Business Succession Planning

Business/Farm Succession Planning Deloitte & Touche Study on Canadian Family Business Business leaders poised to retire in significant numbers: 27% within 5 years 29% within years 22% within years Total of 78% before 2014

Business/Farm Succession Planning Demographics Succession 34% > 61 years old 40% NO identified successor 28% NO estate plan 48% NO buy-sell

Business/Farm Succession Planning Why is … the Rate of Successful Transitions Low??? Families don’t plan for the transition The effect of family dynamics on the bottom line is ignored The next generation lacks the skills needed to succeed

Business/Farm Succession Planning Interrelationships 1.Family owner-managers 2.Family members who work in the company but have no ownership 3.Non-family employees 4.Non-family employees who own stock in the firm 5.External Investors 6.Family members who own stock in the company but do not work in it 7.Family members not involved with the firm

Business/Farm Succession Planning Five events can occur that impact on the relationship between business owners the death of one of the owners the permanent disability of one of the owners the retirement of an owner the bankruptcy of an owner Disagreement on business operations among owners Succession Planning

Business/Farm Succession Planning Succession Planning is probably the most important issue facing virtually all companies.

Business/Farm Succession Planning What is Succession Planning? The process of transferring ownership and management of a business to the next generation or to your successors. Maximizing retirement income for the owners. Maximizing wealth transfer to the heirs.

Business/Farm Succession Planning Why have a Succession Plan? Poor planning can result in business failure. Ensures proper continuation of income to owners, family and heirs. Ensures all tax deferral options have been utilized and implemented properly.

Business/Farm Succession Planning Absence of a Plan Defer to the Will Family Law Act Forced Liquidation 1.Accounts receivable are often not collected in full discounted by as much as 50% 2.Sale of inventory often drastically discounted. 3.Equipment also sold at at a considerable discount. 4.Good will value is totally lost 5.Stoppage of Income

Business/Farm Succession Planning Succession Options 1. Orderly Liquidation 2. Orderly Sale 3. Orderly Family Retention

Business/Farm Succession Planning Steps in Designing a Plan Step 1 - Involve Owners, Family, Partners, and Key Employees Step 2 - Organize a Team of Professionals Step 3 - Establish an Ownership and Management transition plan Step 4 - Identify appropriate Concepts and Tools Step 5 - Implement various Concepts and Tools Step 6 - Regular review and monitoring

Business/Farm Succession Planning Owners Concerns Exit Strategy Retirement Income Moral obligation to family & employees Inheritance Equalization Reward Employee Loyalty Maintain Client Loyalty

Business/Farm Succession Planning Family Concerns Income Continuation Moral obligation to continue business Proud of family business history Fairness to all heirs

Business/Farm Succession Planning Partners Concerns Dissolution of Partnership Cash Reserves inadequate New family partners visions and goals Partners Retirement Goals

Business/Farm Succession Planning Key Employees Concerns Key employees may own shares How are the shares valued? How can shares be redeemed? New family partners vision and goals Job Security

Business/Farm Succession Planning Team of Professionals Board of Directors Family Council Tax Accountant Lawyer Bank/Trust Manager Estate Planning/Insurance Specialist Investment/Financial Advisor

Business/Farm Succession Planning Concepts and Tools Wills & Powers of Attorney Inter Vivos Gifting of Shares Trust Accounts Capital Gains Exemption Buy-Sell Agreement Estate Freeze

Business/Farm Succession Planning Buy-Sell Agreement Provides for the sale of the deceased partners interest to the surviving partner at a pre-determined value or method of valuation Ideally pre-funded in order to provide the proper amount of cash at death in order for the surviving partner to fulfill the contract

Business/Farm Succession Planning Eric & Helga Larsen own 80% of business Nephew owns 20% of business working there 15 years Son works in business -- no ownership 2 daughters -- no involvement in business Case Study Facts

Business/Farm Succession Planning Case Study Facts Eric & Helga’s “WILL” son gets Mom & Dad’s shares 2 daughters get 50% / 50% of remaining assets “Share Purchase” agreement nephew to buy Eric & Helga’s shares by promissory note

