During his years as an accountant working with affluent Canadian entrepreneurs, Andrew Guilfoyle has seen his fair share of estate planning horror stories.
The president of Guilfoyle Financial Inc. remembers the owner who suddenly died without a contingency plan, leaving employees, clients and suppliers reeling. Then there was the retiring business owner who overestimated how much his company was worth, refused to sell for less – and walked away with zero.
And who could forget the owners of a family business who decided to leave their company to a child who spent most of his time perfecting his ollies out in Whistler, B.C.?
"Nice kid, good snowboarder, but …" says Mr. Guilfoyle today from his Toronto office.
Tales like these illustrate how tricky it can be for the wealthy when it comes time to pass on their assets to the next generation. Given that most high-net-worth individuals in Canada are also business owners and entrepreneurs, they are not merely passing along homes, boats and investment earnings, but the businesses themselves.
Now, as baby boomers move into retirement, they will have plenty of company when trying to unload their assets. In 2015, Wealth-X, a Singapore-based wealth research and consulting firm, and U.S. wealth management firm NFP Corp. released a report that predicted that at least $16-trillion (U.S.) of global ultra-high-net-worth wealth would be transferred to the next generation in the coming 30 years.
Considering that about $1-trillion (Canadian) of assets are expected to be transferred within the next couple of decades in Canada alone, it is easy to understand why a 2014 PricewaterhouseCoopers report predicts the Canadian market may become flooded with businesses for sale between 2018 and 2025, making it challenging to sell companies and reap the expected financial rewards.
In other words, it will be more important than ever to get succession planning right, despite how wealthy entrepreneurs are feeling about leaving their business babies behind.
"These owners are very emotionally attached," says Janet Peddigrew, the Ottawa-based vice-president and managing director at Bank of Montreal's private banking division.
"They have put their life into making the business successful."
So the first step can be the most complicated, she says: getting them to step back and decide what they want to do with the business. Transfer it to family members or employees? Sell to a third party? It is a huge decision.
With so much at stake, no wonder many business owners procrastinate and avoid creating a solid succession plan.
"In almost all instances, it doesn't start as early as it should," agrees Mr. Guilfoyle, who recommends beginning the process at least five or even 10 years out from the time owners want to step away from the company.
Not only does that extra breathing room allow the owner to find the best person to take over the business – whether that is a business-savvy niece who has been groomed for years, or a prized employee – but there can be real financial benefits, too. Mr. Guilfoyle has been in situations where an owner suddenly wants to sell in six to 12 months, not realizing the punitive tax implications of such a speedy transaction.
"There's nothing you can do by the time they come to you, but eventually you've got to say, 'By the way, had we known this two years ago, we could have saved you a lot more in tax,'" he says.
Deciding who should take over a business, especially if owners want to pass it on to children, can be particularly fraught. A poor decision, or one that is considered unfair, is sure to create bad blood.
David Sung, president of Vancouver-based Nicola Wealth Management, mentions a client case in which the business owner had three children, and, even though just one worked in the business day-to-day, the father's will stipulated each child would inherit one third. In the end, the child bought out the other two, but without financial liquidity, it was a struggle.
Unfortunately, many business owners don't share their plans with family at all. In 2012, when his company held an event with more than 400 clients wanting to know more about succession planning, a survey of the room revealed that just 24 per cent of attendees said they had a succession plan in place that all family members had agreed to.
Running family meetings that outline how the transition will work and what everyone's roles will be can help develop good family communication and avoid surprises later. So does working with a team of accounting, tax, legal, insurance, wealth management and business transition consultants who can help smooth the way.
For owners who choose to sell to a third party, those five or even 10 years before sale should be spent on "prettying up" the business, advises Mr. Guilfoyle. In other words, paying off outstanding debts that could scare away buyers and cleaning up balance sheets.
Taking some time to ensure everything is in order helps, too. For instance, even if a company has done handshake deals with suppliers for 30 years, that arrangement could prove to be problematic for buyers and lower the sticker price.
"We'll say, 'Okay, that's great for you, but just so you know, the new purchaser is going to discount that very heavily,'" says Mr. Guilfoyle.
It is important to stay focused. The moment an owner considers selling the business, that is the time to ramp up production or find ways to maximize profits. Too often owners spend so much time thinking about snowbirding in Florida or all the details that go into unloading the company, that sales plummet – and so does company value. This common mistake can delay retirement.
"Then owners have to go back and spend two or three years rebuilding their business," says Mr. Guilfoyle. "They've taken their eye off the ball."