The Financial Advisor Guide to Business Insurance Principles
Self-Study Course # 6
BUSINESS INSURANCE PRINCIPLES
OVERVIEW
It really doesn’t matter if your clients own a large or small business, they need
you to help them solve all the problems where insurance could offer the solution.
To work for themselves, to be their own boss, to run their own business--for
many workers these phrases describe the entrepreneurial dream. In recent
decades thousands of individuals have set off to pursue that dream. Indeed, an
increase in the number of small businesses has created much of the growth of
new jobs in the Canadian economy.
Becoming a successful entrepreneur, however, is not an easy task. It requires
skill, motivation, hard work, and good luck. It also requires information in large
measure. The would-be business person stands on the brink of a new future
with a thousand questions that need answers. The time you take to insure your
business is just as important as the time you took to build it.
Insurance is one of the biggest precautions your clients and prospects should
take to protect their business. Regardless of the size of the business, they are
susceptible to all the same hazards as a homeowner, such as storm damage,
liability, theft or even death, disability or retirement.
Taking Care of Personal and Business Needs
Your clients and prospects have invested time and hard work into their business.
That’s why it’s important that they periodically evaluate any financial plan,
including their life insurance to ensure that their personal and business goals are
still being met as the needs of their family and business change over time.
You must understand that all business owners have different needs. To help you
better understand their planning needs and to provide strategies that may be
helpful for their situation, we have categorized their needs into three categories.
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Phase I - Start Up
If you’re business clients are just starting out, they are probably concerned with
issues that involve cash flow as well as strategies to help protect their family and
business.
Phase II - Growth & Maturity
If the business is already growing strong and maturing, you can help them begin
to focus on retirement planning and maintaining flexibility to access money if
necessary.
Phase III - Succession Planning
If they are ready to retire and pass their business onto the next generation, you
can offer life insurance products that can be an important part of their estate and
business plans.
In addition, through the course of your relationship with them, you can help them
understand how life insurance can be an important part of an estate plan, setting
up a trust, and securing their retirement by using the many tools that are
available to you.
Continuing the Family Business
Do they have a business continuation plan? Typically, successful family and
closely held businesses follow a business plan aimed at maximizing profits. But,
to maximize the value of their businesses for their own benefit and their heirs,
business owners will need more. A business continuation plan may complete the
equation.
Why Does the Business Owner Need Business Continuation Planning?
Three common characteristics of closely held businesses make business
continuation planning essential.
First, many closely held businesses lack successor management.
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If a chosen successor isn't there to open the doors, stock the shelves and direct
operations, the business may fail.
Finding a buyer and getting a fair price for the business may be difficult,
especially following the owner's disability or death. Unlike publicly traded
companies, a marketplace for buyers and sellers of closely held businesses
doesn't usually exist.
Finally, if you do not hold a majority of controlling interest, you or your heirs
should expect a reduction in your anticipated sales price. Buyers are often
unwilling to pay fair market value for a minority interest that lacks management
control.
Assuring the Preservation of the Business
So what's the bottom line? Unless they plan for the eventual disposition of their
business interests, the value may be diluted, not maximized.
Business planning is a complex undertaking, generally requiring the efforts of
more than one professional. The first step is putting together your team. Here
are the key members you should include.
Estate and Business Planning Lawyers
Choose a lawyer who specializes in estate planning and business continuation.
The choice could mean the difference between successfully achieving goals and
failure.
Insurance Professional
An insurance professional can assist in determining the best type of policy and
coverage that will be needed to meet any goals.
Certified General Accountant
A CGA can assist the business owner(s) in complex business valuations.
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Financial Planner
The financial planner may be the life agent or accountant or another member of
the team with broad knowledge and special training in financial planning. He/she
can coordinate the efforts of the team.
What Can You Expect from this Course?
Upon completion of this course, you will be more knowledgeable in the
organization and operation of businesses. You will be able to distinguish the
differences between the four types of business structures, with the emphasis on
the advantages and disadvantages of each legal entity.
You will explore the effects of death, disability and retirement on each business
situation. You will have a working knowledge of financial statements and how to
use the ratios to help establish an insurance need.
Every person, and every organization - whether living or non-living - is exposed
to risks, which can result in losses. The main function of insurance is to minimize
or to eliminate the effects of risks on individuals and organizations, to act as a
“transfer mechanism” whereby responsibility for losses from risks which occur
are transferred to insurers, and by which risks are “managed”. An insurance
company is a “business” too, and like any other business it needs to be run well
and profitably.
INTRODUCTION
Whenever a business owner dies or is seriously disabled, there are many
questions that must be answered. There are questions about the future of the
individual family, their business, its valued employees as well as their creditors.
In a recent study, it was found that over two-thirds of businesses did not have
any life insurance of any kind. Many of these same organizations were unaware
of the business uses of life insurance.
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When the remaining one-third was looked at, it was found that many were
underinsured or has very limited coverage for the other contingencies of disability
and retirement.
Two goals of the agent/broker when dealing with Business Insurance
When an Advisor / Agent / Broker takes a look at business situations, it is wise to
look not only at the owner, but also to the other employees of the company. With
this said, there are two main functions of an agent’s / broker’s work with the
business owner.
1. An Advisor / Agent / Broker must take the time to uncover and then
discuss any problems or dangers that may be uncovered in the interview
process. When any areas of concern are discovered, the Advisor/ Agent / Broker
MUST take the time to discuss them in depth.
2. Secondly, the Advisor / Agent / Broker MUST convince the business owner
that the problem has to be solved without hesitation, and then try to help
solve it.
THE FIVE MYTHS OF SALES PROSPECTING
Myth #1 - Prospecting is sales
This is the number one mistake made by small business owners and sales reps.
Prospecting is a separate function from sales. Just as marketing is distinct from
sales but closely linked. Prospecting is simply discarding all the unqualified
leads and retaining the "gold". The job of prospecting is to find qualified leads
that may buy your product.
Myth #2 - Prospecting is a numbers game
The old school of prospecting for business relies on contacting large numbers of
cold contacts. However, quality supersedes quantity. You must find prospects
that have a propensity and possible motive to buy your suggestions and
recommendations.
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Myth #3 - Scripts are for kids
Many sales people insist on prospecting without any script. Scripting provides
the framework of a successful prospecting campaign. It allows you to test what
key benefits and qualifying questions work. The script must be personalized so
the presentation does not sound "canned".
Myth #4 - Prospecting takes time
It only takes a few minutes to determine if the lead wants your benefits and can
afford your company's product or service. Don't waste time on people
unmotivated or unable to buy. Remember to focus on the "gold".
Myth #5 - Close them on the appointment
Far too many sales reps focus on setting the appointment. "Would Friday
morning or afternoon, be better for you?" And then only 20% of appointments
show up. What went wrong?
Prospects will sometimes find it easier to agree to an appointment rather than
saying they are not interested. If a prospect is remotely interested, then offer a
much subtler approach...send them an information package. This allows you to
build interest and turn the lead from warm to hot.
Sales prospecting done right can have a huge impact on your sales revenue. It
does not take an armour suit and great courage to deal with the fear of rejection
during prospecting. Just keep an open mind to challenge the old sales
approaches and the myths of prospecting.
IN MANY CASES, THERE IS ONLY ONE SOLUTION
More often than not, the solution is cash and plenty of it! In most cases, this
money will not be available unless the business prospect realizes that there is a
problem before it becomes a problem and takes the necessary steps to avoid a
crisis. If they wait and death or disability happens, then a solution is certainly out
of reach.
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PROSPECTING IN THE BUSINESS INSURANCE MARKET
It is essential that Advisors / Agents / Brokers understand the business insurance
market in order to take advantage of its many opportunities.
Prospecting is the key to success in the insurance business. This is true whether
you are looking for individual or business insurance sales. Both cases involve
understanding whom to contact, determining where to find them, and deciding
the best approach.
To this extent, we have provided some information on how you can do this. For
some, it may mean a change in how you do business while for others this
information will just be a review as you are doing it already.
SEVEN HABITS OF BUSINESS SUCCESS
The elusive dream of business success captures the imagination of aspiring and
existing business owners everywhere. A vision of flowing profits, industry
respect, thrilled customers, and a balanced life. This vision is only possible by
developing habits that drive business success. Take the time to learn the 7
habits of business success.
Habit 1 - Cultivate Inner Networks
Entrepreneurs practicing the art of business success know the power of
networks. They take the time to identify and build relationships with key peers,
mentors, and advisors. This inner network provides support, direction, and an
increased number of people to assist. Having an inner network of 5 people who
have a network of 5 more, grows the network exponentially.
Habit 2 - Customer Centric
Business success requires an unwavering commitment to the customer. This
commitment encompasses a mindset of understanding the customers' world.
Understanding the customer’s wants and needs provides the business with a
greater opportunity to earn a loyal customer base. Focus away from business
and profits, and toward what you can do to improve the life of your customers.
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Habit 3 - Humble Honesty
Business success requires the ability to know your strengths and weaknesses.
Being open and honest about yourself and your business creates growth as an
