Succession Planning with BluePrint CPAs

Succession Planning with BluePrint CPAs

Innovative approaches to succession planning


Hello. This is Jay Goodis from
Tax Templates in conjunction with Lumi Q. Over the coming years, $30 trillion of wealth is expected to pass from the baby boomers to the next generation. This transfer will extend beyond cash, stocks and real estate and include family businesses. This succession planning can be a delicate process both for the transferors, normally the parents and the transferees, normally, the children. Each can have different goals they're looking to achieve and may need a team of experts, including lawyers, accountants, bankers, financial planners, insurance advisors, merger and acquisition consultants and management consultants to navigate the multitude of business financing and tax challenges that may exist today were fortunate to be joined by Kit Moore, CPA, CA to talk about some of the business and tax issues for succession planning. Kit is the president and lead strategy advisor at BluePrint CPAs. Their firm focuses on hyper-accelerating entrepreneurial growth with the focus on owner-managed businesses on matters of strategy, mergers and complex tax. Thanks for joining LumIQ today, Kit.


Yeah, no problem. Thanks for making the time to talk to me about succession and estates.


Absolutely. So let's just jump right in. How did tax accountants, lawyers and life insurance specialists become focal points in succession planning, where it may once have been more of a human resources endeavor?

succession planning
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Succession Planning Risks and the Diversity of Professionals

That's a really great question, Jay. If we think about succession planning, most of us know generic statistics such as the fact that family businesses often fail in the second generation and infrequently make it to the third generation, right, so that you know the generic stat in Canada that only about 30% of family businesses even make it to the second generation. So what does that statistic really imply? It kind of implies that succession is fraught with risk. So I think what is intuitively a leadership and human resource endeavor has evolved to include all of these specialists because it's so complex, you need specialized tax accountants, lawyers to address the myriad family and corporate law issues, and life insurance is almost unavoidable to fund tax liabilities at death. And we can talk a little bit more about that in detail. But I still believe at its essence that it's a leadership development and HR endeavor, and that it's what I call integrated or comprehensive succession planning. So, yeah, there are are so many issues that we can walk through today and then I think that will shed some light on why all of these specialists need to be involved.

What Questions Should You Ask Your Accountant?

questions to ask your accountant


Well, thanks Kit. I think that's a good introduction of the challenges that entrepreneurs face when it comes to succession planning. You specifically work with business owners all over Canada. When business owners and the next generation speak with you, what types of questions do you ask them, and what information are you seeking in these initial succession consultations?

Succession Planning Focuses on the Business


So I think the most interesting context about my practice Is that I'm generally assisting family businesses that are already existing clients because I operate as a small business practitioner that's a generalist, but with specialist tax and succession skills. So in an initial consultation, I already have some knowledge of the family and family dynamics and the nature of the business. But I have a couple different approaches to matters that need to be addressed when you launch a specific succession planning project. There are quite a few things that you need to assess right out of the gate on day one. One of the reasons I do that is because I actually like to categorize a succession in terms of the amount of risk in the family business transition. You might have some successions that are very low risk, and you might have some that are very high risk.

And indeed, in my case, where successions are very high risk, meaning that there might not be a well developed leadership plan or the valuation may be too lofty, there might actually be some cases where I'm not the professional that some of these families need. Sometimes they may need family facilitators, or they may need other specialized mergers consultants. But generally, though, if I'm launching a project and this is just my approach, my approach is what I'll call "strategy-first." So I really spend some time getting to know the business operations a little bit better. And the reason I do that is because I find that when business owners speak about their business operations, we talk about matters of fact then about matters that have a lot of bias in them, like what is the value of your business? I mean, we could joke around every entrepreneur myself included, maybe yourself included, what's my business worth? It's worth a fortune, right? No matter what, it's worth a fortune. So I tend to talk about the operations, and I break down the discussion into things that help me understand what would actually drive the value. So instead of asking an entrepreneur a direct question like, what's the value of your business at the outset?

