Are you working with the owner or a member of a family business? Are you wondering how you can best advise the family on how to use the business opportunity to provide for retirement income? Learn how to protect one of your client’s most valuable assets with MASTER Your Investment in the Family Business. . .a great take-away from your next “lunch and learn” client seminar!
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Introduction
Small- to medium-sized businesses make up a significant portion of Canada’s business community and account for a large portion of the economic activity in this country. Most of us either know someone who runs a business or owns a business, or perhaps you are a business owner yourself. You may be an employee of a business, that may be owned and/or managed by an independent group of parties, or perhaps it is owned by an individual or family. Sometimes businesses start off as closely held family businesses that later become more widely held, perhaps by parties including the original owners, or perhaps by parties independent of the founder.
Consider the following:
Everyone has to start somewhere… and so most new businesses begin as small businesses. Some businesses stay small, some grow moderately, while others grow to become very large businesses, perhaps with operations spanning a number of countries. Some businesses operate for a period of time, experience moderate growth, and then fade into decline. Others, sadly, are wound up and no longer exist, often when the owner retires. Performance, profitability, and value can vary significantly from business to business, with some companies being sought after by customers, partners, and potential acquirers. Others go virtually unnoticed.
Why do some companies grow while others do not? Why do some businesses become the recognized name or “provider of choice” within their industry, while others fall to “commodity” status? Why do some companies remain strong throughout the years, perhaps even over generations, while others flounder when the original driving forces behind the business are no longer involved?
Is this a product of circumstance, luck, or something else? Most of us have heard stories of great business owners who seemingly had an opportunity dropped into their lap many years ago, and it was at that point that their future prospects changed for the better. Although this type of situation can and does occur (and often the greater the ultimate success of the enterprise, the greater the drama of the tale!), the reality is that an individual or group of individuals can indeed have a significant impact in building a business, particularly in terms of the perspective they bring and the lessons and example they pass to others.
More often, the ongoing success of a family business is the result of a vision to make a great product or provide an outstanding service, a defined strategy, process, and plan for its development, a sufficiently-sized target market and effective marketing plan, and astute business acumen that integrates effective fiscal management with the right amount of investment capital for growth.
The success of the family business, dynamics within the family unit, and ongoing financial planning that leads to an enduring legacy, perhaps an inter-generational transition, also has much to do with the work of professional advisors. Accountants, lawyers, insurance, and financial advisors, as well as those with specific expertise in terms of raising capital and leading business transactions, can all help business owners plan and structure income requirements now and in retirement for each family member. They can also help manage various risk factors and tax erosion all along the way to a successful transition of the business entity to the next generation of owners. The big win, for a family that masters their investment in the family business, is the realization of significant tax free gains when the company is sold.
This book, Master Your Investment in the Family Business: How to increase after-tax wealth, is designed to help you with just that. It will provide insight as to how those involved with a family business can effectively grow and maintain what is typically one of the most significant assets held by a family—whether it was borne out of economic necessity, or the driving vision and passion of its owners to meet a specific need or make a difference in the community.
More important, many families do not realize that the survival of their business may be at significant risk. Baby Boomer founders are now of retirement age and are faced with the reality of what the next steps for their business could be. Yet, they typically do not start their succession planning early enough.
Will the family business survive the transition to the next generation? How will the founders fund their retirement and receive a return on their investment? How will the next generation of business leaders cope with the multifaceted challenge of how to take a business forward into the future—into a world characterized by market volatility, rapid change, shrinking profit margins, increased regulatory requirements and public scrutiny, and the rising presence of environmental issues?
Do you know what you don’t know? You must have a firm handle on tax planning opportunities, for example. From planning tax-efficient owner- manager compensation, to the delivery of perks and benefits to family members and other employees working in the business, to income split- ting opportunities, maximization of the small business deduction, and the use of various business structures that could include everything from sole proprietorships to corporate operating companies, holding companies, and family trusts. You need to understand the impact in terms of timing the application of business losses on spending decisions and how “estate freezes” can help to position family members to utilize the lucrative capital gains deduction when a sudden opportunity to sell the family business arises.
There is much more to consider—but no one can be an expert at it all. That is why you need a team approach to Master Your Investment in the Family Business.
So, what’s in it for you? If you need to know more in order to make important decisions for your family and your business, this book can help. In fact, reading this book may be one of the most important decisions you make today, because your investment in yourself and your family can be improved, now and in the future.
By learning new ways to build better professional relationships and sharpen your decision making skills, you will have greater opportunity to master a more powerful and secure investment in your family business, and ensure that sustainable wealth and a lasting legacy are built for the family.
THE FORMAT OF THIS BOOK
The principles for Mastering Your Investment in the Family Business are discussed in this book in a straight-forward fashion, with common features to empower your decision making skills. In each chapter, you will find:
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A True to Life Scenario: These feature fictitious families in real- life situations and are a backdrop for the principles discussed in the chapter.
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The Issues: What is important and why?
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The Solutions: What do you need to know and do to make the right financial decisions? How can you best integrate these solutions into your strategic plan to meet your goals?
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The Mastery: Tips and Traps to help you put your financial decision making into focus, simplify your efforts, and get better results.
We hope you will find this format useful in taking control and making better financial decisions, either on your own or together with your team of financial advisors.
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