
- Business succession planning
- Navigating tax structures and capital gains
- Family Trusts
- Working with family
Ideas Worth Sharing:
- “Make sure you have the right business structure that will allow you to pull funds, pull equity out of your operating company, protect it elsewhere, and then get access to your capital gains exemption. Make sure that we have all the steps in place so that when you exit, you know exactly where you stand. Let’s not wait until that point to start building our wealth plan. It needs to start now.”
- “If you’re 5 years out, start planning. If you’re 3 years out, start planning. If you’re 10 years out, start planning. The earlier we can introduce the right structure into your business, the more we’ll be able to save you.”
- “When we start getting close to our exit time, we probably want to limit those expenses, and maximize our profits so that we’re telling a really good story. One really good piece of advice is to maximize the value on your exit.”
- “Do we have a business that operates without us? Because if we’re creating a business that’s completely dependent on us, we can’t exit. And if we can’t exit, then there’s no value in the business for people to buy.”
Resources In Today’s Episode:
Gauvreau Accounting Tax Law Advisory
Contact Us – Gauvreau Accounting Tax Law Advisory
The Wealthy Entrepreneur – Bob’s book
Retirement for Business Owners with Bob Gauvreau
Planning for retirement for business owners means creating and telling a good story in anticipation of the sale of their company.
Ultimately, transitioning into the sale of a company and into retirement also means having a great long-term plan. Bob Gauvreau, founder, and CEO of Gauvreau Accounting Tax Law Advisory, takes us through a comprehensive look at retiring as a business owner. He outlines the importance of structuring your company to be ready for sale, demonstrating its value, maneuvering through tax structures and capital gains, sale and succession planning, and working with family.
Demonstrating Value in your Business
As a business owner, there are many intricacies involved in retirement. For instance, business owners have the greatest value tied up in their business. Further, there are a number of factors that go into creating greater value in order to make a more saleable business. Firstly, they need to show an income. If it isn’t a profit-generating business beyond the income being pulled out, it’s not overly saleable.
Can the Business Operate without You?
Secondly, can the business operate without the owner? If the business is completely dependent on the owner, the owner cannot exit. And if they can’t exit, then there’s no value in the business for people looking to purchase the business.
Importantly, this means starting with a wealth plan. Part of this is looking at the structure of the business because when it’s time to sell. It’s likely the owner will have to pay tax on the disposition of the company or when the owner exits the company.
A Family Trust for your Business in Anticipation of your Exit
Therefore, one way to structure your transition away from the company is a family trust. As a business owner and a shareholder of a Canadian-controlled private corporation, you have access to a capital gains exemption. Subsequently, when you sell your shares of the corporation – not your assets – you will likely qualify for a capital gains exemption of just close to $900,000. The best part about a trust, if we introduce a family trust early enough on, we can actually multiply that exemption with family members. Moreover, there are good structures that can be put in place to help with tax minimization. Certainly, if you’re within 5 years of exiting, we want to make sure it’s set up for your exit.
More on Family Trusts for your Business
A structure that can benefit a business owner is a family trust. To clarify, it’s essentially an arrangement where there are people in charge of who these beneficiaries are. They make the decisions about what happens. Your beneficiaries don’t own any of the company. If the owner were to sell, they can choose to distribute the funds to them. That’s what gets the capital gains exemption down the road.
Listen to Episode # 22 “Working with Different Types of Trusts in Estate Planning”.
Above all, if you’re 5 years out, start planning. If you’re 3 years out, start planning. If you’re 10 years out, start planning. Importantly, the earlier we can introduce the right structure into your business, the more we’ll be able to save you. Here’s a quick calculation: Let’s say we want to sell our business 10 years from now and we want to get 10 million. Right now, it’s a million-dollar business. If we introduce a family trust right now and we’ve got a million-dollar business, we can take any of the 9 million of future value when we introduce the trust. Now that future value can all go to our beneficiaries. We don’t want to wait until year 7 or 8 and the company is worth 7 million. We now have ownership of all that 7 million and we have to pay tax on that. We can’t split that income out because the trust isn’t in place. Get your plan in place even if you’re not selling your business for 30 years.
The 21-Year Rule
This rule applies to most personal trusts. It means that every 21 years the trustee has to file a return on all property held as if it’s been sold at a fair market value. This triggers capital gains which you will be taxed on.
Ultimately, it needn’t ever become an issue. Instead, it becomes future work that needs to be done. For example. at the 21-year mark, some restructuring will be required. Between now and the 21-year mark, we hope that we have millions of dollars attributed to the beneficiaries to gain access to all that gain. Right now it’s important to get that value created. Then have the flexibility to transfer it to other people outside of the owner.
Creating a Wealth Plan for your Business when you Exit
Likewise, one issue that business owners may not realize they will face is having too much cash or investments inside the company account. This might seem contradictory but what it speaks to is the necessity of structuring and planning your company. Primarily, make sure you have the right business structure in place. The structure will allow you to pull funds, pull equity out of your operating company, protect it elsewhere and get access to the capital gains exemption. Likewise, we need to make sure we have all the steps in place so that when the owner exits, they know exactly where they stand.
