Introduction
You've built something valuable. Your business is generating six or seven figures in revenue, employing people, and contributing to Ottawa's economy. But what happens to it when you retire, move on, or pass away?
Without succession planning, businesses often collapse. Families fight. Employees lose jobs. Years of hard work evaporate.
With proper succession planning, your business continues thriving under new leadership, your family is financially secure, and your legacy endures.
This guide covers exactly what Ottawa entrepreneurs need to do to plan for business succession and ensure smooth transitions.
Why Succession Planning Matters
The Statistics
- 70% of family businesses don't survive to second generation
- Only 10% survive to third generation
- Main reasons: Lack of planning (50%), family conflict (30%), inadequate management (20%)
- Businesses with succession plans are valued 20-30% higher than those without
The Financial Impact
Without succession plan:
- Business value: $1,000,000
- Upon death/exit: Family fights, business deteriorates
- Final value: $200,000-$400,000 (80% loss)
- Taxes owed: Potentially 50% of estate value
With succession plan:
- Business value: $1,000,000
- Smooth transition to next generation/buyer
- Continued operations and growth
- Final value: $1,200,000-$1,500,000 (20-50% appreciation)
- Taxes minimized through planning
- Family harmony preserved
The difference is $1-2 million for a typical Ottawa business.
Types of Succession Scenarios
Scenario 1: Family Succession
Your children or family members take over the business.
Advantages:
- Values and culture continue
- Family wealth stays consolidated
- Children carry on your legacy
Challenges:
- Family dynamics (Who's ready? Fair to other family members?)
- Not all children want/can run business
- Tax implications (capital gains when transferring)
- Sibling conflict over ownership/control
Scenario 2: Sale to Third Party
You sell business to outside buyer.
Advantages:
- Clear valuation and payment
- Buyer's responsibility to continue operations
- No ongoing family disputes
- Can be very lucrative
Challenges:
- Loss of control and legacy
- Key employees may leave
- Buyer might change business direction
- Finding right buyer takes time
Scenario 3: Management Succession
Current employee or manager takes over.
Advantages:
- Smooth transition (they know business)
- Employee loyalty improves
- You can stay involved initially
- Often best outcome for employees
Challenges:
- Manager may lack capital to buy
- Financing structure needed
- You still have ownership interest
- Requires trust and clear terms
Scenario 4: Hybrid Approach
Combination of above (e.g., sell 60% to outside buyer, keep 40% for family).
Valuation: What's Your Business Worth?
Key Valuation Methods
1. Multiple of Revenue
- Business value = Annual revenue × Multiple (1-3x typical)
- Example: $500,000 revenue × 2.0 = $1,000,000 business value
- Quick and simple, less accurate
2. Multiple of EBITDA
- EBITDA = Earnings Before Interest, Taxes, Depreciation, Amortization
- Business value = EBITDA × Multiple (5-8x typical)
- Example: $200,000 EBITDA × 6 = $1,200,000 value
- More accurate than revenue multiple
3. Discounted Cash Flow
- Project future cash flows
- Discount back to present value
- Most accurate but requires detailed projections
- Example: 5 years of projected cash flows discounted at 10% = $1,100,000
4. Asset-Based Valuation
- Business value = Assets – Liabilities
- Example: $1.5M assets – $300K liabilities = $1.2M value
- Best for asset-heavy businesses (real estate, manufacturing)
Getting a Professional Valuation
For business succession, hire professional appraiser:
- Business valuator (CPA or business appraiser): $3,000-$10,000
- Tax accountant: $1,000-$3,000
- Business lawyer: $2,000-$5,000
- Total investment: $6,000-$18,000
This investment is essential. Improper valuation leads to:
- CRA challenges (undervaluation)
- Family disputes (disagreement on fairness)
- Buyer disputes (disagreement on price)
- Lost tax deductions/credits
Fair Market Value for Tax Purposes
When you transfer business to family:
- CRA considers "fair market value" (what arm's-length buyer would pay)
- If you undervalue to avoid taxes, CRA will reassess at higher value
- Document valuation professionally to defend if audited
Tax Implications of Succession
Capital Gains Tax on Sale
When you sell business (to family or third party):
- Selling price minus cost basis = capital gain
- 50% of gain is taxable
- Taxed at marginal rate (up to 53.53% in Ontario for top earners)
Example: Sell business for $1,000,000, cost basis $200,000
- Capital gain: $800,000
- Taxable: $400,000 (50%)
- Tax owing: $212,000 (at 53% rate)
Lifetime Capital Gains Exemption
In 2024, Canadian entrepreneurs can claim $1,016,836 lifetime exemption on capital gains from selling qualified small business shares.
This exemption means:
- First $1,016,836 in capital gains are tax-free
- Only applies to shares of Canadian-controlled private corporation
- Must own shares for required holding period
Example using exemption:
- Sell business for $1,000,000, cost $200,000
- Capital gain: $800,000
- With exemption: $800,000 – $0 = $0 taxable (gain under $1M limit)
- Tax owing: $0
This exemption is valuable—plan to maximize it.