individual and as a company. Don't spend time developing weaknesses. Find
help for weak areas, enabling you to focus on strengths. Take the time to know
yourself and your business.
Habit 4 – Adaptability
Business success requires the ability to adapt to changing situations. Nothing
ever goes as planned. The world of business is full of surprises and unforeseen
events. Using the habit of adaptability allows business owners to respond to
circumstances with the ability to change course and act without complete
information. Being flexible allows you to respond to changes without being
paralyzed with fear and uncertainty.
Habit 5 - Opportunity Focused
Problems are a regular part of business life. Staff issues, customer
misunderstandings, and cash crunches- the list is endless. To achieve business
success, look at both sides of the coin. Every problem has an opportunity.
Being opportunity focused makes the game of business fun and energizing.
Habit 6 - Finding A Better Way
Productivity is the cornerstone of business success. Formulate the habit of
finding a better way to make your business more productive. This will create
more time to focus on the critical issues that drive sales and profit. Productivity
can be enhanced by technology, automation, outsourcing, and improving
business processes.
Habit 7 - Balanced Lifestyle Management
A business can consume an owner's time and energy. It's easy to allow the
business to take control of your life. Business success requires the habit of
balancing all aspects of your life.
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Separating time for daily business tasks, profit driven tasks, and free time is a
habit that will make your business and life more enjoyable. Take the time to plan
each week.
Learning and instilling new habits in your daily business life can have a dramatic
effect on your level of success. Review each of the 7 habits. Choose one habit
to focus on for a month or until you achieve mastery.
FIVE KEY TRAITS
Stellar sellers and entrepreneurs share the same strong traits. An entrepreneur
will excel because they have such enthusiasm for their service, and their
ebullience is embraced by prospects accustomed to the same-old, same-old
hackneyed pitches. A great closer will possess an aura of competence and zeal
that makes him top of the office each month.
The five key traits of successful entrepreneurs are:
1. Creativity
Having an appreciation for the non-obvious solution is a must if a sales pro is
going to outpace the pack. While an average salesperson depends on business
cards and leave-behinds, a true rainmaker brings a unique vision to his work that
makes him stand out.
2. Passion
Genuine love for a product gets salespeople through the inevitable dark times,
and it makes their offers all the more irresistible to their clients. Passion, like
creativity, cannot be faked, so it has great weight with customers.
3. Integrity
Why are some professions so poorly regarded? Because the perception is that
they lack integrity and that they'll say anything to get the sale. Many sales and
communications experts believe that integrity tops the list of qualities salespeople
need.
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Feeling good about a purchase is a hallmark of buying from a salesperson with
integrity. Trust brings customers back, and that's a key factor to the success of
any salesperson. The importance of selling with integrity has been heightened
by the recent poor ethical and financial performance of huge corporations.
Customers still buy the salesperson!
4. Tenacity
Shelving feelings of rejection to keep plugging away is another essential
requirement for sales success. It takes personal courage to get up every
morning and say “I am going to be the best.” It also requires a certain steely
quality to persist in the wake of one dismissal after the next. Sales require
someone who can always see possibilities, even in difficult situations.
5. Commitment
The sales cycle for any big deal can typically take months, even years. Keeping
an eye on the prize, while continuing to sell to other prospects simultaneously,
takes commitment. Selling is never easy. You must have a burning desire.
Success is the result of a person's willingness and intent to make things happen.
SO WHERE DO YOU START TO PROSPECT FOR BUSINESS INSURANCE?
1. Understand whom you want to meet.
In a business setting, this will usually be the business owner – the person
who makes the major decisions and signs the cheque. Initially, Advisors
/Agents / Brokers may feel somewhat intimidated by the thought of dealing
with business owners. But it is important to remember business owners and their
organizations can benefit greatly from services that you provide.
2. Determine where to find these prospects.
Your personal clients can provide you with an unlimited number of prospects.
Always try to find out where your clients work, etc. Another excellent way to
meet business owners is by getting involved in your community, because that’s
what many business owners do.
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Join a service, fitness or racquet club. Become a member of church
committees or a volunteer for charitable organizations.
Some suggestions for locating business prospects are – your present Group
Insurance clients, Business Insurance clients, Personal insurance clients Local
newspapers, financial reports and any business people you know.
3. Choosing the best approach.
This all depends on the circumstances. Referred leads seem to be the
method of choice for many Advisors / Agents / Brokers. A good way to
familiarize the prospect with your name is through a brief pre-approach letter that
outlines why you want to see them and reviews the products and services you
offer.
In this era of time restrictions and growing competition, it’s not easy to
prospect for new business. That’s why you need a prospecting plan that is
strategically focused and easy to execute.
The final step is to get out and do it. Any successful Advisor / Agent / Broker
will tell you that great intentions are noble, but great intentions don’t get the
job done!
WHY FOCUS ON BUSINESS INSURANCE?
Many financial professionals now recognize that it is more rewarding to prospect
among businesses than consumers, for several reasons:
1. You can easily identify small businesses in your market and access data
about them.
2. Business owners always have financial needs to address. Unlike some
consumers, they can’t afford to “stand pat."
3. You can develop powerful referral networks by focusing on specific industries
or types of businesses.
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BECOME A RECOGNIZED EXPERT
There are many professionals who are trying to get noticed by the businesses
community. Yet, because the marketplace is more discriminating and sceptical,
it's hard to get noticed. To enjoy the greatest return on your marketing efforts,
you need to rise above the crowd. You need an edge over the competition. In
short, you need to become noteworthy by establishing an expert reputation.
Not so long ago, expertise was equated with the number of years you were in
business or the university or professional levels that you had achieved. That has
changed as people have come to be more interested in results. If you can
deliver, people will be interested in you no matter how brief your business
experience or how bare your walls are of any recognition.
Experts are sought after. They get more business with less effort and command
higher fees and earn more than their counterparts.
Journalists come to them for information. They are asked to speak at
conferences. They out-position their competitors and break out of the anonymity
trap because they know more and are recognized as knowing more.
Becoming an expert can help you achieve "top of the mind" awareness among
members of your target market. By packaging your knowledge into articles,
speeches, and workshops your name can immediately come to mind or be the
first one mentioned when members of your target market turn to others to find
what they need.
Publish
Publishing articles, columns and books are powerful techniques to establish your
expertise. Publishing pre-sells others on your abilities and exposes you to
thousands of prospects.
And reprints of published articles make excellent, low cost sales literature, easily
replacing expensive brochures, mailers, and newsletters.
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There are endless opportunities to publish. Thousands of business, trade and
Internet publications covering every imaginable industry and audience are fairly
easy to break into, even for beginners. If you have a good idea, tailored to a
specific readership, there are hundreds of publications hungry for articles.
BUILD YOUR BUSINESS INSURANCE REFERRAL BUSINESS
Growing a small business is tough work. The sales function is a time consuming
task with a constant need to fill your "sales funnel" with fresh, qualified prospects
on a regular basis. Finding the best qualified leads for your business does not
come from a cold contact situation but from building a strong referral business.
The business of referrals makes sense for most people for the following
reasons:
1. Referral business reduces your sales expenses and sales cycle. With less
time calling cold prospects, your small business can focus on customers and
their circle of influence.
2. Referrals can build your level of satisfied customers. The cycle selfperpetuates with more satisfied customers referring others to your company.
3. Referrals increase your sales revenue.
If the prospect of building the referral end of your business is so enticing, why do
so few businesses do it? Because they use the wrong approach in building
referrals and have limited success.
So, how do you Build Referrals?
Set A Target
In business, measure the results to improve performance. Set a clear goal with a
time line (For example, 10% increase in referral business over the next 10
weeks).
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Timing
Conventional sales wisdom claims the best time to ask for the referral is
immediately after the close. This tactic is far too aggressive.
Give your clients time to experience your service or product before asking for a
referral. Ask for the referral at close only if your client is already delighted with
your business.
Your Top 20
Not all customers are referral candidates. Find the top 20% that are ecstatic
about your business and ask them for referrals. Make sure their network is the
type of client you want.
Give and You'll Receive
Give your clients extra service and follow-up support before asking for referrals.
When you give willingly to your customers, they will return the favour.
Type of Customer
Inform your referring clients of the type of customers you can help. Provide a
clear picture of the customer demographics for your small business.
Rewards Program
Provide special rewards to your referring customers on a regular basis.
Thank-You
Businesses need to establish trust to build referrals. Create a basic thank you
letter that can be personalized and sent to each referral you receive. Treat your
referral sources with the utmost of care and you will not only build a foundation of
trust but keep hot prospects coming to your door.
These tips are simple but when executed on a regular basis they can drive your
referral business and build sales revenue. Start today and watch your referrals
grow.
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COMPETITIVE ADVANTAGES
In today's economy, big and small businesses are seeking every opportunity to
win sales through competitive advantages. Smart owners of small business
know a sales strategy can create a competitive advantage.
Selling consists of two main functions
1. Tactics
2. Strategy
The tactics of selling are very important but equally vital is the strategy of sales.
Sales strategy is the planning of sales activities: methods of reaching clients,
competitive differences and resources available. Tactics involves the day-to-day
selling such as prospecting, sales process, and follow-up.
Competitive Advantages of Strategic Sales Planning

