The Three Question Fact Find for Business Owners

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:

Question One – Do you have any Debt?  Blog and video.

Question Two – Do you have a plan to sustainably protect and grow your assets?  Blog and video

Question Three – Where do you want your money to go after you die?  Blog and video

Question One for Business Owners – What would happen to you, your business and the people you care about if you didn’t show up to work tomorrow?  Blog and video

Question Two for Business Owners – Do you have a plan to protect and reward your most loyal employees?  Blog and video

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: or simply leave a comment below.

Let’s Make a Deal

Business Planning is an integral part of any entrepreneurial venture. It’s been said that no business plans to fail, they just fail to plan. One of the most over looked parts of any business plan is succession. What do you plan to do with the business when you no longer want to run it or even own it someday? Failing in the area of succession planning will inevitably lead to a failed business. So today let’s take a look at two of the most common ways entrepreneurs can negotiate the sale of their business and retain value in a business that they purchase.

business for sale

A lot of clients who work for themselves don’t really own a business at all, they simply own their job. In a lot of cases, especially in regards to trades people and even small retail operations when you really get down to the day to day operations the number one asset of the business is the owners own entrepreneurial spirit. When an entrepreneur like that stops working all of the good will and client relationships they have built up go away. In that case the only value in the business is in equipment, inventory and referrals, and all of those things are depreciating assets.

In that case the most common way to sell your business is by getting fair market value for your equipment and then doing an honest assessment of the value of any client introductions that you might do for the new operator. The value of a client introduction is only as good as the first time that new operator does business with that client. If they don’t bring the same level of quality and customer service to the job as you did they will lose the client forever. Generally the value of a client introduction is one to two times the value of their average purchases after that they aren’t buying on the strength of the relationship they had with you, they’re buying on the strength of the relationship they have with the new operator.

For a “job-owning” type business by far the most common and fairest way to negotiate a sale is through the sale of assets. After the purchase is completed the new buyer may even choose to operate the business under a different name, that’s okay because the value of the business is less in the name than it is in the client relationships.

But if your business is a little bigger and a little less reliant on the personality and work ethic of the owner then you might want to sell it through a transfer of shares. Here valuing the assets of the business is done in much the same way but equipment is depreciated inside the corporation for tax reasons and the value of client relationships is much more heavily weighted in favor of the seller because the clients are more likely to stick around under new management.

Valuing a business of this nature is usually done using a multiple of revenue, say 2-3 times annual sales as it is assumed the equipment will eventually depreciate to zero and the customers will remain loyal through the transition because they were less tied to the individual owner than they were to the company itself. Businesses sold in this manner are also much less likely to go through a name change, at least in the short term because the goal is to make a smooth transition that the customers might not even notice.

Tax wise the seller of shares is better able to take advantage of capital gains exemptions and dividend tax credits as well. Although I’m not an accountant and am unqualified to give much in the way of tax advice this just makes sense on a broad level.

In both cases it’s a good idea for the buyer of a business to insist on a non-competition clause as part of the agreement. The last thing you want is to spend hundreds of thousands of dollars on a business with depreciating assets only to turn around and be faced with competition from an experienced operator sporting newer and better equipment that you helped finance by purchasing their old stuff. Not to mention their ability to cherry pick your best customers through old relationships and loyalties.

If you are thinking of selling a business or even starting one, start with the end in mind, like Stephen Covey says.  It’s always a good idea to think about how you will go about selling it someday. For more information on The Meekonomics Project and how we work with business owners around issues of succession and estate planning write to