I start to try to understand what would drive value and what's your view on some of these drivers. So the entrepreneur's assessment of value is something that I ask some questions about right away. And then when they're answering those questions you try to understand, is this transferor, seller, parent whatever you want to refer to them as, are they going to be able to relinquish control? And will they be able to create an environment where the next generation of leaders will thrive? And so some of the questions and these might be awkward because in terms of some succession approaches where it's really tax driven, I spend a lot of time on the business strategy first. So again, where I say, instead of asking an entrepreneur, what's their assessment of the value of their business instead I'll go into, you know, let's understand the revenue stream.

Is your business high customer retention or does it have a lot of churn? Is it hard to acquire new clients? Or are you growing very rapidly? And so when you break down some of these kind of detailed metrics and drivers, you start to get a better understanding as to how much value there is in this business, without asking these kinds of biased questions like, what's your business worth? And so you know, starting to understand the revenue stream and then starting to understand the owner's perspective around investment, risk cost structure so you can say, how strong is this business? Because certainly that's what's going to drive up the valuation. And that's kind of initially what I'm trying to get an understanding of, at least from the transferor's perspective, because the transferee is pretty important, too, and I know we will speak about the transferees later. But the transferor's perspective is critical because if they're too rosy on valuation or they're not realistic about the future of the business, then it becomes hard to imagine how you can transfer a business to the children in an equitable manner that meets everybody's needs.

So really what I'm trying to understand at the outset is the owner's objectives and then trying to understand some of their retirement goals to, You know, like if if this business can fund $100,000 a year of retirement income, but but you want to, you know, by a cottage on Lake Joe and a Ferrari, well, then we know we have a problem right at the outset so my initial questions are really about assessing the overall risk of the transfer and whether or not the transferor and the transferees are truly in a position to engage in the process.

Multi-Disciplinary Advising in Succession Planning


It really seems that you're taking on this almost quarterbacking role for the client. It's really about starting to understand what's important to them. What do they need? What do they want to achieve? Because once you figure out what is important to that transferor, you can start putting in place that succession plan or putting the steps in place, whether that be to move it to the next generation, looking for an outside seller, just trying to find a way of building a custom plan for that client. So in your experience, what do you find that the transferor is looking to achieve, what is most important to them that you find among the majority of your clients.

Every Succession Plan is Unique


It's a very heterogeneous pool of business owners out there, right? So there's a really broad set of objectives, but there are certainly some commonalities. Funny enough, one of the things I find is that, for a lot of transferors of private companies an actual objective for them is being able to spend more time with their grandchildren and travel. Funny because it's really got little to do with the business. So key to doing this succession planning and I say relatively early on is actually looking at retirement planning. So you know, I might go into a detailed lifestyle budget, at least for some first preliminary period of retirement, which says, how many gifts do you need to buy for the grandchildren?

You know, you get a pretty wide range, some people might want to spend $5,000 on Christmas, some people might have views of $20,000 or $30,000 worth of gifts a year and then breaking it down into travel costs as well. If someone wants to go on several trips a year to Europe or Asia, although obviously not in the COVID-19 environment, but typically speaking, then you're allocating a fairly large budget to travel and gifts and so common goals that I find with the transferors on the family side are being able to fund a sound retirement and being able to meet the goals that a lot of them have put off for years while they were building the business. And then, on the other hand, a really common objective for better or for worst, and it almost doesn't seem consistent with capitalism and financing and all this getting money out of succession, but a really common objective is for the existing staff to be looked after. Business owners that have built these businesses over a long period of time want to know that even if they're transferring the business to their child or to a private equity buyer, that the staff will be looked over.

I hear that coming up pretty often, even in large business sales, that they do not really want to sell this business if the main idea is cost synergies and cutting out staff on day one. I think most business owners understand that business is business and you're doing planning and you want it to be viable as a buyer but having a goal around preserving the staff and the legacy of the business is truly important to a lot of them. And then you'll see varying degrees of objectives around, you know, some owners will come in and they want to get top dollar, they want fair market value for their business.

