Start at the very beginning
David Rowat, vice president at boutique investment bank Strategic Exits, says owners should start thinking about the sale of their businesses when they first form the company.
“It all has to do with tax, and the structures that you put in place early on can dramatically affect the tax that you will have to pay upon exit,” says Rowat, a specialist in guiding companies through the exit process.
For example, an exemption for Canadian-controlled private companies allows an individual to accumulate the first $800,000 in capital gains tax free. A common strategy among business owners is divvying up a company’s shares among as many family members as possible, allowing each of them to shelter up to $800,000 in capital gains generated by a business sale.
While experienced business owners may have laid the groundwork for their eventual ride into the sunset, young, aggressive entrepreneurs focused on surviving until the end of the week aren’t always as concerned with such a distant future.
But youth isn’t an excuse for ignoring what could be real concerns in the future. Particularly in the technology space, where Rowat spends much of his time, “certain kinds of wealth management and tax planning don’t happen soon enough,” he says.
The cheque’s been delivered. What now?
Let’s assume you just sold your highly successful business for $40 million. By planning ahead, you have minimized the amount of your proceeds going to the CRA, while putting other vehicles in place: trust funds for your children, tax-free savings accounts, various retirement savings plans and registered education savings plans.
Time to put the rest of your money to work.
1. Paying for the rest of your life
A conversation with a financial planner can help you determine how much the rest of your life is going to cost you, bearing in mind that as life expectancies get longer, life itself inevitably becomes more expensive.
For the portion of your windfall that you invest to cover your daily expenses, you’ll want to choose diverse assets with relatively low risk. That likely means low returns as well, but since this cash is meant to feed, clothe and shelter you for the rest of your life, you can’t afford to lose too much of it chasing rapid growth.
Bonds and fixed-income investments may not be particularly exciting, but Rowat is a fan of laddering, the process of buying bonds with different maturity dates as a means of hedging against interest rate swings and inflation. And international bond funds help spread out the maturities and diversify your holdings into foreign currency, he says.
Today’s increasingly worrisome inflation rates provide a teachable moment for business owners planning their futures. When the time comes to invest the proceeds of a sale, some of that money should go to assets that have historically weathered inflation: real estate, gold and investments in companies with the ability to raise their own prices.
Putting a stack of cash aside — Rowat says two years’ worth is a good rule of thumb — can also help you navigate any unforeseen, lasting market downturns.
2. Providing for your family and favourite charities
With your own finances mapped, you might have other priorities you want to tend to, such as leaving a legacy for your family members and supporting organizations close to your heart.
This is where more volatile investments, including growth stocks and foreign currency, play a larger role, as the higher returns involved will make the most impact. You won’t necessarily want to take big swings at individual stocks, but funds geared toward technologies such as robotics, artificial intelligence and medical tech, as well as those that track today’s FAANG giants (Facebook, Amazon, Apple, Netflix and Google), could provide short- and long-term growth.
With a substantial amount of money to spend, different tiers of the real estate market will open to you — residential, commercial, land and even development. Don’t overlook this option as a source of potential legacy income.
Not only can you set aside rental income from residential and commercial properties for your family or chosen charities, but when you're ready to offload them, you can potentially reap a hefty profit or simply pass them on. An appreciating asset makes a pretty decent gift.
And at a time when so many young Canadians are struggling to afford homes, buying your kids property may be the shortest route to helping them build wealth of their own.
The last piece of the puzzle
Once the grunt work’s done, and you’ve ticked each box on your financial planning checklist, Rowat suggests that you actually enjoy some of the money from your business sale.
“Take that trip to Antarctica you always wanted. Go see the Taj Mahal. The time to do it is before you start accumulating the aches and pains that make it harder to get around,” he says.
“Take a little money and go crazy because you’ve earned it.”