Increased closing ratio by knowing clients hot buttons

Improved client loyalty by understanding needs

Shorten the sales cycle with outside recommendations

Outsell competitors by offering the best solution
SUGGESTIONS THAT HELP YOU WITH BUSINESS INTERVIEWS
The presentation is starting. Dim the lights. Time for a nap. These are the
thoughts of many audiences subject to yet another boring business presentation.
1. Dig Deep
Having an effective business presentation that will have the audience on their
feet requires more than the usual factoid dropped into your PowerPoint. Find a
relevant fact beyond your topic norm. Give them the unexpected. The one
obscure and contradictory piece of information that will raise heads and stimulate
discussion. Where do you find such information?
Go past the typical quick search engine scan. Check out educational websites
for new research, interview industry mavericks, or scour the business press.
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2. Avoid Info Overload
When you overload your audience, you shut down the dialogue that's an
important part of decision-making.
When you remove interesting but irrelevant words and pictures from a screen,
you can increase the audience's ability to remember the information by 189%
and the ability to apply the information by 109%.
3. Practice Delivery
A knockout business presentation is so captivating it makes you forget about the
speaker and become absorbed in the talk. Practice your delivery over and over
until you remove the distractions including nervous tics and uncomfortable
pauses. Pay particular attention to your body language. Is it non-existent or
excessive? Good presenters work the stage in a natural manner.
4. Forget Comedy
Business presenters will flirt with the temptation to deliver the stand up humour of
Chris Rock. Remember your audience didn't come to laugh; this is a business
presentation. Leave your jokes at home. It's ok to throw in a few natural off the
cuff laughs but don't overdo it.
5. Pick Powerful Props
You don't need a box full of props like the watermelon-smashing comic,
Gallagher. A few simple props to demonstrate a point can be memorable in the
minds of your target audience.
6. Minimize You
Your audience doesn't care as much about your company history, as they do
about whether you can help them solve the specific problems they face.
Write a script for your presentation that makes the audience the protagonist, or
the main character, who faces a problem that you will help them to solve.
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7. Speak the Language
A knockout business presentation doesn't leave people wondering what you said.
It might be tempting to throw in a few big words but are you alienating your
audience? Always explain terms and acronyms. The number of smart executives
who aren't up on the latest terminology would surprise you.
8. Simple Slides
Beware of the PowerPoint presentation. Many corporate brains will turn off at the
sight of yet another PowerPoint presentation. Over 400 million desktops
currently have the PowerPoint application. If you want your business to stand
out, don't be like everyone else. Use slides in your knockout presentation to
highlight and emphasize key points. Don't rely on your slide projector to run the
show.
It all comes down to what your audience walks away with in the end. Did you
deliver another boring business presentation? Or did you persuade or motivate
everyone to action? Apply the previous information and watch your results
increase.
THE FIRST INTERVIEW WITH THE BUSINESS PROSPECT
Adequate preparation and planning for an interview are critical steps in the sales
process. They ensure effective use of the interview time and also help to build
confidence.
The first step is to learn something about the prospect and the business he or
she represents. Information can be obtained from friends or acquaintances of
the prospect, and existing client bases.
The Interview
The initial interview will likely be the most important opportunity to make a good
impression on the prospect. In most cases, you would not go into this meeting
expecting to make a sale.
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Generally, the initial interview is considered a success if you begin to establish a
relationship with the business owner and secure a follow-up interview.
Building Relationships
In order to begin to build a relationship with the business owner, you need to sell
yourself as much as you sell the company you represent. A short visual
presentation, which includes the following, can be useful:

