It is estimated that small family businesses employ over 5 million people in Canada. Our economy depends on their future well-being.
A successful business owner has an optimistic outlook and enjoys a challenge. Yet if family businesses are to remain successful in our fast-paced economy, they must address the following issues:
Continued success may depend on the leadership of the founding owner. If the owner desires to retire in 10 or 15 years, succession planning may be necessary today. Have you made plans to sell, or to pass the company on to the children or another successor?
Talk to your CA or tax lawyer to assess possible capital gains tax liabilities. If these liabilities exist, life insurance policies may be able to solve the problem in advance. Life insurance could be purchased individually or jointly on the lives of the owner and/or the spouse while in reasonably good health.
If the owner of the company will depend on the company's resources for retirement income, it should be budgeted as an ongoing disbursement, in terms of salary or dividend payments.
An immediate (as well as long-term) successor should be groomed to take over the company, just in case the owner suffers a disability. Owners need to ask, "What would happen if I was laid up and incapable of giving directives? Would that force a fire sale of my company?"
To prepare for the event of either disability or death, owners should make sure that they are covered with both disability insurance to replace income, and life insurance to meet capital needs and cover liabilities such as company debt. Acquiring loans may be harder for unknown successors and servicing debt could get costly if interest rates go up. Life insurance can wipe out company debt entirely upon an owner's death, spouse's death, or after both have died (using a joint-last-to-die policy).
Owners need to make sure that key family members actively working in the company (including active owners), and important employees, are covered with key-person insurance. If a key-person is afflicted with a disability or dies, the business may need money to acquire replacement help.
Buy-sell agreements are essential for partnerships and many corporations. Often family members in joint ventures will overlook this planning device as they feel they can solve business issues when one dies or is disabled. Without proper planning, businesses could get bogged down in conflicts, and may not have enough capital to buy out the interest of a partner. Back up the agreement with life insurance and disability insurance to solve these potential problems.
