Giselle BodkinPartner, Accounting & Auditing

BDO Canada LLP

UNINTENDED CONSEQUENCES: IMPORTANT CONSIDERATIONS FOR OWNERS TO

PREPARE FOR THE UNEXPECTED

Rachel GervaisPartner, Taxation

BDO Canada LLP

• Exiting Your Business – One Day You Will Exit!

• Value Drivers – What Are They & How to Protect

• Traps – What Are They & How to Fix

AGENDA

ONE DAY YOU WILL SELL YOUR BUSINESS

THE 4 D’S – COMMON CAUSES OF INVOLUNTARY DISPOSAL

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isability

ivorce

isagreement

• HOW do I calculate the value?

• HOW do I protect the value?

• WHAT should I do now?

KEY QUESTIONS REGARDING THE VALUE OF YOUR BUSINESS

• Reality Check

• Measurability

• Retirement/Succession/Estate Planning

• Selling

• Merger/Acquisition

• Asset Protection

WHY IS KNOWING THE VALUE IMPORTANT? Some Common Reasons

• Retained Earnings

• Earnings Prospects

• Risks (Goodwill, Few Customers, Key Employees)

VALUE DRIVERS IN YOUR BUSINESS

VALUE DRIVERS IN YOUR BUSINESS Case Study

Case Study #1

Facts: Value:

- EBITDA = $2M Goodwill = $2M (= $2M x 1)

- R/E = $4M R/E = $4M

- Risk Multiple = 1(high owner involvement, few customers/suppliers, risky industry, etc).

Total Value = $6M

Case Study #2

Facts: Value:

- EBITDA = $2M Goodwill = $10M (= $2M x 5)

- R/E = $4M R/E = $4M

- Risk Multiple = 5(low owner involvement, many customers/suppliers, non-risky industry, etc).

Total Value = $14M

VALUE DRIVERS IN YOUR BUSINESS High Level Self Assessment of Value

Sample Business

Excess Retained Earnings A $4M

EBITA B $2M

Risks (1-10) 1 is high risk, 10 is lowC 5

Business Value A + (B x C) = $14M

• Diversify

• Organize and Fix Traps

• Innovation

HOW DO I REDUCE RISK AND PROTECT THE VALUE?

• “Owning” too much of your business

• Paying too much tax

• Feeling your company is “clean”

• Adequate Life insurance

• One or No Will

• Bad Shareholder Agreement

• Time for succession planning

ORGANIZE – FIX YOUR TRAPS!

• Estate Freeze - Freezes your tax exposure at current value of your business

• Allows next generation/others to participate in the future growth of business

• Allows for income splitting (with persons > 18)

• Allows for more persons to share the tax burden on eventual sale/exit of

business

TRAP: “OWNING” TOO MUCH OF YOUR

BUSINESS

• Discretionary Family Trusts

• Salaries

• Dividends

• Other

TRAP: PAYING TOO MUCH TAX IN GROWTH

AND EXIT PHASE

• Is your company eligible for the “Capital gains exemption” (CGE)?

• Individuals can claim an exemption of approx. $824K of the capital gains which arise when they

dispose of shares of a qualified small business corporation (QSBC)

• QSBC is a difficult definition to meet so you need to take steps to meet and keep

meeting definition

• Are the assets you want to dispose of and/or maintain in the right place?

• Reorganizations often required to meet objectives

TRAP: FEELING YOUR COMPANY IS “CLEAN”

• Often not set up properly

• In Opco? What if you sell Opco?

• Funding personally? Why are you using your after tax personal funds?

• Jan 1, 2017 Tax Rules Changing – Time to Act is Now!

• Enough Insurance? Too Much Insurance?

TRAP: INSURANCE

• Dual wills for probate planning/savings

• Wills do not tie into shareholder agreements

• Wills not updated regularly

TRAP: WILL(S)

TRAP: BAD SHAREHOLDER AGREEMENT

Entrance

Incoming shareholders need to

know the purchase price is fair and be able to link it to their

return on investment and

eventual sale of shares.

Exit

Outgoing shareholders need to

receive a fair value while ensuring that the payments are

affordable to the remaining

shareholders.

Compensation

Shareholders need to feel they

are receiving market value for the role they play separate

from their return on

investment.

Return on Investment

The ROI should be measurable

against the value of the investment and shareholders should realize a reasonable

return on equity.

Governance

Decision-Making

TRAP: TIME FOR SUCCESSION PLANNINGCanadian Business Owners Are Getting Older

0

100,000

200,000

300,000

400,000

# of Business Owners Age 55+

Source: Stats Canada

TRAP: TIME FOR SUCCESSION PLANNINGMen at Greater Risk from Aging

Source: Stats Canada

0

20

40

60

80

100

120

Males per 100 Females By Age

TRAP: TIME FOR SUCCESSION PLANNINGBusiness Owners Are Planning To Exit

Source: Stats Canada

0

100,000

200,000

300,000

400,000

500,000

600,000

Within 2 Years Within 5 Years Within 10Years

# of Business Owners Planning to Exit

TRAP: TIME OF SUCCESSION PLANNING Business Owners Are Planning To Exit & Haven’t Planned

0%

25%

50%

75%

100%

ReachingRetirement Age in

5-10 Years

That Have aTransition Plan

% of Business Owners

The Planning Deficit

Formal?Reviewed? Communicated? Agreed to? Updated?

Source: BDO, CIBC

REMEMBER:• Your Choice….

• Voluntary

• Involuntary

QUESTIONS