Your qualifications and experience in the market.

Your companies’ reputation.

A review of how you operate.
Get the “Soft Facts”
Concentrate on the “soft facts” during the initial interview.
Ask questions such as:

How did you get started in the business?

What are the reasons for your success?

What are your plans for the business?
This line of questioning is non-threatening and will give you a good idea of the
kind of individual you’re dealing with. It will also help you to qualify the prospect’s
insurability, insurance need, ability to pay, and accessibility. And the questions
will allow you to determine which areas should take priority in future discussions.
THE FACT FIND
At this point, you have probably used the time allotted for the initial interview.
In most cases, completion of a detailed fact-find will have to wait until your next
interview. Make sure that you get a commitment from the owner for a follow-up
interview.
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Why Complete a Fact Find?
A successful fact-find will help you and the prospect identify potential business
insurance needs. It can also help to prioritize needs, allowing the prospect to
focus on the problem at hand. Also, the fact-find provides a permanent record
you can refer to when any business is placed, and can be used in a follow-up
when outstanding needs are reviewed.
A fact-find provides an effective way to guide the discussion with the business
prospect. It helps ensure your time together is used wisely. A good fact-finding
interview will enhance your professional image.
Hard facts in your fact-find, and the soft facts and other information gathered
during the interview, are key ingredients that will help you make the best possible
recommendations for your business prospect.
A good fact-find should include:

General information about the business and the owners.

A list of soft fact questions to use during the interview.
Questions to develop the business needs should be centered on the following:

Business Loan protection

Buy-Sell funding

Disability, Critical Illness and Long Term Insurance

Employee benefits and pensions

Employee Assistance Programs

Personal needs of the business owner
Whatever format you use, make sure that you are familiar with the fact-find
before the interview. Your image can be harmed if you’re not prepared and don’t
have answers to queries such as, “Why is that question important?”
You have put a lot of time and effort into approaching the business prospect.
You owe it to yourself to ensure the fact-find is done properly, because it will help
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ensure that your recommendations are appropriate. This in turn will lead to the
successful conclusion of the case.
We have included some different forms of Fact-Finds and questions to use with
the business prospect.
Example 1
Questions to Ask a Business Owner
If you had died last night – How would these questions be answered today?

Who is running the business?

To whom do they report?

How does your spouse get income?

Who will pay the creditors?

Does the bank have your personal guarantees?

Are there partners?

What will they want?

Should your shares be sold?

Will your partner(s) buy them?

At what price?

Where will they get cash?

Is this what you want?
Example 2
Small Business Five-Minute Fact Finder
1.
How’s business?
2.
Are you a corporation, a partnership, or sole proprietor?
3.
Who would or who could run this business if you are not around/
4.
Is it a relative? Or is it an employee?
5.
Can you give me the names of all the owners and their percentage of
ownership?
6.
What is their age? Are they in good health?
7.
Was this business purchased? What price did you pay for it? How long
ago was that?
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8.
How long do you plan to continue in business?
9.
What plans do you have for retirement?
10.
If today was a good day and someone offered to write you a cheque for
the value of this business, how much would that cheque have to be?
Example 3
How Secure is the Financial Future of Your Business?
Have you made the necessary plans for safeguarding the
future of your business?
This handy 10-point planning checklist will help determine whether adequate
plans have been made.
YES NO N/A
1. I intend to continue to own the business for the foreseeable
future
2. I have a good idea of what the business is worth today
3. My professional advisors have updated my estate plans
within the past five years
4. My will has been updated to reflect my estate plans for
passing on the business
5. My spouse is fully capable of running the business in the
event of death or disability
6. I am aware of the tax implications of a sale or transfer of
the business in the event of my death or disability
7. The business has enough cash on hand to pay off bank
debts in the event of my death or disability
8. If there are other owners involved in the business, we have
a written buy-sell agreement that is adequately funded
9. The business is financially able to cope with the death or
disability of a key employee
10. The business provides group insurance and pension
benefits to our employees and their family members
An Advisor / Agent / Broker should know how to help the business owner answer
these questions. In order to do this, you have to become familiar with Business
Insurance and the different types of business ownership, and how they apply in
various situations.
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PROSPECTING FOR BUSINESS
The primary sources of prospects can be found in your present client files. Most
of these policyholders work for or with small businesses. Small business firms
can be classified as having gross revenue of 1.5 million or less in a fiscal period
(1 year or less). Most Canadian businesses will fit that category.
Qualifying Business Prospects
Like family insurance prospects – business insurance clients need to meet the
same qualifications:

Ability to pay

Need for insurance

Be able to qualify medically

Be accessible
The more prospects you approach the more skill you develop. It is essential to:

Do your homework – know as much background as possible.

If at all possible – be referred.

