How to ensure a secure retirement after you exit your company

In parts 1 and 2 of our CWB Wealth Essentials series, we looked at how to improve the value of your business, how to mitigate taxes and legal risks, and the importance of diversifying income sources to protect your wealth for the long term. Now, in Part 3, Jason Kinnear, Manager, Family Office Services at CWB Wealth, discusses four important steps to protect your wealth when exiting your company and planning for retirement.

1. Minimize the personal taxes you pay now and when you leave the company.

Exiting a company through the full or partial sale of your ownership stake is what we call a liquidity event—the transition of your equity into a (hopefully) large amount of cash. That can trigger significant tax consequences, making early and efficient planning essential.
One of the main strategies we encourage our clients to adopt is what we call 3D tax planning—focusing on deductions, deferrals and divisions. That means ensuring you are taking full advantage of allowable personal tax deductions and tax-deferral vehicles (such as RRSPs and/or individual pension plans, or IPPs), as well as taking advantage of any opportunities to divide personal income among family members involved in the business.

As you look towards an exit, a forward-looking corporate tax plan becomes key, ensuring you are deploying strategies to minimize the tax impact when you sell. There are legitimate ways to do so, in particular through the lifetime capital gains exemption, but remember that tax mitigation strategies like estate freezes and reducing non-performing assets can take years to plan and implement, so starting early is almost always beneficial.

Remember that income tax regulations can, and do, change. If you have a tax strategy already in place, reviewing and updating it at least every couple of years can help avoid unpleasant surprises down the road.

2. Protect yourself and your business partners.

Most people don’t like to talk about them, but there are always personal and business risks involved in operating a company. When they turn from risk into reality, unexpected setbacks can undermine the value of your business and derail the best-laid exit plans.

Business owners rightfully take pride in being primarily responsible for building and running their business. But that can also make them somewhat vulnerable. What happens, for example, if you as owner-operator become disabled or pass away? Partnerships face vulnerabilities, too. It’s usually the case that partners divide responsibilities according to their abilities and expertise. If one of them becomes disabled or dies, how will the company continue to operate? If the business is going to continue to grow, roles and responsibilities that become vacant will need to be filled, and ownership structure might even need to change.

Business continuity is a vital consideration to preserving long-term value. A good place to start is by reviewing your shareholders agreement and any employment agreements to ensure everyone is protected and that the agreements reflect the current legal landscape.

On a broader level, contingency planning for unexpected crises can make responding to them much less disruptive. And long-term planning for how you see the business evolving in the future, how your role and those of your partners (if any) will change, can smooth the path to a successful exit.

Also, don’t forget about insurance, which can provide for owners’ beneficiaries and reduce the financial impact of adverse events. It’s good practice to review your insurance needs regularly to make sure the policies, designated beneficiaries and coverage amounts are right for you, your family and your business.

3. Explore the full spectrum of personal and professional options available to you after exiting your company.

From the outside, selling your company for a tidy sum can seem like a dream come true. But for many owners, the idea of exiting the business can instill complex emotions—including fear. Some wonder how they will keep themselves busy or worry that they will lose their sense of identity. Fear of what comes next can make them put off exit planning or even the exit itself.

Along with the financial planning involved in an exit, it’s important to set aside time for life planning. Think about how you want to spend your days. Travel? Reconnecting with loved ones and friends? Or maybe you have a hobby that you want to take to the next level. Also, exiting a business can open up a new world of professional opportunities. Some former business owners go into teaching or venture capital. Some have become sought-after public speakers. Others with an interest in shaping their communities have gone on to serve in government.

Whatever your passion, think about how selling your business can help you follow it.

Talk about your plans with your family and with your advisors. When everyone is on the same page, you will feel more comfortable preparing for and completing your exit at a time that is right for you.

4. How is your company funding your retirement?

Many business owners are laser-focused on their businesses and don’t put a lot of thought into taking care of themselves in retirement—it’s common for many to simply hope that the payout from the eventual sale of the business will see them and their families through. But hope, as the saying goes, is not a strategy. However successful a business is now, relying on its future value to fund your retirement does not have to be your only approach.

The good news is that there are retirement planning opportunities that business owners can and should explore while they are still operating the company. One is the individual pension plan, or IPP, which may allow your company to contribute funds to a tax-deferred retirement savings account and realize a tax deduction on the contributions. Depending on the stage of your career and your timeline for exiting the business, an IPP, along with other savings and investment vehicles, can be a valuable part of a tax-efficient, diversified strategy to ensure a financially secure retirement.

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