Part 3 of 3
Welcome to the final installment of my series on the three question, fact finding process. If you’re just joining us take a few minutes to catch up by going back and looking at the first five instalments and accompanying videos here:
Now the final question, where we start to think about life after business.
Question Three – Do you have a plan to one day exit the business?
Retirement for a business owner looks a lot different than it does for most regularly employed individuals. Most small business owners don’t have any kind of employer sponsored RRSP or pension plan, their assets tend to be tied up in the business itself and their accountants, for the most part, have done everything they can to reduce reported income on a yearly basis to avoid income taxes. The result, as an individual approaches retirement, is that they are looking at a lower CPP entitlement and significant illiquidity making it challenging to fund a retirement income.
As a business grows you may not be thinking about your exit plan. Many business owners joke that they will never retire, either because they love the work too much or they recognize that these issues will hold them back. Regardless there will come a day when you simply can’t go to work anymore. A good exit plan will provide you with some choice as to when that day comes and prevent you, or your family from having to sell the business quickly, at a huge discount, just to survive.
Two things to consider when developing your exit plan.
First, make sure you have a fully funded partnership buy/sell agreement containing Life, Disability and Critical Illness Insurance. This will prevent the need to quickly sell assets at a time that may not bring the best price in order to fund an unplanned retirement, due to illness, injury or death. If you are a sole proprietor or single shareholder corporation the need for these insurance products is by no means reduced. Business owned insurance products could be the difference between a long and happy retirement and bankruptcy, it’s that simple.
Second, consider setting up an Individual Pension Plan (IPP). This is a supercharged RRSP program, owned by the business for the benefit of a key executive or owner. Many business owners have an income that is too high for the RRSP limits and relying solely on RRSP investments to fund retirement is unrealistic. By setting up an IPP you can keep a lot of the money inside the company and pay it out over time as a pension without maxing out on RRSP contribution and RRIF income in the same way. When you sell the business the IPP may either stay within the company, as in a case where a second generation takes over, or it may be exported into a personally owned retirement income plan/ annuity, that pays you a regular (tax advantaged) income for the rest of your life.
Regardless of how you approach retirement one thing is certain, whether you want to or not, you will stop running the business one day. Either as a result of a formal plan to sell or transfer to family or as a result of a health emergency, or death. Without a plan of how to manage this transition the cost, in taxes and legal fees could quickly erode the value of your life’s work and leave you and your family with only a fraction of the value you’ve put into it.
For more information or help with your financial plan contact: firstname.lastname@example.org or simply leave a comment below.