British Columbia Law

Business Succession Planning in BC: Why Every Business Owner Needs a Plan — and When to Start

By Andrew Liggett, Sea to Sky Law, New Westminster, BC

The Question Every BC Business Owner Avoids

What happens to your business when you are ready to leave?

Most business owners have thought about this — briefly, in the abstract — and then returned to the urgent demands of running the operation. There are clients to serve, employees to manage, cash flow to watch. Succession planning feels like something for later.

But "later" has a habit of arriving suddenly. An unexpected health event, a partner who wants out, a buyer who appears with a compelling offer, a dispute that forces a transition — these moments reveal whether a business has a succession plan or not, and the difference in outcome can be enormous.

Many Canadian small and medium-sized businesses are expected to change hands over the next decade as the baby boomer generation of business owners reaches retirement age. BC is no exception. Yet many business owners either have no succession plan or have not updated one in years.

This article is for BC business owners who know they need to think about this — and want to understand what is actually involved.

What Succession Planning Really Means

Succession planning is not simply deciding who gets the business. It encompasses:

• Ownership transition — who will own the business, and how the transfer will happen
• Management transition — who will run the business, and whether that person is ready
• Legal structures — whether the current corporate structure, shareholder agreements, and contracts support the intended transition
• Tax planning — how to structure the transition to minimize tax liability (in concert with your accountant)
• Estate planning — how the business fits into your overall estate and what happens if you die or become incapacitated before the transition is complete
• Timing — when to begin, how long the process takes, and what triggers could accelerate the timeline

Each of these elements interacts with the others, and each has legal dimensions that need to be addressed well before the transition actually happens.

The Four Main Paths for BC Business Owners

1. Sale to a Third Party

Selling your business to an outside buyer — whether a strategic acquirer, a private equity firm, or another entrepreneur — is the path that typically generates the most immediate capital. It is also the most complex.

A third-party sale involves business valuation, due diligence by the buyer, negotiation of purchase price and terms, representations and warranties, and the potential for significant tax consequences. The legal work alone — preparing the business for sale, negotiating and documenting the transaction, and managing the transition — can take many months, and often longer for a complex business.

Starting this process before you are ready to sell — rather than the moment you decide to — gives you time to:

• Clean up any legal loose ends (contracts that are out of date, shares that are not properly structured, disputes that have not been resolved)
• Ensure your financial records are in order and your corporate structure is appropriate
• Identify and address issues that a buyer's due diligence team will find anyway

A business that is prepared for sale attracts better buyers and commands a better price.

2. Sale or Transfer to Family

Passing a business to a child or other family member is emotionally meaningful but legally and financially complex. Key questions include:

• Is the intended successor actually capable of running the business?
• Will they purchase it (creating liquidity for the retiring owner) or receive it as a gift?
• If there are multiple children, how does a transfer to one affect the others?
• What happens to the business if the successor divorces, becomes incapacitated, or dies?

Family business transitions that are not properly documented are a leading cause of family disputes — and family law complications. If a child receives a business interest and later separates from their spouse, the business may become a family property asset under BC's *Family Law Act*.

Appropriate legal structures, including properly drafted shareholder agreements and potentially a cohabitation or marriage agreement for the successor, can protect the business from this risk.

3. Management Buyout

In a management buyout, the business is sold to the existing management team. This can be an excellent outcome — the buyers know the business, the clients, and the employees, which reduces transition risk. The legal structure of a management buyout can be creative: vendor financing, earnout arrangements, and deferred purchase price structures are all common.

The key legal documents include a purchase agreement, financing arrangements, and updated shareholder agreements among the management team. If the buyers do not have all the capital immediately, the terms of the vendor financing arrangement need to be carefully documented to protect both sides.

4. Winding Down

Not every business has a buyer, and not every business owner wants the complexity of a sale. Winding down — closing the business in an orderly way — has its own legal process. It involves fulfilling remaining contractual obligations, addressing employee entitlements, resolving any outstanding liabilities, and ultimately dissolving the corporation.