Can we finance that? How can it be done? And then I've actually had quite a few other business owners where they're truly concerned about their children not becoming so indebted to buy the business that now they have too much financial pressure for a situation that they may already not be that well prepared for. So family objectives are really important, and I work a lot in the farming community as well. And that's where you really see complicated family issues because you'll have a child that works on the farm for the majority of their lives and probably has foregone a lot of income. And then you might have another really well educated child that's, you know, a partner at a law firm in Toronto and hasn't really been involved with the farm. And so you look at the fit. The current farm operator is very concerned about how they equitably divide these assets without compromising the future of the business. So family dynamics and managing cash flow and sustainability of the business those are often significant concerns.

Protecting Your Family and Staff in a Family Business Transaction


Well, I I think that was a really good point when we think about business owners, their biggest asset is normally the business, which may be an illiquid asset. So certainly finding a way to fund retirement that, for many, is the eventual sale of their business, whether that be through the family or to a third-party buyer. And I think you also bring up a great point about protecting their people, a lot of them develop that family relationship with their employees, and they want to make sure that they have jobs after the transition and that their good jobs and they're going to stay there for them because they've been so dedicated to the business for so many years. So if we look at those two factors, the ability to have some liquidity with also the idea of taking care off their team, what would be some tax elements to consider when we're trying to maybe maximize liquidity or taking care of the staff in the next generation of the business?

Business Strategy is Central to the Value of the Business and the Tax Plan


Tax and business strategy and finance are financing are closely related. Obviously, when you have a really sound strategy, you have better access to financing, which allows you to do better tax planning and create more liquidity. But let's use a specific, or maybe a generic case study. Often times in smaller private enterprises, if you think about how small businesses evolve, entrepreneurs that started out a business, let's say, 30 or 40 years ago, the family may have immigrated here, or they may have started on humble beginnings. A lot of times what occurs in those businesses is that they didn't have access to financing early on, so I see a relatively common structure, especially where I takeover a new client relationship, where the building or the main properties that the business uses might actually be held personally, and that's because they had to buy them personally "back in the day." They couldn't access great bank financing in the corporation, so they bought stuff personally.

So in that particular case that raises a couple of financing and tax issues. You know, I worked through an example recently where the family has a very successful business and the buildings are owned personally for exactly that reason. And so when you're walking through the tax issues, you and I would be pretty aware, you want to maximize the QSBC, or the Qualifying Small Business Corporation gain exemption, and that's a little bit harder to do if you've got a big part of the tangible value held outside of the corporation. So you might have to look at reorganizing the building into the corporation and ensuring that you're not getting caught under any rules doing a transfer immediately before you reorganize shares. That's a particular case that comes up. And then another complexity that arises in that particular scenario would be what the buildings help personally by the transfer or then it doesn't really form part of the debt capacity of the business. So if you're looking for your child to pay fair market value for the business and you have a free and clear building, but it's not part of the sale than that child, as the buyer, is really losing out on a great opportunity for low-cost financing.

They might have otherwise been able to get a mortgage for a $1,000,000 on a building at 2.5 or 3% and if that's not going with the business you're losing the tax shield of the share structure, but you're also losing the availability of that really low cost financing. So that's just kind of one particular case study. And it is interesting how heterogeneous the set of examples are out there because no two businesses are organized the same. So you know when you look at basic tax structures that we would all be familiar with as practitioners, you're obviously looking at capital dividend account planning and grip balances and making sure that the current owner is extracting value that is fundamentally theirs, making sure that you maximize gain exemptions. If there's safe income, you might want to extract that into a holding company and be able to defer some some of the taxes through an inter-company dividend, which again you get into a little bit riskier area. Now, with tax uncertainty going forward, especially, I'll say that when you look at structures that use some of these tools, you just want to make sure that you're being thorough and that you're not over selling something in terms of tax risk.

