Selling Your Business P2

In Part 1 of Selling Your Business, we had been introduced to Miles. Miles was a hard-working everyman, who had translated his strong work ethic into a successful business. Now, Miles had received a large offer to sell his business. He knew it was time to cash out, but he had to do it the right way.

Who would he talk to?

A Trusted Circle

Miles had a trusted lawyer and accountant, but he wasn’t sure about the financial advisor he used. Typically, he would only hear from his advisor at RRSP time and he always recommended the same mutual funds. Noticeably, Miles’ investment returns had been quite flat for years.

The issue that concerned Miles the most was that he didn’t understand any of the investments he was in. Miles was a great businessman, but he didn’t want to look or feel stupid like he did in school by asking questions, so he kept nervously silent.

Miles had considered moving his investments to one of the new robo-advisors he had seen advertised during Hockey Night in Canada, but he was unsure how their generalized platform would help his unique needs. He also heard from a friend who used one that they rarely spoke to the same person. Since the advisor was different each time, personalized or specific tax or investment advice was impossible to get.

Miles’ friend mentioned that he was asked to fill out a risk tolerance form, was placed into one of many portfolios, and that was it. As much as Miles loved a bargain, he also knew that you typically get what you pay for.

You Get What You Pay For

After getting a few names from his lawyer and accountant, Miles and his wife met with several financial advisors. Most talked about their process, their returns, how great their firm was, and by the end, they all sounded the same. The two advisors Miles thought they would meet with again were the ones who asked the most questions. They really seemed to understand what Miles and Cheryl were going through.

Of the two, they ended up choosing Susan to work with, because the other individual was getting close to retirement. Miles and Cheryl wanted a long professional relationship, to work with someone who was going to be around for a long time.

When Miles and Cheryl met with Susan for the second meeting, Susan explained the process that she takes clients through. Susan also advised them of the costs of working with her in a way that was surprisingly clear and easily understood. The questions that were most pressing for Miles and Cheryl were:

• how do they minimize taxes?
• did they have enough to retire on given how much they spend?
• What options were available for their son Brett?

When Susan started to ask many different financial and personal questions, Miles became hesitant and reluctant. Miles had only met with Susan once before and thought it was strange that he would need to divulge all his financial information to a stranger. However, that wasn’t what upset him most.

What caused Miles so much concern was that he didn’t have many answers to Susan’s questions. The questions Susan was asking were forcing Miles to examine what was important in his life, not only in the present, but in the future as well.

Susan mentioned that she had seen this many times before – many of her clients had no idea what they wanted to do with their lives. They only knew what they didn’t want to happen. Most people Susan worked with were taught to put their heads down, work, and save as much as they could. Although Miles and Cheryl did all of those things well, they hadn’t thought much about what they wanted to do with the next phase of their lives.

Finding Your Balance

To help with this, Susan had developed a process she called, “Finding Your Balance,” that helped clients identify not only what was important to them, but why. As they went through the process, Miles and Cheryl were excited and surprised about many of the goals they were identifying. Although Miles and Cheryl had some vastly different ideas for what they wanted to do in retirement, they were eventually able to come to a mutual understanding with Susan’s help.

Part of what made Susan’s approach so unique was that, other than just asking how much money her clients wanted to spend in retirement, she helped them visualize and feel it. Susan had provided Miles and Cheryl with what she called a Vision Board, with various images that resonated with them. Miles and Cheryl admitted to Susan later that they found this process far more meaningful and insightful than just simply “running the numbers.”

When Miles considered his newfound goals within the context of how he had been spending in the past, it was abundantly clear to him that he had way too much “stuff.” Snowmobiles, boats, expensive cars – although he was excited when he first bought the items, in reality, they just sat in a storage facility outside of town.

Spousal Loans

One of the first recommendations that Susan made was to set up a spousal loan. With the sale of the welding business, Susan advised that all of the taxation would be in Miles name, since Cheryl was not an owner of the business. As the source of the income was from Miles, even after the funds were invested, all of the taxation would be in Miles’ name. And with Miles planning to continue working for the next five years, this would place him in the highest marginal tax bracket.

Cheryl, on the other hand, had stayed home to raise their children. Therefore, she was in the lowest marginal tax rate. Canada Revenue Agency (CRA) doesn’t allow individuals to “gift” money to their spouses to avoid higher marginal tax rates, but they do allow money “loans” to their spouses as long as they charge interest on the loan.

The minimum interest rate charged is known as the prescribed rate, which is determined by CRA. Although interest rates had gone up slightly in the last few years, they are still quite low. Susan estimated that if the funds were to be invested in Cheryl’s name, rather than in Miles’ name, it would collectively save them over $1,000,000 in taxes. Susan advised that the loan could be recalled at any time and the initial cost to set up a spousal loan was very low.

To Miles and Cheryl, doing a spousal loan was a no-brainer.

More on Spousal Loans

A spousal loan is only applicable to a very small percentage of the population and would only be considered if one or all of these conditions are met:

• One spouse is in a lower marginal tax bracket;
• You have a significant amount of non-registered cash investments (basically anything invested that is not in a RRSP, TFSA or other registered accounts).
• You have reached the thresholds for RRSPs and TFSAs.

In this scenario, Miles couldn’t just give the proceeds from the sale of the business to Cheryl – CRA would disallow this and subsequently tax the investment returns to Miles since he was the source of the funds.

The interest paid by Cheryl to Miles is a tax write off for Cheryl and Miles must claim the interest income on his return. The interest rate charged by Miles to Cheryl is known as the prescribed rate which is set by CRA and is currently near historic lows. The rate will stay the same until the loan is completed. The cost to set up the loan is minimal, typically around $500.

Susan had delivered on her promise – you get what you pay for. She had helped Miles and Cheryl to better understand their situation, and how they could use their legal relationship to help facilitate the sale of Miles’ business.

But that wasn’t all Miles was concerned about – he wanted to make sure his son Brett was set up for success well into the future.

Susan had a plan for that, too. We’ll talk about it in the final chapter of “Selling Your Business”.

Thanks for reading,

Brent

Brent Misener is a Financial Advisor with Raymond James Ltd. The views of the author do not necessarily reflect those of Raymond James. Statistics and factual data and other information are from source Raymond James Ltd. (RJL) believes to be reliable but their accuracy cannot be guaranteed. Information is furnished on the basis and understanding that RJL is to be under no liability whatsoever in respect thereof. It is provided as a general source of information and should not be construed as an offer or solicitation for the sale or purchase of any product and should not be considered tax advice. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. Securities-related products and services are offered through Raymond James Ltd., Member - Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a Member - Canadian Investor Protection Fund.