A planned wind-down, done carefully and with legal advice, is very different from a business that simply stops operating. The latter can leave personal liability exposure for directors and owners.

The Role of Shareholder Agreements in Succession

If your business has more than one shareholder, your shareholder agreement is the foundation of your succession plan — or the source of your biggest problems, if it does not address what happens when a shareholder wants to leave.

A well-drafted shareholder agreement should address:

Buy-sell provisions: What happens when a shareholder wants to sell their interest? Do other shareholders have a right of first refusal? Is there a mechanism for valuing shares? What triggers an obligation to buy or sell?

Death and incapacity: If a shareholder dies, does their estate automatically become a shareholder? Or do the remaining shareholders have the right to purchase the deceased's shares? At what price, and on what terms?

Disability: What happens if a shareholder becomes unable to work for an extended period? Is there a mechanism for the business to buy out a disabled shareholder?

Departure: What happens if a shareholder simply wants to leave — to retire, or to pursue another opportunity? Is there a vesting schedule that applies to their shares?

Many BC businesses — particularly those that were incorporated quickly and inexpensively — have either no shareholder agreement or an agreement that was drafted years ago and has never been updated. If your shareholder agreement does not address these questions clearly, you may find yourself in a very difficult legal position when a transition actually occurs.

Key Man Insurance: The Legal and Financial Backstop

One of the most practical tools in succession planning is key man life insurance (also called key person insurance). This is a policy owned by the corporation on the life of a key shareholder or executive. If that person dies, the corporation receives the insurance proceeds.

Those proceeds can fund a buy-sell agreement — allowing the surviving shareholders to purchase the deceased's shares from their estate at a pre-agreed price, funded by the insurance payout. Without this funding mechanism, surviving shareholders may find themselves in business with the deceased's estate or family members, which is rarely what anyone intended.

The legal and financial structure of key man insurance arrangements — who owns the policy, who is the beneficiary, how the proceeds are used — needs to match your shareholder agreement and your overall succession plan. This is an area where legal advice and financial advice need to work together.

Your Estate Plan and Your Business

Many BC business owners have a personal will, but the will does not adequately address what happens to the business. The two documents need to align.

If you own shares in a corporation, your will should address what happens to those shares. In some cases, a specific bequest to a family member is the right approach. In others, the shareholder agreement governs what happens regardless of what the will says — and the two documents need to be consistent.

If you become incapacitated rather than dying — a much more common scenario, given advances in medical care — your *Enduring Power of Attorney* needs to authorize your attorney to manage your business interests, including signing documents, making management decisions, and potentially initiating or participating in a buy-sell process.

Business owners who have neither a current will nor an enduring power of attorney are creating an enormous risk for their families and their business partners. The legal process for managing the affairs of an incapacitated person without a power of attorney (through the BC court system) is slow, expensive, and gives the courts control over decisions that the business owner would have made themselves.

When to Start

The honest answer is: earlier than you think.

A business succession plan is not a one-time document — it is an ongoing process that evolves as the business grows, ownership changes, and the owner's personal circumstances change. But it has to start somewhere.

The best time to begin is when the business is doing well, you are not under any immediate pressure to sell or transition, and you have time to be thoughtful. That is when you get the best outcomes — legally, financially, and for the people who depend on the business.

The worst time to begin is in a crisis: a health emergency, a partner dispute, or a forced sale. At that point, your options are limited and your leverage is reduced.

At Sea to Sky Law, Andrew Liggett has worked with BC business owners for 35 years on business succession, shareholder agreements, and the estate planning that supports a well-structured transition. If you are thinking about what the future of your business looks like — even if that future is years away — a conversation with a business lawyer is a good place to start.

This article is general information, not legal or tax advice. Meetings are by appointment only, by phone or secure video.