When it comes to succession, some business owners prefer to pass
the business on to their employees. Instinctively, they know that
this can be a very risky way to transition the business. On the
other hand, they like the idea of passing on the business to
employees because these are the very people that helped to make the
business a success. I assist many business owners with planning and
executing tailored business succession strategies. In
particular, one method I have used successfully is what I call the
staged buy-out process. In that process I consider three critical
elements. First, the need for the business succession plan to
create an alignment of interests between the owner of the business
and the proposed successor. Second, the need for the business
succession plan to set measurable milestones to ensure that the
proposed successor has financial targets to meet that will generate
the income needed to buy the owner's interests in the business.
Third, the need for the business succession plan to provide
"escape hatches" that will allow the owner to unwind the
buyout if things were not working out as planned. When these
critical elements are present, the likelihood of a good result is
When effectively implemented, during the transition period this
strategy allows the business owner to maintain the same flexibility
and control he had over his business prior to implementing the
succession plan. This is a key benefit in the staged buyout
strategy but not the only benefit. In addition, the business owner
always retains the option of selling the business outright to a
third party. That's good for the owner and the employees
because, the proposed successor would also benefit by receiving
value for the acquired interest.
The succession plan would also provide sufficient incentive for
the proposed successors to put in the necessary time and effort to
grow the business over the buy-out period without harming their
chances of acquiring the business. In other words, the proposed
successors wouldn't be working against themselves by working
hard to increase the value of the business. Under my plan the
proposed successors would not have to pay for value that they had
created upon the buyout. As a result, they would have sufficient
incentive to add value and prove their worth as the successors.
I have implemented this strategy numerous times and it has been
very successful. The first thing the business owner notices is that
employees who had become shareholders express renewed interest in
the business, are willing to put in longer hours and are invested
in making improvements. These employee shareholders are also
committed to meeting the financial milestones established under the
plan, because failure to do so may result in the owner unwinding
the entire succession plan. In reality, the unwinding of the
succession plan would likely only happen following consultation
with the employee shareholders and a review of economic conditions.
The real objective of this plan is for things to proceed so well
that there is no need for the owner to ever use his "escape
hatches". The staged buy-out can be so effective that year
after year, financial milestones are exceeded by the employee
shareholders, rapidly increasing the value of the business. The
employee shareholders are happy about this because much of the
increase in value can be attributed directly to their shares. This
strategy is part of the "alignment of interests" concept
I champion in the staged buy out. In some cases, the plan is
structured so that the owner also receives the benefit of the
increased value of the business creating an even bigger
Business succession planning is not something to be taken
lightly and the assistance of an experienced adviser to guide you
through the process is a key factor in controlling how you exit
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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