A successful owner-managed business will often go through a lifecycle of creation, growth, asset organization, restructuring for efficiency and sale to a third party or transfer to the following generation. While successful entrepreneurs diligently plan and make proactive decisions to start and develop their own business, many become indecisive and neglectful when it comes to implementing a workable succession plan that meets the needs of stakeholders.

Business succession planning is not an easy task for owner-managers to address, not only because the business often represents a significant part of their assets, but also because of the emotional attachment as many spend a lifetime investing time and energy in creating and growing their business. A comprehensive succession plan will help preserve the value of the business and ensure a smooth transition to the new owners. Statistically, only 33% of businesses are successfully transferred from the first to the second generation and only between 10% to 19% survive the transition from the second to the third generation, so the importance of succession planning cannot be underestimated.

Involvement Required

Establishing a well-defined succession plan requires a great deal of time, commitment and energy. It involves a multi-step process requiring the participation of different stakeholders such as the shareholders, family members, key employees and professional advisors (lawyers, banker, broker, accountant, etc.) to identify all the potential succession, financing, estate and tax planning issues facing the owners and their business. Succession planning also addresses critical issues such as the future management of the business, retirement planning, potential family conflicts and options for exit strategies. It may take up to two years to prepare and implement a comprehensive succession plan for a small or medium-sized business. No matter the size of the business, the ultimate goal is to provide for a smooth transition of the business to the new owners while ensuring that the former shareholders maximize their return when they decide to retire.

There are a number of options available, including the transfer of the business; liquidation; or sale to a third party. This article will focus on the transfer or succession of the business to family members.

When transferring the business to his/her children, the founder of a business may feel that some or all of the children do not possess the qualities to run the business and he/she may, in that case, consider selling to an unrelated third party as the only viable option to achieve a successful exit strategy. Alternatively, he/she may want to involve only one or some of the children in the business. Conversely, some children may want to be involved in running the business while others may have no interest. It is also important to consult key employees and gain their support since employees may not endorse the transfer to a new generation given their loyalty to the original owner.

On the tax front, the enhanced capital gains exemption of $750,000 is the most advantageous tax benefit for shareholders of owner-managed corporations. The shares of a corporation must be a “Qualified Small Business Corporation” as defined under the Income Tax Act in order for the capital gain to be eligible for the exemption.

It is possible to “purify” a corporation and separate the eligible assets from the ineligible ones thereby ensuring the shares of a corporation will qualify for the enhanced capital gain exemption. One of the most efficient options to transfer a business to the next generation is the estate freeze. This enables the original owner of a business to keep the actual value of the corporation for his/her own benefit while transferring the future growth in value of the business among some or all of his/her children. A family trust and holding corporations will usually be added to the corporate structure to facilitate the implementation of the estate freeze and will provide substantial tax benefits to the shareholders of the business.

There are may advantages to proceeding with an estate freeze for the original owner. First, the owner will know how much income tax he/she will have to pay upon death and may adequately provide for its payment by purchasing sufficient life insurance or ensuring that sufficient funds are available from other sources. Secondly, it minimizes the potential tax liability of the original owner by implementing tax splitting strategies and ensuring that he/she qualifies for the enhanced capital gains exemption of $750,000. Thirdly, the original owner can keep control of the business while progressively introducing the new generation to the business to ensure a smooth transition, typically, through the issue of voting control shares.

Succession planning would not be complete without proper estate planning. Wills and powers of attorney should be prepared as part of succession planning to implement the wishes of the original owner upon death or disability. When two or more shareholders own shares of the business, a unanimous shareholders’ agreement should also be executed by all of the shareholders of the corporate group to establish the rights of the shareholders and directors of the corporation, as well as, exit strategies in case of shareholder disputes, or the retirement, death or disability of a shareholder. An insurance advisor can provide counsel on proper use of life and disability insurance to minimize the impact of a share repurchase by the corporation upon the death or disability of a shareholder. Financial planning with an investment or financial advisor should also be part of a comprehensive succession plan to ensure that the business owner has sufficient funds to retire comfortably after the sale or transfer of the business.


Although succession planning for owner-managed business does involve some costs and takes time to implement, it should be a priority for all owner-managers to protect the significant investment they have made in their business and to provide for an effective exit strategy. Failure to implement a sound succession plan while still active in the business will inevitably affect the business and may cause its downfall in some cases. It is always easier to implement a succession plan years before considering retirement. A proactive and thoughtful approach, with the help of a team of qualified advisors, will considerably reduce the stress and heartache of business success planning and ensure a smooth transition for all stakeholders involved.