Sometimes a financial advisor's ability to see a deal amidst the fog is crucial to pulling the funding together. Other times, the deal almost writes itself. Either way substantial sums of money change hands, resulting in a life-changing event for both parties. Here is one success story involving several financial professionals:
"Barbara," a very successful owner and operator of a hotel, incorporated her business 28 years ago. About 10 years ago, as part of an estate freeze, she sold 49 per cent of the ownership of her shares to her husband, "Donald," on the advice of their accountant. Since that time, the hotel business has thrived, resulting in a significant increased value. Today, it is worth approximately $4,000,000 according to a recent valuation.
Barbara and Donald talked to their accountant, lawyer, financial advisor, and management team five years ago about the possibility of selling their hotel and retiring this year. They planned to sell the hotel to their long-time general manager, "Sarif," who had expressed interest in buying in.
However, Sarif could not afford to buy it all at once and would need assistance with the financing. They agreed on a plan for Sarif to buy the hotel over a period of three years incorporating vendor-take back financing for a portion of the purchase price to augment bank financing.
This "staged exit" gives Sarif more flexibility with financing and reduces the tax burden for Barbara and Donald.
Barbara and Donald have always contributed the maximum to their RSPs every year. On the advice of their accountant, their company also set up an Individual Pension Plan (IPP) for them, to defer even more of their substantial annual income from tax. In addition, they recently updated their powers of attorney, Wills, and insurance coverage to ensure that if one of them becomes unexpectedly ill or dies, the other will be able to continue to operate the hotel or sell it without undue legal complexities or tax burden.
What did Barbara and Donald do right?
Initiated discussions with experienced advisors several years in advance of selling and engaged financial experts.
Had powers of attorney, Wills and insurance coverage to deal with life's unexpected events while they were working out their plan.
Had a suitable successor in mind and actively engaged him in the succession planning process.
Incorporated the business, saving taxes on active business income as well as creating the potential to claim the capital gains tax exemption on the disposition of their shares of a Canadian-Controlled Private Corporation. Since they are both owners, they may each be able to receive up to $750,000 of capital gains tax-free.
Set up an IPP, which allowed for additional tax sheltering of retirement savings beyond that provided by their RSPs.
Had the business properly valued by a CBV so everyone felt the purchase price was fair.
Because they initiated succession planning several years before leaving their business, Barbara and Donald are pleased with the outcome: Sarif will continue to run the business and they are well positioned for a very enjoyable lifestyle in retirement.
Mark Ryan is an Investment Advisor with RBC Dominion Securities Inc. Member CIPF. He graduated from Simon Fraser University in 1990 with a degree in Business Administration and has worked in the financial industry ever since, as a Commercial Lender, Risk Manager and Advisor. He lives in Prince George with his wife and 7 children.
