Business owners in Manitoba have several extra layers of complexity when it comes to retirement planning. How do you factor a business into the equation? Pension projections or investment withdrawals pale in difficulty to the tax and valuation challenges of business planning.
As with any planning exercise, some assumptions need to be made before we project the impact a business will have on retirement plans. The largest elephant in the room for creating these assumptions is the exit strategy of the business owner! How you leave the business will ultimately drive how it provides for your retirement.
- Wind down the business. The simplest of scenarios; winding down the business simply means that the business stops operating when you stop working. If you ARE the business and there isn’t a market for buying your operations, winding down may be your only option.
The key consideration for businesses like this is: can I build wealth inside and/or outside my business while it is in operation? If you aren’t going to get a buyer to write you a cheque, you’re going to have to accumulate your retirement nest egg by investing in assets along the way.
- Sell the business. If your business is sellable, you could be facing a sizeable cash influx in the future, and a sizeable tax bill as well! When and how you sell your business is incredibly important in the Canadian tax code. Qualified small businesses that sell the shares of the company may entitle the owners to shelter a great deal of taxation, thanks to their Lifetime Capital Gains Exemption ($892,218 in 2021). Non-qualified businesses, or small businesses who fail to meet certain criteria, may not benefit at all from this tax exemption. Similarly, the sale of non-share assets or sale to non-arm’s length parties (family members) could leave you with far less cash, after taxes, than you had hoped.
The key consideration for business like this is: what do you expect the after-tax value of your business sale to be? You may need to hire an outside business evaluator and a tax accountant to help evaluate what a reasonable sale price could be and ensure your tax bill is kept to a minimum.
- Groom a successor. If your business is able to continue without you running the ship, but an outside buyer is unlikely, consider creating your own buyer! Hiring an employee to become your eventual buyer (or training an existing one) is an excellent strategy for business succession. You can likely predict the eventual sale price and structure years in advance, while guiding the direction of the business itself.
The key consideration for a business like this: how do you set an exit price that keeps all parties happy? Many business owners discount their business value when it is sold to a planned successor. After all, they were there for the growing pains and no business owner wants to see their legacy struggle due to a financial burden they’ve placed themselves.
Retirement planning for business owners can present many challenges and opportunities along the way. After all, your business may be your single largest asset. How you exit the business is almost certainly going to drive a great deal of your financial security in retirement. Next week we’ll talk about the opportunities exclusively available to business owners, for enhancing their retirement plans.
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