I guess we could generically say that freezes are the most common structure where you're using a set of pref shares and votes to freeze up the value and then create future growth in the hands of family members, whether those are held by a trust or directly by the new the new purchaser of the business so freeze is a very generic term. But then you get into these very specific business and tax issues about how do you reorganize the business to accomplish a freeze? And like I had earlier mentioned, you know, you walk through a lot of the really obvious things like capital gains planning, CDA, if life insurance arises, how will that flow out of the corporation? GRIP balances if they are larger businesses that have GRIP pools, those probably should be crystallized in some manner. Another common structure for the seller is the use of holding companies because I deal with a smaller subset of private, well, maybe it's a large subset, but I deal with private enterprises that aren't enormous.

It's pretty common to use a holdco freeze and Section 85 whether or not a trust is needed is fact specific because I don't like to over sell a structure, especially in light of the fact that we could be looking at tax regime changes in the future. So that's a basic description of some of the talk structures. And we can talk a little bit more about business issues or some of the philosophies that the owners share, you know, what are the common principles? But those are the generic tax tools. The Section 86, the Section 85, the Section 51, the Pref shares, the votes and the structuring of the share attributes and then promissory notes, etcetera.

Financing for Succession Plans


All right, thanks, Kit. So the idea around these types of freezes, it still allows them to redeem the preferred shares over time, which will provide them liquidity they need for retirement or for their life goals once they moved on from the business, but also last them too. Maintain control of the business while the transition is happening. So let's speak about the transfer. Worry. How do transferees fund the Biota of the original shareholders if they only have resources personally because they have not been a shareholder in a corporation before? What are structures or ideas that you bring to your clients to help them take over the business from the prior generation?

Succession Planning Finances for Buyers


Yes, it's a great point about the transferee and again, every family's a little bit different. In some families, there might have been a trust in place where the child has significant personal wealth already, in which case that would kind of affect the way you want to finance and structure deal. But in a really common scenario for a private enterprise, you might have Mom and Pops operating the business for a long time, and the child may have served as any other employee did in kind of a line role, and so that employee might not have a lot of personal wealth. So if you looked at two streams where you know, the varying degree of personal wealth is a key factor for the transferees in a situation where the transferee doesn't have a lot of personal wealth and you're typically going to be looking for earn-outs or any kind of structure where the business cash flow is funding the buy-out of the parents. And that kind of structure is more favorable to the transferor because, really, you're using their asset to buy them out in the first place.

So earn-out is typically used in a situation where there's a dispute over goodwill, and you'll usually see that a little bit more in third-party sale where there's truly a negotiation for the goodwill, I don't see a lot of arm wrestling about valuation in family transfers. I mean, the parents want top dollar to the extent possible but like I mentioned earlier, a lot of parents don't want to indebt their children, where the children may not have the same risk tolerance and appetite as the parents. So you know it's a big question mark as to how they'll respond once they take over the business and their life fundamentally changes. So those factors are pretty critical to how you fund a deal now in a situation where a child's got more personal wealth or maybe they've already served in an executive capacity in the family business because the transferee could be 50 or 60 years old in some cases and that transferee because they have a higher degree of wealth, I'd look at that through a lens of paying really close to fair market value, which is is always kind of your benchmark, but you may want them paying real true fair value and structuring the financing so that the payout is rapid because they might have a higher degree of success in running the business than one reason you do that is because from a leadership perspective, it's really important for the new president. or whoever's in charge of the day to day operations to be able to leave their fingerprints on the business.

So you end up with this interesting conflict where it's really intuitive for the seller to take to retain control until their pref shares air bought out but then you encounter this human aspect, which is that the buyer also needs to know that Gramps or Mom and Pops aren't going to hamstring them every time they want to take on a new initiative and I'm finding that particularly relevant right now because in some of these legacy businesses that I've done well for a very long period of time, they might not have a lot of digital maturity, so there might be a fair amount of risk in transforming the business for the future. If that young leader or you know, maybe not young, but if the new leader doesn't have the ability to take on those initiatives because of a control overhang, then you can end up with some family conflict. And that's one of the guiding principles that I work with is really preserving family harmony because in the majority of family businesses, there's not this tension over wealth where it truly is a battle for money.