Estate Planning on Death
If you pass away without succession plan:
- Business value included in estate
- Full capital gains triggered on death
- Heirs face massive tax bill
- May force business sale to pay taxes
Example:
- Business value: $2,000,000 at death
- Cost basis: $400,000
- Capital gain: $1,600,000
- Taxable (50%): $800,000
- Tax owing (53%): $424,000
- Family must pay this tax or sell business
With proper planning (trusts, insurance, etc.), this can be minimized.
Creating Your Succession Plan
Step 1: Decide on Successor (Year 1)
Determine who will take over:
- Family member: Which one? Do they want it? Can they handle it?
- Management succession: Which employee is ready? Do they have capital?
- Sale: What type of buyer? Local or national?
Action: Write down your preference clearly.
Step 2: Communicate Your Plan (Year 1-2)
Tell key stakeholders:
- Your successor (if person)
- Your family
- Key employees
- Your accountant/lawyer
Clear communication prevents surprises and conflict.
Step 3: Prepare the Successor (Years 2-5)
If family or employee succession:
- Gradually increase their responsibilities
- Involve them in strategic decisions
- Have them take leadership/business courses
- Consider temporary co-management period
- Give them authority and credit
Step 4: Document Everything (Year 2-3)
Create written succession plan including:
- Business valuation (professional appraisal)
- Identified successor(s)
- Transition timeline
- Compensation/purchase terms
- Key employee retention plan
- Insurance to fund transition
- Tax planning strategies
Step 5: Set Up Legal Structures (Year 3)
Work with lawyer and accountant to create:
- Buy-Sell Agreement (if selling or management succession)
- Operating Agreement updates (if family succession)
- Shareholder Agreement (if multiple owners)
- Will/Trust updates (to incorporate succession plan)
- Key person insurance (funds transition if key person dies)
- Disability insurance (if you become disabled)
Step 6: Implement and Monitor (Ongoing)
- Implement succession plan on schedule
- Monitor progress toward goals
- Update annually as circumstances change
- Adjust for tax law changes
Real Example: Ottawa Tech Company Succession
Situation: Owner "Bob" built successful software company, revenue $2M, EBITDA $400K, planning to retire in 5 years at age 55.
Initial thought: Sell to highest bidder
Better plan (with succession planning):
1. Year 1: Identify promising manager, offer VP role
2. Year 1-2: Get professional valuation ($2.4M based on 6x EBITDA)
3. Year 2: Communicate plan to family, key employees
4. Year 2-3: Manager and Bob work as co-CEOs, manager learns business
5. Year 3: Set up buy-sell agreement—manager buys 30% with seller financing
6. Year 4: Manager buys additional 30%
7. Year 5: Bob sells remaining 40% to manager, fully retires
8. Tax benefit: Bob's capital gains ($2M+) spread across multiple years, utilizing lifetime exemption
9. Outcome: Business continues, employees retained, Bob retires with income stream, manager becomes owner
Result: Everyone wins. Business survives. Bob secures retirement.
Insurance's Role in Succession
Key Person Insurance
If key employee dies, business loses operational capacity. Insurance funds:
- Hiring and training replacement
- Temporary revenue loss
- Operations during transition
Buy-Sell Insurance
If manager is buying business:
- Life insurance on manager funds buy-sell agreement
- If manager dies, insurance pays to buy back shares
- Protects business and family
Disability Insurance
If you become disabled:
- Business income protection
- Covers operating costs while you recover
- Funds succession if disability is permanent
Avoiding Common Succession Mistakes
Mistake 1: Waiting Until Last Minute
Succession takes 3-5 years minimum. Don't wait until you're 75 to plan.
Action: Start planning at 50 (or when business is 50% through its desired life).
Mistake 2: Not Preparing Your Successor
Don't assume successor is ready. Prepare them over years.
Action: Gradually increase responsibility, involve in strategy, provide training.
Mistake 3: Undervaluing for Tax Avoidance
Don't undervalue business to avoid taxes. CRA will challenge it.
Action: Get professional valuation, defend with documentation.
Mistake 4: Ignoring Family Dynamics
Don't assume family will agree on succession. Talk about it explicitly.
Action: Family meeting with lawyer/accountant to discuss openly.
Mistake 5: Forgetting Key Employee Retention
Key employees often leave after succession, taking knowledge/relationships.
Action: Have retention agreements, competitive offers to key people.
Conclusion
Succession planning isn't morbid or pessimistic—it's the responsible thing to do. Your business is your life's work. Proper succession planning ensures it continues thriving after you move on.
Start now. Get professional help. Communicate clearly. Execute systematically.
Your legacy depends on it.
Related Articles
- Article 5: Real Estate Investment Tax Strategies Guide
- Article 14: Corporate vs Self-Employed Tax Strategy Guide
- Article 17: Stock Options Tax Planning for Employees
Sources & References
- CRA Lifetime Capital Gains Exemption
- Canadian Association of Business Valuators
- Business Development Bank of Canada Succession Resources
- Ontario Business Succession Association
- CPA Canada Business Succession Guide
- Law Society of Ontario – Business Succession Lawyers
- Government of Canada Business Succession
- Canadian Chamber of Commerce
- Ontario Chamber of Commerce
- Professional Associations of Canada – Valuation Standards