Moreover, the minimum to start building a wealth plan is 2 years. The reason that 2 is important is that within that 2-year period 90% of the assets inside the corporation have to be active within one year at the time of closing. Cash and investments don’t qualify for that. For instance, if we have too much non-operating capital inside the company, it disqualifies us.
Off-the-Book Income in your Business
Gauvreau Accounting Tax Law Advisory handles many mergers and acquisitions. In fact, they probably work with at least one client a month on buying a business. One common theme, especially in the small business market, is there is off-the-book income.
Importantly, for a business owner who’s selling their business, that is lost value because we can’t justify this as part of the purchase price. Our corporate tax rates in Ontario are 12% for the first $500,000. Consequently, for owners who are not showing a profit, we’re looking at paying 12% tax. If that profit shows up, for example, let’s say it’s even a hundred thousand dollars that show up in our business, the average multiple for a small business would be five times earnings. Now we’re looking at a $500,000 value of that business because those earnings show up.
Give the Full Picture
For the business owner, if we’re trying to build something that is saleable, we need to start including all that income. This means we’re giving the full picture. For example, if we look at a business and there’s $100,000 of cash jobs, but reporting zero income, the value of that business is zero. And there’s nothing that we can do to justify that $100,000 exists. Ultimately, if we can’t see it, we can’t touch it.
Finally, the lesson here is to legitimize your business.
Maximize the Value on Your Exit
Another suggestion is that business owners invest in growing their business in the last 5 years, They may be invested in certain areas of the business, the people, systems, or professional development. When you get inside your last 5 years a quick way to get your profit right in the short term is to start limiting expenses. For example, look at the dues and subscriptions you pay monthly. It’s easy to find $1000 dollars a month. Further, that’s $12,000 a year and then times that by five years. We’re now adding more value to the worth of the business. When we start getting close to our exit time, we want to limit those expenses. We’re looking to maximize our profits so that we’re telling a really good story.
Working with Family
In some instances, business owners will be transitioning the business to family. One thing we can do in succession planning is we can transition to the next generation without triggering any tax consequences. Ultimately, with the next generation, we’re building a legacy. We can transition to the next generation through corporate restructuring where we freeze the value of the company. We get the next generation to come in and subscribe for new shares. They take the future value and get paid out over time. We should be looking at our goal and what our objective is for our exit and then create the path forward.
Considerations for the Next Generation
Bob has a client who owns a family cottage. The owner’s children are successful. Both spouses have an employment income in the 50-70 range. The family household income is around $100,000.
The client purchased the cottage in 1970 for $20,000. The client is adamant that her children take over the cottage. Bob pressed her and asked her to consider the following: They paid $20,000 for the cottage which is now worth $4-5 million. The property taxes are $40,000 a year. The children are making $100,000 and they aren’t necessarily able to spend extravagantly. As a result, by asking them to take over the cottage, the client is adding $20,000 to each of them on an ongoing annual basis. There’s also maintenance. And maintenance on a $4 million cottage is not cheap. Importantly, the client was placing these expenses on their kids. Ultimately, it forces them to max out the financing on the place or sell it.
Understanding the Value of our Assets
In addition, if the client were to pass before the planning is done, the cottage is deemed disposition as it’s a second property, not a primary residence. Consequently, this makes it a taxable event. On the client’s death, the $4 million cottage that they paid nothing for becomes a million-dollar tax liability. Ultimately, where will the children get the money to pay for this cottage? The client didn’t realize they were bankrupting their children. We must understand the implications of putting the next generation in these positions. We need to understand the value of our assets.
Business Succession Planning with the Family
When a business is being passed to a family member it can be more complicated. There will need to be more discussion and family meetings that go beyond the scope of operating the business. To clarify, the key route to success is early communication about expectations in terms of defining what everybody wants and what we want the desired outcome to be. Finally, let the professionals start building the plan.
About Gauvreau Accounting Tax Law Advisory
Gauvreau Accounting Tax Law Advisor is a one-stop shop for business owners. They offer the Million Dollar Year Peak Performance Program which offers coaching to business owners.
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DISCLAIMER: Investment services are provided through Matthews and Associates Investments of Aligned Capital Partners Inc., an approved trade name of Aligned Capital Partners Inc © Podcast Abundance | podcastabundance.com (ACPI). Only investment-related products and services are offered through ACPI/Matthews and Associates Investments of ACPI and covered by the Canadian Investor Protection Fund. Tax planning, financial planning and insurance services are provided through Matthews and Associates. Matthews and Associates is an independent company separate and distinct from ACPI/ Matthews and Associates Investments of ACPI. Matthews and Associates are not licenced tax professionals, and you should consult with your tax advisor before acting on any recommendations.