Develop a working relationship with a team of advisors – accountants,
lawyers, and trust officers.
If you are new to business insurance, contact a veteran, offer to do joint work and
split the commission. You do the initial prospecting; your “expert” comes in at the
presentation and close.
A good Business Insurance Advisor Must Have Two Qualities:
1. Technical Skill
2. Sales Ability
The technical skill can be developed by study, but the sales ability can only be
developed by interviews.
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BUSINESS INSURANCE IN MORE DETAIL
The meaning of “Business Insurance”
The term “Business Insurance” includes insurance, which is started with the
object of rendering assistance in the administration of a business, in times of a
crisis.
Business Insurance provides collateral security in times of financial strain. It also
provides funds with which to absorb the shock, which a firm suffers in case of the
death of one of its valued employees, and lastly it assists a person who has an
interest in the business by getting this interest out of the business or acquiring a
more complete interest in the business.
Whatever the situation, available cash is required to prevent tragic losses.
Insurance on the life of the owner is usually the best and often the only means of
making this cash available.
The purpose of “Business Insurance”
The purpose of Business Insurance is to protect the viability of the business and
the lives of the people who own it. The protection of the people involved and
their assets is primary of course, but the guarantee of a business to carry on is a
close second.
The human life values in business rest on two abilities
The first is a mental ability that is creative and the other is a manual ability or skill
that enables the individual to produce a product that will generate a profit. Some
businesses like professional practitioners require only one, but manufacturing or
a service industry, requires both.
Business Insurance provides us with the ability to protect both of these vital
aspects of a business operation.
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The term “Business Insurance” thus refers to insuring human life values of
business owners and employees in order to develop a sound business and to
help preserve the value of any business interest, as well as to transfer control in
accordance with the owner (s) wishes.
Business Insurance usually falls into one of three categories:
1. The funding of business arrangements to enable the survivor(s) to carry on
after the death of the owner or one of the owners – Buy and Sell Agreement
between partners or shareholders.
2. Insurance to provide for recovery of loss of income in the event of business
interruption due to the death of one of the owners. It would be as wise, in
most instances, to insure the human life values, as it is to insure the physical
assets.
3. The third category is one of protection by insuring the employees and their
dependants from the financial hardship that can be created at death, disability
and retirement.
The Insurance we place on the lives of the owners and their employees is
used to:
1. Transfer ownership of an owner to a new owner, a partner or another
shareholder(s) in the event of death, disability or retirement.
2. Insure Key Persons – Often success of a business rests on the shoulders of
one or more very talented employees. These vital components, if the
business is to continue successfully, should be insured in the event of their
death or disability. Business life insurance can enable key employees to
purchase the business at the owner’s retirement.
3. Employee Benefits - Provides coverage for the business’s most important
asset, the employee.
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4. Collateral Security – An insurance policy is of value as a security for a loan or
debt because it may have a definite cash value, which a creditor may secure
to cover the loan.
The Four D's of a Business Exit
1. Death
The issue of the death of a small business owner should be considered during
the start-up of a business.
Unfortunately, during the creation of many buy/sell agreements the issue of
death is only addressed at the urging of a life insurance agent. At the meeting,
your client arbitrarily decides how much insurance they can afford and how much
their company is worth, when in fact they do not know.
2. Disability
Death is not as likely to end the business relationship as disability. Small
business survival will often take prescient over paying a disabled partner. If the
person is important to the business, the financial strain impacts the business and
the family who depends on the income.
3. Divorce
You can imagine the torn feelings if a disability occurs, but what if the partners
cannot get along? How do they split a partnership without financially ruining each
other? It may be complicated by many personalities, some may not even be a
part of the dispute, yet may be affected financially.
4. Departure
The Business Owners may all be happy working together, but what happens if a
partner decides to leave for another opportunity or simply to take life easier. Who
is going to do the work? What is owed the leaving partner? Where is the money
coming from? What happens if the business owner wants to retire?
These are all important considerations for a business exit strategy.
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A Fair Buy/Sell Agreement
Although we will go into more detail later in the course, it is important to mention
it now briefly.
For the small business owner, each one of the four D’s has special demands on:
family, income, taxes, and transfer of control of assets. An agreement, commonly
called a buy/sell agreement, can be used to handle the four D's.
Creating a Business Exit Strategy
Once your client understands the four D’s, they can include the following actions
in the creation of any business exit strategy:
1. Consider incorporating their small business to legally recognize themselves
and their business as separate entities.
2. Find a method of determining the value of the corporation that can be done at
least annually and will qualify under Canada Revenue Agency (CRA)
standards.
3. Develop an employee benefit plan that will assist with the departure of each
partner in case of death, disability, or retirement.
4. Plan for who retains company ownership and who gets paid off.
The great entrepreneurial dream is to: build a business of your own; bring it to
life; and make it successful. How your clients plan their small business exit
strategy will determine their financial success. Just as building a successful
business takes planning, hard work, and a little luck, so does leaving it.
Business Insurance therefore, rests on the same risks that face families: Death,
Disability, Divorce and Departure (Retirement).
THE EXECUTOR / EXECUTRIX, THE LAW AND BUSINESS INSURANCE
It does not matter what the business structure is, upon death certain
complications occur depending on the form of structure chosen.
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Although the size of the company and the amount of assets could be different in
each business form, the services of an executor / executrix will be needed to a
varying degree.
The first obligation of the executor / executrix is to wind-up the business. If the
executor / executrix decide to continue the business they are:

Personally accountable to the estate and business creditors.

Liable to the heirs of the estate for any losses.

Unable to receive any of the profits.
What are an Executor / Executrix?
An estate executor / executrix – or, in Ontario, an estate trustee — is the person
or party named in the last Will and testament of the deceased and who has the
primary responsibility for the administration of the deceased’s estate.
The executor / executrix’s role is to act as the alter ego of the deceased; his or
her fundamental job is to wind up the affairs of the deceased and distribute the
estate to entitled beneficiaries. The duties of the executor / executrix can be
onerous, and one should give consideration to the demands of time and effort
before agreeing to undertake the responsibilities that come with this role.
Handling an estate can be a time consuming project. This is why it is best to
have a professional such as an estate lawyer to work with the executor /
executrix to look after all the details.
Who Should the Executor / Executrix Be?
Your executor / executrix should be someone you consider trustworthy. He or
she should know and be in agreement with your wishes regarding bequests to
your heirs.
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There are several things to take into account when pondering the question
of whom you should choose as executor / executrix:
He or she should be capable of performing the duties required as estate executor
/executrix. If your estate is complex you may consider a professional executor/
executrix - a trust company, chartered accountant or legal advisor.
If you anticipate controversy or conflict among beneficiaries you may choose
someone other than a family member (or beneficiary) to ensure impartiality.
Your executor / executrix should of course be someone likely to outlive you.
Your executor / executrix should be someone who is a nearby resident so that
duties may be performed without undue inconvenience and delay.
One named in a Will as executor / executrix is under no obligation to serve. Make
sure you have discussed your wishes with your executor / executrix beforehand;
that he or she understands the duties required of them and is comfortable with
the performance of those duties.
Ensure he or she knows your wishes regarding burial arrangements. Appoint an
alternate executor / executrix in case the primary named executor / executrix is
unable or unwilling to perform those duties at the time of your death.
Executor / Executrix Services
Recommended Approach
An initial meeting between each of the executor / executrix, the estate lawyer (if
one has been selected) is recommended to discuss the scope of the work
required including reviewing the will, the contents of the estate, projected
timelines for administering the estate, areas of concern, asset protection,
documentation required for probate of the will, etc.
Depending upon the complexity of the estate and the wishes of the executor /
executrix, it will be possible to develop a specific list of services to be provided
that can be used as a terms of reference administering the estate.
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Lawyer Compensation
The hourly rate for foreseeing over the Executor / executrix or Executrix can be a
per hour rate, or an all inclusive based on many factors. After reviewing the
complexity of the estate and the extent to which the executor / executrix require
help, it will be possible to estimate the number of hours' work that will be involved
in helping to organize and administer the estate.
Estate Executor / Executrix Compensation
Although family members and close friends may perform the services of an
executor / executrix or estate trustee without compensation, the courts have
traditionally allowed such persons as well as trust companies to charge for their
services. In fact, most trust companies that agree to act as an executor /
executrix or estate trustee request that the testator execute a fee agreement and
incorporate the agreement by reference into the Will. The courts in estate
matters have developed a scale of charges so that executor / executrix can
determine with some precision the amount of compensation they are likely to
receive. This scale, based on the value of property in the estate, has been in use
since 1975.
Courts allow the executor / executrix a fee of:

2.5% on capital receipts (i.e. where an executor / executrix gathers in capital
assets of the estate, such as real property, the compensation on a $100,000
property would be $2,500).

2.5% on capital disbursements (i.e. where the executor / executrix distributes
capital property to beneficiaries; the compensation on the transfer of a
$100,000 property would be $2,500).

2.5% on revenue receipts (i.e. where the executor / executrix receives
income, such as bank interest).

Where the estate is not distributed immediately, an annual care and
management fee of 2/5 of 1% on the gross value of the estate (i.e. where the
gross value of the estate is $100,000, the annual compensation would be
$400).
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This guideline is generally followed but the courts will establish what a fair and
reasonable figure is by looking at the following five factors:
1. The size of the estate,
2. The actual care and responsibility involved,
3. The time occupied in performing the duties
4. The skill and ability shown; and
5. The success resulting from the administration.
The executor / executrix(s) usually need to propose their fee to the beneficiaries
who in turn need to approve it. If the beneficiaries do not agree with the proposed
fee, and it is not possible to negotiate a compromise, the accounts will need to be
passed before the court.
Typically, the Executor / executrix Services costs are paid out of the Executor /
executrix' compensation, so it is worthwhile to estimate the overall value of the
estate and determine how much compensation will be available to the executor /
executrix.
What Information is Required?
The following is a summary of some of the pieces of information that will be
important in administering the estate.
Personal Information about the Deceased

Full name, date of birth, Date of death, SIN, did the deceased have a will?
Was the deceased?

Married? When? To whom?

Divorced? When? Did the deceased have any known children? List all names
and dates of birth of any children, or additional spouses with different last
name. Did the deceased have any other dependents?

Was the deceased employed at the time of death? Where?

Did the deceased own any businesses? If yes, please provide details.
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Assets and Liabilities in the Estate

Did the deceased own a house or other primary residence? If so, give its
address, and indicate whether there are any other owners listed on the
property's title.

Did the deceased own any cottage property? If so, describe it and indicate
whether any other names appeared on the title.

Were there any mortgages on any of the above real estate holdings? How
much and with which institution.

List all bank accounts, investment accounts, individual stocks or securities,
etc., owned by the deceased at the time of his/her death and indicate whether
they were jointly owned with anyone else.

List all RRSP / RRIF investment accounts held by the deceased at the time of
his/her death. Did he/she name a beneficiary on these accounts?

List all life insurance policies held by the deceased and indicate who was
named the beneficiary of these policies.

List all credit cards held by the deceased.

List all loans held by the deceased.

List all vehicles owned by the deceased.

Did the deceased own any property, investment accounts, etc., in the United
States?

Did the deceased own any property, investments, etc., in foreign countries
other than the United States?

List any other valuable items owned by the deceased such as antiques,
artwork, furniture, electronic items, etc.

Are there items of sentimental value that will need to be distributed among
family members?
Other Relevant Information

Is there anyone who is not specifically named in the will but who might make
a claim against the estate? What would be the grounds of that claim?
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
Are there any dependents of the deceased who have immediate financial
needs as a result of the death?

If so, who is currently looking after these children and does the will name a
guardian for these children?

Does the client know anything about the beneficiaries of the estate that might
be relevant in executing the estate? (For example, are any of the
beneficiaries mentally incompetent, addicted to drugs or alcohol, etc.?)

Do they know of any personality conflicts among the beneficiaries that might
have an impact on the responsibilities of the executor / executrix?

Where are the beneficiaries of the will physically located?

Do they have any other concerns about the estate, other than those
discussed above?
Executor / Executrix Interpretation of the Will

Describe any and all of the specific bequests listed in the will.

Indicate to whom the "residue" of the estate is directed.

Are there assets (such as household furniture, silverware, etc.) that will need
to be distributed between or among 2 or more beneficiaries?
Executor / Executrix Tasks and Responsibilities
Preliminary Arrangements

Obtain deceased's identification and credit cards.

If the deceased was employed at the date of death, advise their employer of
their death.

Locate most recent Will and any codicils or memoranda.

Arrange the funeral service and burial/cremation.

Obtain ten original death certificates from the funeral home.

Review the deceased's financial affairs and begin a list of relevant
information. Complete list as information becomes available and update as
required.

Provide the beneficiaries named in the Will with a copy of the Will or relevant
portions.
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
Take steps to meet any immediate financial needs of the deceased's
dependants.

Determine whether it will be necessary to probate the will. If so, arrange the
necessary court application and payment of probate fees.
Securing the Assets

Where the deceased carried on business as a sole proprietor or as the
owner-manager of a corporation, make arrangements for the business to
continue and/or for the security of all physical assets and documents.

Redirect the deceased's mail to your address.

Arrange safe storage of personal valuables and important documents.

If the deceased's home will be vacant, advise the insurance company and
arrange to have someone check the property frequently.

Review property insurance arrangements, maintaining appropriate coverage
and arranging any necessary new or additional coverage.

Cancel any leases, health insurance coverage, driver's license, cable,
telephone, club memberships, subscriptions, credit cards, professional
memberships, and arrange for payment of any refunds.

Advise Canada Pension Plan, Old Age Security Plan, Veteran's Pension and
employer-sponsored pension plans of the deceased's death, as well as
applicable professional groups and associations as required.

If the deceased received benefits under a private insurance policy, contact
the insurer to advise of the deceased's death, and arrange payment of any
sums owing under the policy.