Succession Planning and Family Harmony


A lot of times, you know, I'll ask the question. Five years after this succession takes place, Do you still want all the family members sitting around the same Christmas table having a good time? Right? Because that affects your ability to negotiate hard if you're really looking to preserve family harmony. So I may have gotten a bit off topic there, but I think that these factors air so important. Understand that you're really dealing with a leadership development process. You have to look at the overall ability of the buyer to finance the seller you have to look at if the sellers needs air realistic. And so when it puts me it can put me in an awkward spot where sometimes I'll bring in another independent professional because in not in every scenario, is it feasible for me to represent the buyer and the seller. I mean, it raised the question of whether you should do that at all, but in a low risk transition, I'm more comfortable assisting the family on it. But in a high risk transition, you can have a fair amount of tension between the buyer and the seller. If the buyer thinks that the business is worth quite a bit, well, the transfer he has the contemplate. Are you really willing to pay that valuation? In light of the fact that you know the majority of the business cash flows going for the retirement, you may not have cash flow for a period, and if the control shares prevent you from taking on transformational initiatives, you may not be able to create the growth in the value that you need so really complicated issues. And I try to break them down through business issues first and then leave the tax structure to kind of shake out from what's going to make sense for the family. Can we handle the business and the strategy issues? First things first.

Family harmony with transactions

Tax Planning for Succession


Something interesting you shared Is that how these are normally funded or in cases that you see is we do have a freeze of the common shares, the transferor taking back preferred shares with voting and then the next generation come in with common shares. And that's a very common situation. But from a tax perspective, it doesn't leave the option open to recognizing the capital gains exemption. So in one situation we're maybe producing family harmony. we're finding a way for the next generation to buy into the business, but it may not be tax optimal. Is that a question that comes up from transferors? But how can they access their capital gains exemption? But by still using one of the structures, is there a way to get both? So that it's a have your cake and eat it too

Common Tax Structures in Succession Plans


So if you look at a situation and again, very fact specific, none of this really constitutes a specific plan, you always have to look at the composition of the assets and the shares and the availability of financing. But, if you used a Section 85 transaction to create a holding company freeze when the owner transfers their existing operating company shares into a new corporation, you could elect on your on your forms to trigger a gain and then crystallize some of that gains exemption. I think that's particularly relevant right now, too, because when you look at, you know, the federal government is having to spend an exorbitant amount of money to stabilize the economy, there are a lot of questions out there about which direction our tax rates are heading in and where's the low hanging fruit in terms of creating extra income for the federal government in the future.

Triggering capital gains in advance might be a prudent strategy in some cases, and especially where you use a gain exemption on a roll over transaction, that's a little bit harder to accomplish. So I don't like to use a Section 86 if you're getting to where you want to actually affect a full freeze and roll over, the Section 85 is useful because you can control the gain when you roll the shares over to a new company. We're talking very generically here in terms of a basic structure that you could trigger a gain. And then the compensation back to the owner is some freeze shares in the new holding company so that the values locked up there. But the big concern is tax risk and uncertainty because I don't like to over-sell complicated structures, especially in this environment where the Globe and Mail has been publishing articles and even top people in our profession are starting to raise questions about estate freezes. Are they equitable from a tax perspective? It's my opinion that they're a great tool. But if the federal government starts looking at freezes, when they've always kind of looked at pipeline planning from the estate perspective, there's a lot of question marks about if you can even do it.

