How to Prepare for a Smooth Family Business Succession

A majority of businesses in Canada are family businesses—privately owned companies where one or more family members of the owner (usually children) work in the business. In many cases, the question of succession planning and whether the children will eventually take over ownership of the business often arises.

Passing on a family business to the next generation is a major life event of which many owners dream. Realistically, this does not magically happen and requires carefully mapping out a family business succession plan. This article looks at the challenges of family business succession and highlights preparations to make for a smooth transition.

The Challenges of Family Business Succession  

Family business succession can be challenging in part because it is tied to the reality that the owner is going to retire someday. Questions about whether or not the next generation actually wants to take over, or if they can run the business as successfully, may arise. Furthermore, there may be and often are significant tax implications to such transitions that require proactive planning, along with considerations around protecting the business and legacy beyond the actual transition itself.

Without a proper family business succession plan, both the business and the family can wind up in unwanted conflicts, legal troubles and sizeable tax bills, sometimes preventing the business from making it to the next generation entirely. Preparations for a smooth family business succession can be divided into three stages: planning, transitioning, and exiting. 

1. Planning: Start the Process Early

If you are a family business owner and expect that one or more of your children will take over at some point, it is time to start the conversation. There are many things that you will have to work through, including estate planning, taxes, liability, and ownership stakes, and a full transition could take as long as 10 years.

Consult professional advisors and mentors such as attorneys and accountants who can provide advice relating to succession planning, so that your plan has a structure that protects all stakeholders, is tax-efficient, and timely.

For instance, the Lifetime Capital Gains Exemption is a powerful Canadian tax minimization tool often employed during business succession and disposition. It is an annually indexed amount ($892,218 for 2021) representing the capital gains resulting from the disposition of shares in a qualifying small business that can be exempted from taxation. It is available to all individuals such that each shareholder in the business could potentially apply this amount to their share of the total capital gain resulting from the transaction, often generating hundreds of thousands of dollars in tax savings. However, there are certain criteria that must be met in order to apply this exemption, including a stipulation that a given individual must own the shares for at least 24 months prior to the sale to which it would apply and that more than 50% of the business’ assets must be primarily used for active business in Canada over this 2 year period. As such, those hoping to benefit from this exemption would need to plan well in advance to meet these criteria, potentially employing strategies such as share issuance or moving passive assets from the operating company to a holding company.

2. Transitioning: Aligning the Family Business Vision and Financial Talk 

Once a child has demonstrated leadership competence and is prepared to begin the transition, a framework for family interactions and management responsibilities should be established. Communication between the two generations should be open and straightforward, with both sides listening to what the other has to say.

Financial discussions should never be avoided and while the senior generation is still present, they should take this time to introduce the financial statements of the business and their implications on business decisions. The senior generation should also use this time to introduce bankers and trusted advisors to help the later generation begin establishing credibility with these key people.

Attention should also be paid to the relationships and marriages of adult children who are candidates for succession as, following the transition, shares held by them personally may form Net Family Property within their marriage and be subject to division in the event of marital breakdown or spousal rollover in the event of death, potentially adding an undesired ownership interest into the business. It may be wise to consult legal expertise and explore ownership through a trust structure or the establishment of a marriage agreement to address these potential outcomes to protect the business and the interests of the family.

3. Exiting: Patient Today and Mindful of Tomorrow

With the transfer of the enterprise complete, the senior generation may wish to look beyond succession and consider their overall legacy, particularly if not all children are involved in the business. For heirs that may be employed outside the business but are meant to be beneficiaries of that legacy nonetheless, an estate equalization strategy may need to be assessed in order to ensure that children outside the business are not disadvantaged, for example making bequests of other assets. Life insurance may also be used to balance a legacy and provide an equitable transfer of wealth to all desired beneficiaries, by calculating the value of the business passed down to those heirs involved with it and using the future policy payout to provide a meaningful legacy to those outside the enterprise.

Family business succession takes time, and both generations must be patient as they navigate their way through the process. Senior generations should allow later generations to make some mistakes and allow them to do things differently. A successful succession requires patience, guidance, and a gradual exit—let your children run the show, but stay a while to provide your advice and wealth of experience. 


Bloom Investment Counsel, Inc. is a well-established Toronto-based independent, privately-owned boutique investment management firm providing customized, actively managed, Canadian and U.S. dividend-paying portfolios for wealthy individuals, family offices, foundations, corporations, institutions and trusts.

Founded in 1985, Bloom has experience in managing in excess of $2.5B in assets over the years. We believe that generating independent cash flow is central to the success of our clients’ portfolios because it provides capital for the present day, if needed, while continuing to preserve and build wealth for the future.

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This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.

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