If the deceased was receiving spousal or child support from a spouse or
former spouse, advise the spouse or former spouse of the deceased's death.

If the deceased was the sole or a co-executor / executrix of an estate whose
administration is not complete, or the sole or a Co-Trustee of a trust, advise
the co-executor / executrix or Co-Trustees of the deceased's death and obtain
professional advice as to whether you have any responsibilities.

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Assembly, Inventory and Valuation of the Estate
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Open a bank account for the estate.

Obtain a valuation as of the date of death for all assets.

Determine the adjusted cost base for tax purposes of each capital property.

Close all of the deceased's bank accounts and transfer balances into the
estate bank account, including business accounts, if the deceased was a sole
proprietor of a business. Ascertain for each account the balance at the date of
death and the interest accrued to the date of death.

Contact employer(s) to arrange for payment of amounts payable to the estate
as wages or under employee pension plan(s) of which the deceased was a
member.

Apply for CPP death benefit. Assist with the application for CPP survivors'
benefits for eligible dependants, if any.

Clear and close the deceased's safety deposit box.

If the deceased was in a business partnership, obtain a copy of the
partnership agreement to ascertain the estate's entitlements and liabilities.

If the deceased owned shares in a private company, obtain a copy of any
shareholders' agreement to ascertain the estate's rights and responsibilities.

Contact life insurance companies to arrange for payment to you, for deposit in
the estate bank account, of life insurance proceeds payable to the estate.

Have transferred to your name as Executor / executrix (or Trustee, if
applicable) title to all real estate owned by the deceased, and advise all
holders of mortgages or other encumbrances of your name and address.

Consider whether any RRIFs and or RRSPs of the deceased are to be rolled
over to their spouse or other eligible dependants and, if so leave them in
deceased's name.

Contact all financial institutions and brokers etc. to have transferred into your
name as executor / executrix all GICs, investment accounts, bonds, stocks,
and other investments and notify all disbursing agents of your name and
address for receipt of distributions.

Collect any debts or payments on debts owing to the deceased.
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
If the deceased was a capital beneficiary of an estate or trust not yet
distributed, or an income beneficiary of an estate or trust, contact the
executor / executrix(s) and/or Trustee(s) to advise them of the deceased's
death and to obtain a copy of the Will or trust document. Ascertain any
outstanding entitlements.

Consider which assets should be sold or liquidated and which should be
retained, and act accordingly.
Paying Debts, Legacies and Tax Compliance
If it appears the debts and liabilities in the estate will exceed the assets in the
estate, obtain professional advice to ensure you divide available assets
appropriately among the various creditors of the estate.

Advertise for creditors, in accordance with the applicable law. Include an
advertisement for any appropriate business or trade names.

Pay balances on all credit cards, lines of credit, utility accounts, and owing to
other creditors, including judgment creditors.

Arrange to pay all debts associated with the deceased's business or
partnership as appropriate.

Determine the deceased's income for the year until the date of death,
including capital gains/losses, both realized and deemed.

Determine the tax obligations in Canada and elsewhere, if assets were held
by the deceased outside of Canada.

Ensure the deceased's obligations under any marriage contracts, cohabitation
agreements, paternity agreements, separation agreements or court orders
are paid or provided for. Obtain appropriate releases.

Ensure that the time for dependants to make claims for support from the
estate and/or for the spouse of the deceased to make a claim for a division of
matrimonial property has expired or that such claims have been resolved by
court order or settlement and paid.
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
Pay all legacies. Transfer specific bequests to beneficiaries. Pay amounts to
which minor beneficiaries and incompetent adult beneficiaries are entitled to
their proper representatives, if any. Obtain a receipt from each beneficiary.
Consider making an interim distribution to residuary beneficiaries depending
on the value of the estate and the status of claims.

Prepare and file all necessary income tax returns to the date of death, and for
any prior years, obtaining professional advice and assistance as needed.

Prepare and file estate income tax returns for period subsequent to the date
of death.