This tax risk is a big factor because I don't like to impose a clunky structure in an unstable tax environment. But you know, there's a basic holdco freeze to crystallize a gain is definitely an option, and then you have to spend the time looking like did those shares qualify before you do the transaction? So a little bit of purification activity may be needed and what that favors is, and you would know this as well as I do, the longer the lead time you have for a succession, the more proactive planning you can do both on the tax side and on the family harmony and business transition side. That's really critical. Sometimes I get owners where they come in and they're burned out and they want out, that can be a challenging situation where the next generation is truly not prepared. They may not have had a lot of business projects to manage.

They might not have the managerial abilities with the staff. And so rushing a transaction like that is what I'll call high risk or where you're leaning on one successor, another risk that arises, and I know where we're talking about tax issues here. but another real business risk that arises because we were talking about transferees, if I'm a transferee and my father's right hand lieutenants are the same age and they're all retirement age, my mom and my dad might have a right hand financial person or might have a right hand operations person. And if those people are all retirement age too, then that would make me question the valuation of the business. Recognizing that this, you know, if the key value driver in the business is this management team and if that management teams eroding due to retirement, that would put serious question marks in my mind about the value of the business. So again, when you're looking at tax structuring and how do you finance these buy-outs?

I had mentioned previously, you could end up in a little bit of a tense situation here, where it's almost better to represent one or the other and have another accountant that you trust and that the family trusts sit at the table so that you can work through some of these inherent conflicts that arise and again sorry because I know you were talking about tax structures using holdco's and trusts, and there are some generic structures and there are very advanced structures too. I do not use as many of those for larger organizations, but again, I always tend to take it back to the fact that the tax and the financing can't really be extricated from the business issues. They're truly related matters. And that's where when I do my initial risk assessment on the probability of success of a transfer, because we know that they're not generally high success transactions in the first place, I'm really looking at the time frame and the preparedness of the transferor, do we have enough time to do a good job of this? Can we train the leadership? Can we purify the business? Can we set up a structure that is conservative enough to endure changing tax rules but aggressive enough to accomplish the desired tax benefits?

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Rebecca Scott
Web Designer

Rebecca is a Web Designer at BluePrint CPAs. She is a graduate of St. Clair College’s Internet Applications and Web Development Program and has worked as a freelance web designer before joining the BluePrint team.

BluePrint CPAs is a management consultancy that simplifies digital, financial and talent strategies. Our team helps entrepreneurs and their teams grow profitable and modern businesses.

Kit Moore, BluePrint CPAs President & Lead Tax Advisor
Kit Moore, CPA, CA
President & Lead Tax Advisor

Kit Moore, is an entrepreneur that simplifies digital strategy for other business owners. The team at BluePrint CPAs can assist you with web design, development, analytics, management systems and, more importantly, your overall business strategy. The toughest part of digital transformation is re-training your team - and we have pros to help with that as well.

BluePrint CPAs is a management consultancy that simplifies digital, financial and talent strategies. Our team helps entrepreneurs and their teams grow profitable and modern businesses.

Kit Moore, BluePrint CPAs President & Lead Tax Advisor
Kit Moore, CPA, CA
President & Lead Tax Advisor

Kit Moore, is an entrepreneur that simplifies tax and financial strategy for other business owners. The team at BluePrint CPAs can assist you with financial technology, tax strategies, mergers & acquisitions, succession & exit planning and, more importantly, your overall business strategy.

BluePrint CPAs is a management consultancy that simplifies digital, financial and talent strategies. Our team helps entrepreneurs and their teams grow profitable and modern businesses.

Joe Marra, MBA
Senior Associate, Strategy Consulting

Joe is a Senior Associate, Strategy Consulting at BluePrint CPAs. He is a recent graduate of the MBA Program at the Schulich School of Business and has most recently worked for Bayer Inc and the Ford Motor Company of Canada. His experience in marketing, sales, and human resources spans various industries including hospitality, logistics, life sciences and automotive manufacturing. Joe loves working with entrepreneurs to develop their digital strategies and help them grow their business.

BluePrint CPAs is a management consultancy that simplifies digital, financial and talent strategies. Our team helps entrepreneurs and their teams grow profitable and modern businesses.

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