Entrepreneurs are often very busy in their daily lives, passionate about their work and do not think about preparing for retirement. However, selling the business in which you have invested your whole life is a complex and crucial task to be able to afford a good retirement. And you have to prepare this a few years in advance if you want to be able to save more than $900,000 in taxes.
The situation
Luc*, 63, is an electrician and has his own business. He is the only shareholder. His wife, Chantal*, 62, works in the company’s administration and his son Éric*, an electrician, is also employed there. Luc recently received an external purchase offer for his company. “I didn’t expect that at all,” he says. I wondered what to do. It sort of woke me up. I figured I would have to talk to my son first to see if he was interested in taking over the business. » Luc also has a management company where he deposits the accumulated profits of the electricity company. He wonders what steps must be taken to sell his business and retire comfortably, allowing him to enjoy the fruits of his efforts throughout his working life.
Numbers
Luke, 63 years old
- Annual income: $200,000 combined salary and dividends
- Monthly pension estimated at age 65 from the Quebec Pension Plan (QPP): $1,030
- Registered retirement savings plan (RRSP): $350,000
- Tax-free savings account: $60,000
- Management company: $115,000
Chantal, 62 years old
- Annual income: $48,000 in dividends (which does not allow you to contribute to the QPP)
- Monthly pension estimated at age 65 from the QPP (she had a salary previously): $331
- RRSP: $45,000
Value of the property owned by the couple: $575,000 (fully paid)
Estimated annual net cost of living in retirement: $65,000 net
Have a family discussion
Julie Paquin, financial planner and vice-president, private management at Optimum Investment Management, is not surprised by Luc’s somewhat late realization. “Entrepreneurs are often absorbed in their daily activities, business development, administration, so they do not stop at questions related to the possible sale of their business,” she says. Now, this is very important. Preparing for the transaction takes about five years, two of which are really crucial to qualifying for a tax exemption of up to $971,190. »
PHOTO ROBERT SKINNER, THE PRESS
Julie Paquin, financial planner and vice-president, private banking at Optimum Investment Management
Then indeed, before considering an external offer to purchase the business, Julie Paquin strongly advises Luc to have a discussion with his son to explore his interest in taking over the business.
“Maybe he’s not interested at all and wants to stay employed,” says the financial planner. But you have to know your intentions to avoid causing family tension. Then, if Eric wishes to take over the business, it will be necessary to look at whether he has the necessary skills to become an entrepreneur and the financial capacities to achieve his ambitions. »
Have your business evaluated
To find out, Luc will need to know how much his business is worth. “He must find an approved appraiser to carry out this work,” says Julie Paquin.
She calculated that to have $65,000 net per year in retirement starting at age 65, Luc would have to make a profit of at least $300,000 net from the sale of his business.
The capital gains deduction provided for on the sale of shares of an eligible small business could therefore make all the difference for him.
“Normally, capital gains are taxable at 50%, but the government put this deduction in place to give a boost to small business owners who, often, have worked very hard and have always reinvested money. money in their business, explains Julie Paquin. But there are several conditions to meet in order to be eligible. »
Prepare your business
One of the important elements to prepare to take advantage of this tax deduction is that 90% of the income held in the business must be active at the time of the sale of the shares. “Often, there is a lot of money accumulated in mature companies,” notes Julie Paquin. We have to take it out. For example, Luc could transfer the passive assets to his management company, or pay himself a higher salary and contribute to his RRSP to reduce the tax payable. His accountant or tax specialist is the best person to make recommendations. »
Also, for at least two years before the sale, the share must have belonged to the individual or a person related to him, therefore here to Luc or his wife, and more than 50% of the fair market value of the property of the business must have been used for its active operation.
“It is essential that Luc takes the time to look at his situation in detail with an accountant or a tax specialist to ensure he complies with all the conditions,” specifies the financial planner. This is an important tax advantage and it must be provided for. »
Unfortunately, we see entrepreneurs who are caught off guard, for example by a quick sale or because they suddenly become very ill and they cannot take advantage of it.
Julie Paquin, financial planner and vice-president, private banking at Optimum Investment Management
Working in the business after the sale
If, ultimately, Luc does not have all the money he will need by selling his business, he could consider different solutions. For example, continuing to work at the company even if it has been sold.
“Often, this is what the buyer wants, because the founder is the one who knows the customers and suppliers best,” indicates Julie Paquin. It’s interesting that there is some time left to ease the transition. But it is also a challenge, because the person who founded the company and who has managed it all his life may have difficulty delegating and reviewing his ways of doing things. The important thing is that Luc surrounds himself with different experts to support him, both financially and humanly, in the different stages that will lead him to the sale of his business. »
* Although the case highlighted in this section is real, the first names used are fictitious.