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Sell or Keep it in the Family?

Part three of a three-part series on succession planning


Ian Lobo on September 17, 2018 in Business Valuations

Sell or keep it?  That’s a key decision of business owners and largely dependent on whether there are  family members who have demonstrated interest and /or been groomed to take over.

If you are looking to transition your business to family, a business valuation will typically be used to assist in completing an estate freeze — the transfer of the future growth of your business into the hands of the next generation (i.e. the children). An estate freeze effectively divests the current owners (i.e. parents) of the future growth.

To elaborate, an estate freeze involves a reorganization of business ownership where the value of a corporation is “frozen” in preferred shares (provided to the parents) preferably based on a supportable conclusion of value such as one provided by a valuation expert. Once completed, new common shares are issued to the next generation, and future value then accrues in these newly issued common shares that are typically held either directly or indirectly through a trust.

The Canada Revenue Agency (“CRA”) requires support for the basis of the value such as one conclusion used in an estate freeze and can choose to challenge and reassess the values used. To ensure a supportable basis of value is used and be in a position to provide a defensible response to CRA if asked, an expert valuation is recommended.

A valuation expert can not only value your business for tax planning purposes but can also establish the current fair market value to assist you in negotiating a price to a likely buyer, and at a minimum assist you in establishing and understanding the factors that maximize or create value, that can assist sellers in accessing a higher price down at the time of sale.

Needless to say having a business valuation in your back pocket is an integral part in formulating your succession plan, because if you fail to plan, then you are planning to fail.