Part 3. Understanding the Status Quo
In part 1 and 2 of this series we outlined the importance of communications in the stakeholder groups and the need to have strong structures. This entry discusses the readiness of the business for transition.
Determine what the status quo scenario looks like.
There are many factors that may prompt a transition – both anticipated or unanticipated. It could be age, health, stress or other circumstances not necessarily tied to a strategic reason to initiate a transition. An important matter is to address the readiness of a business for transition; a key starting point for this analysis is to assess the tax implications. For example, what would be the implications of the unexpected death of an owner? What amount of personal tax would arise and how would such amount be funded?
The tax funding question is key because it will have a direct impact on the business and the related. In the absence of proper planning the group may be faced with a tax liability that cannot be funded. This may lead to tough choices including the need to sell the business to fund the tax owing or to contemplate borrowing to fund the tax liability.
Once the status quo has been evaluated an effective succession plan will contemplate how the underlying tax liability can be minimized and setting a plan for the funding of the tax. We are often keen to see shareholders freeze the value of their interest in the corporate group – this sets the value of the equity so that the tax can be estimated and a funding plan can be put in place. Further, once a freeze has been implemented we may be in a position to decrease the value held directly by an individual such that the ultimate tax liability decreases. A family trust can be used as a family and tax planning vehicle to enhance tax and succession planning options.
In Part 4 we will go through some tips, tools and a tax planning example in order to demonstrate how working closely with professional advisors will benefit all stakeholders.
This discussion is based on the Welch LLP webinar “Succession Planning for Automotive Dealers” with Welch LLP Partner Jim McConnery CPA, CA, TEP and Sirius Financial Founder and President Susan St-Amand.