Business/Farm Succession Planning Larsen Brothers Ltd. profitable company low debt $500,000 of investment assets (RBC DS) hard assets (business) worth $4.5 Million value of business growing at 6% per year Case Study Facts

Business/Farm Succession Planning Corporate Structure Eric Larsen 60 Years Old Helga Larsen 58 Years Old Nephew 39 Years Old LARSEN Brothers Ltd. $500,000 Investment Assets 40 Class A FMV $2,000,000 ACB $150, Class A FMV $2,000,000 ACB $150, Class A FMV $1,000,000 ACB $200,000 FMV: $5 Million

Business/Farm Succession Planning Major Conflicts “Will” and “Share Purchase” out of sync. If Share Purchase implemented nephew owns 100% with Prom. Note son -- no shares; Prom. Note; no guarantees daughters don’t get the $500K invest. assets Estate shrinkage capital gains on Mom & Dad’s shares taxes on RRSP’s

Business/Farm Succession Planning Concerns of Eric Larsen What happens if I die? wants nephew to have 51% control of business wants son to hold 49% of shares 2 girls to get a “fair” value from estate -- each equal to 35% of value of son’s shares Can son and nephew run the business together? How does nephew get money to buy shares.

Business/Farm Succession Planning Initial Recommendations Estate Freeze -- Eric & Helga set up Hold Co’s -- Eric & Helga; nephew set up Family Trust use $500,000 Capital Gains Exemption do Will Planning -- Eric & Helga restructure Shareholder Agreement fund Tax Liabilities and Shareholders Agreement Corp. Owned Life Insurance -- to maintain low debt

Business/Farm Succession Planning Estate Freeze Why perform an estate freeze? Cap Mom & Dad’s Cap. Gains Tax liability transfer growth of common shares to nephew and Family Trust allow Mom and Dad to “wind down” nephew and son take more responsibility

Business/Farm Succession Planning Holding Companies Eric & Helga transfer $4 million Voting Preferred shares to their new Hold Co. Nephew transfers $1 million Voting Preferred shares, plus 20% New Common shares to his new Hold Co. 80% of New Common shares held in Family Trust Future growth to New Common shares

Business/Farm Succession Planning New Corporate Structure Larsen Holding Co. Larsen Family Trust Eric Larsen & Helga Larsen (Son, Daughter 1, Daughter 2) Nephew Wife Nephew Holding Co. Larsen Brothers Ltd % New Common Shares $1 M Voting Preferred Shares 20% New Common Shares $4 M Voting Preferred Shares

Business/Farm Succession Planning Revised Shareholder Agreement All Preferred Shares to be redeemed. Voting rights re-allocated to Common Shareholders. Recognizes transfer of 49% shares to son through “Will”. Nephew to be required to purchase 31% shares from Family Trust. Funding implemented with life insurance

Business/Farm Succession Planning The $500,000 Capital Gains Exemption Eligibility Must be an individual tax-payor: Canadian resident Shares of a CCPC Asset test at disposition Holding period test

Business/Farm Succession Planning Why buy Life Insurance? Fund taxes at death most cost-effective method Fund Shareholders Agreement Cost-effective investment does not increase company debt Tax efficient funding vehicle

Business/Farm Succession Planning Succession Planning are complex and need to be discussed with your Regional Insurance Specialist to find out which method is better suited for your client(s). For more information on Succession Planning or any other corporate concepts please contact your Regional Insurance Specialists. Thank You! Insurance products are offered through RBC DS Financial Services Inc., a subsidiary of RBC Dominion Securities Inc. When providing life insurance products in all provinces except Quebec, Investment Advisors are acting as insurance representatives of RBC DS Financial Services Inc. In Quebec, Investment Advisors are acting as Financial Security Advisors or RBC DS Financial Services Inc. RBC DS Financial Services Inc. is licensed as financial services firm in the province of Quebec. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member CIPF. ®Registered Trademark of Royal Bank of Canada. Used under licence. RBC Dominion Securities is a registered trademark of Royal Bank of Canada. Used under licence. ©Copyright All rights reserved.