This is the third and last of a series on Bill and Mary who have a small manufacturing business. In this article, we will explain how Bill and Mary can efficiently transfer their business ownership to their children -- Gwen (married, age 23, working in the billing department) and Randy (single, age 24, running the plant under Bill's supervision for the last 18 months).

In the previous two articles we dealt with such factors as potential sibling rivalry and the reluctance of the founder (Bill) to embark upon an intergenerational transfer of ownership that will see his control relinquished. Bill and Mary have the majority of their net worth tied up in the shares of the business. While they would love to have Gwen and Randy ultimately own the business, they need their accumulated capital to generate retirement income.

There are several steps Bill and Mary should take:

Step 1. Bill and Mary need to know the value of the shares they own. Fairness and Revenue Canada both dictate this must be done in a defensible way.

Step 2. They must decide if they want to take advantage of any existing unused capital gains exemptions. Up to $500,000 can be received tax-free by both Bill and Mary if they follow the rules.

Step 3. They need to determine how much future growth they want to see in their own hands -- and how much in Gwen and Randy's hands. This will require some discussion. Bill and Mary should probably participate in future increases in value for some time.

Step 4. Assuming Gwen and Randy can only come up with a nominal down payment, a payment plan can be drawn up which sees a portion of Bill and Mary's interests "redeemed" out of the company's earnings over time. Note: absolute voting control should stay with Bill and Mary until they are satisfied that enough of their interest has been "bought" and they are comfortable about beginning to relinquish voting control.

Step 5. A formal shareholder's agreement must be prepared that deals with death, disagreement, disability, and current and future spouses as well. Great care must be taken to deal firmly but fairly with eventualities such as premature death or even divorce. For example, Bill and Mary may be concerned about the possibility of one of their children being in an unhappy marriage with the family business a potential casualty.

Step 6. A retirement plan should be done for Bill and Mary which shows their present assets and projects their sources of retirement capital. (For more information, read the "Why You Need a Retirement Projection" article.)

I strongly recommend seeking professional advice prior to acting on any plan to ensure that all interests have been protected and laws (including tax) have been complied with.

Bill and Mary can arrange to "sell" their business to the children and extract their built-up capital for their retirement if they plan ahead and get sound professional help. Gwen and Randy can end up with the business and may someday benefit from a similar transition. While no two family transition plans are the same, there are overwhelming advantages in most instances to pursuing an organized transition.

Should you want more information on options available to facilitate the transfer of your family business, please contact your Fraser Financial Group advisor.