Request clearance certificates from all relevant tax authorities.
Final Distribution of the Estate
Prepare and distribute to the beneficiaries your final report, accounts and claim
for compensation. If approval in writing of all beneficiaries, including the
appropriate representative of any minor, unborn and incompetent adult
beneficiaries, is received, you may take the compensation claimed and proceed
to distribute. If such approval is not forth-coming, bring an application before the
court to pass your accounts and fix your compensation.
Establish any ongoing trusts provided for in the Will, transferring funds and/or
assets to a separate account for each trust. Distribute remaining assets among
residuary beneficiaries specified in the Will.
Estate Administration with Testamentary Trusts
A testamentary trust is any trust that is created through the provisions of a Will
and comes into effect only when the testator dies. The assets of the trust are
stipulated in the Will as are the beneficiaries, the length of time the assets will be
held in trust and the terms by which they are to be administered.
Such trusts provide a means of providing for named beneficiaries and have
certain significant tax advantages due to preferential treatment under the Income
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Tax Act as well as other non-tax estate planning benefits. The terms of the trust
usually provide for the payment of income and/or capital to the beneficiaries.
The executor / executrix or trustee named in the Will is usually - but not
necessarily - the trustee of the testamentary trust. As such he or she is the legal
owner of the properties within the trust and has full authority over the
management of its assets and may make discretionary allocations among
beneficiaries of the trust unless otherwise stipulated in the Will. The executor /
executrix are obligated to make decisions regarding the investment of the trust’s
assets and file tax returns on behalf of the trust.
The most common uses of testamentary trusts are to provide for minor inheritors
- children and grandchildren - and as a means of providing a benefit to a spouse
usually over a spouse’s lifetime.
The trustee manages the assets in the trust for the benefit of the child/children
and distributes the income and capital at the trustee’s discretion. The full assets
of the trust may devolve to the beneficiary when an age of responsibility has
been attained or as stipulated in the Will.
Specifically, the responsibilities of the executor / executrix with respect to the
administration of the estate assets through a testamentary trust may include:
1. Set up the trust fund(s) as directed by the Will.
2. Maintain accounts and records for trusts, and issue regular statements to
beneficiaries.
3. Make income payments to beneficiaries. Exercise discretion—where allowed
under the terms of the Will—to meet the particular needs of beneficiaries.
4. Provide continuous investment management of securities, mutual funds, real
estate and mortgage investments.
5. In the case of the continuation of a private business, serve as a director or
officer, arrange for competent management and provide supervision.
6. Maintain residences, cottage, farm or other property, including the supervision
of repairs and insurance.
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7. Be prepared to account regularly to the court (where necessary) on the
administration of the trust.
8. Provide tax advice to beneficiaries and, if necessary, assist beneficiaries with
income tax returns.
9. Make final distribution of estate on death of life tenant(s) or upon beneficiaries
reaching age of entitlement. Final income tax certificate of clearance from the
CRA is necessary before the estate can be wound up.
10. Consult the estate lawyer regularly throughout this process.
Allowable Investments within a Testamentary Trust
The estate executor / executrix may be responsible for investment of assets
within the testamentary trust. To that end every executor / executrix should have
an investment plan that reasonably assesses risk and return. The executor /
executrix may, at his or her discretion, hire a professional investment advisor to
assist in the development and execution of the investment plan. The executor /
executrix must maintain authority and responsibility for the overall investment
plan and must ensure that the investment plan is followed and revised as
necessary. Under the Trustee Act, an executor / executrix is not liable for
investment losses if the conduct of the executor / executrix that led to the loss
conformed to a plan or strategy for the investment comprising reasonable
assessments of risk and return that a prudent investor could adopt under
comparable circumstances.
The Trust’s funds must be invested as directed by the investment powers spelled
out in the Trust’s deed. Executor / executrix in Ontario usually have one of the
following four investment powers:
1. The executor / executrix must make investments in accordance with the
Trustee Act. The funds of these trusts must be invested in the way set out in
the Trustee Act as amended on June 29, 2001.
2. The funds of the Trust must be invested prudently but investments are not
limited to investments authorized by law for executor / executrixes. The
Trustee Act provides a useful guide to making prudent investments.
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3. The funds of the Trust are limited as to kinds of investments allowed, as laid
out in the Trust document the executor / executrix is constrained by these
restrictions in his or her investment choices even if other investments might
provide a higher return.
4. The investment powers are not specified in the Trust document. In these
cases the executor / executrix must follow the requirements of the Trustee
Act.
TYPES OF BUSINESS STRUCTURES
Businesses are organized into one of three types of endeavour.
1. SOLE PROPRIETORS
The most numbers of businesses in Canada are of the sole proprietorship type.
Most small business (and some not so small) started out as the dreams and
concepts of one person. They are responsible for every aspect of the business,
although after a while they may employ others to carry out these duties.
A sole proprietorship is an unincorporated business that is owned by one
individual. It is the simplest form of business organization to start and maintain.
You can operate a sole proprietorship under your own name, or under another
name you've chosen (as long as you don't add any of the legal designations of
other forms of business, such as Ltd. or Inc.).
An advantage of legally setting up your business as a sole proprietor is that
setting up and administering the business is comparatively easy and
inexpensive. If you choose the sole proprietor form of business and operate it
under your own name, for instance, you don't even have to register your
business.
And as a sole proprietor, you declare your business income on your personal
income tax form, rather than having to file a separate tax form, (as you would
have to do if you choose the corporation form of business).
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However, if you set up your business as a sole proprietorship, legally your
business is considered to be an extension of yourself, meaning that you assume
all responsibilities for the business.
This means that as a sole proprietor, you are personally responsible for all the
debts and liabilities of your business. So if your business fails, any of your
assets, including your personal assets, can be seized and used to discharge the
liability you’ve incurred. This personal liability is the biggest disadvantage of
choosing to operate as a sole proprietorship, although there are others such as a
lack of tax flexibility. The success of the sole proprietorship depends on the
ability of the proprietor to actively run the business. Death causes a problem for
the estate of the sole proprietor. Estate liquidity is often a key concern, because
the estate may not have sufficient cash to cover income tax, lawyer’s fees, and
other immediate expenses while still providing an income for the surviving
spouse and children. Estate liquidity is important because it gives the executor /
executrix time to consider options – sale or transfer of the business – even when
faced the bank and other creditors demanding payment. As you will see, life
insurance provides the necessary cash at death.
The Sole Proprietor shares many of the same succession problems as the
incorporated business, with the added responsibility of being solely responsible
for the business legal liabilities. Since the sole proprietor alone receives the after
tax profits, the sale of his or her business after death is limited to:
A. Family successor or buy-out
B. Employee(s) buy-out
C. Outsider buy-out
Each of these methods has its own inherit danger. “A & B”, may not have the
money and it may be difficult to find an outsider “C” with the desire and the cash
to purchase the business.
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The best answer may be to provide for succession of the business with a
properly funded, binding Buy-Sell Agreement using the Criss-Cross method
funded by either direct payment by the Life Insurance Owner or a Split-Dollar
Arrangement. The Insurance proceeds will retain their tax-free status when paid
at death. The split dollar option will certainly benefit the family member or
employee with limited funds.
Advantages of Sole Proprietorship
1. Easy to set up - simplest and least expensive business organization to set
up.
2. Low start-up costs - sole proprietorship usually has low start-up costs.
3. Minimal registration requirements - certificate of compliance, business
license, registration of business name, and GST/HST registration.
4. Owner has complete control - sole proprietor is boss.
5. Government regulations - minimal government stipulations to follow.
6. Tax advantages - lower tax rate and losses may be applied against other
income of proprietor.
7. Continuity of business - sole proprietorship will continue till business
owner's death or if he/she decides to dissolve business.
Disadvantages of Sole Proprietorship
1. Unlimited liability - creditors can look beyond business assets to the
proprietor's personal assets for payments.
2. Difficulty in obtaining start-up costs - the amount of equity that can be
raised is limited to the proprietor's personal wealth.
3. Due to the risk of sole proprietorships - it is often difficult to obtain
financing.
4. Employment insurance benefits - if the business does not succeed the sole
proprietor is not eligible to collect employment insurance benefits.
5. Tax disadvantage - profits must be added to personal income.
6. Termination of business - legal life of business terminates with death of
business owner.
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Probably the biggest disadvantage of this type of business arrangement is that
the business ceases at death of the owner. However, if the owner wishes the
business to continue they should:

Stipulate in the Will that the executor / executrix and trustees are not
responsible for the deceased’s prior business debts as well as subsequent
business debts incurred while carrying out their duties.

The will should state how the business is to be disposed of.

The executor / executrix should execute the Buy-Sell Agreement, if any.
LIQUIDATION
If the business is to be wound-up, the next decision is whether the business
should be wound-up as a going concern or should be liquidated. The business
assets and good will are deemed to have been disposed of separately.
As a going concern, the problems are:

The need to find an immediate buyer and settle for a fair price.

The need to settle quickly, so as to find proceeds for the estate.
Most wind-ups take on the characteristics of a forced sale and the accounts
receivable and the inventory shrinks to less than 50% of their listed value. The
final conclusion would be an astounding reduction in value.
To offset this, the business owner should do two things:
1. Properly draw a will with discretionary powers:

The power to sell the business without restriction and to determine the sale
price and how it is paid; to adjust the terms of sale to fit the buyer’s needs.

To retain and operate the business temporarily until the best buyer can be
found under favourable conditions.

This power would include the right to borrow funds for operating capital or
estate settlement needs.

The power to change the form of business.
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
To hold the Executor / executrix harmless from personal liability for any
course of action taken.
2. Buy Life Insurance:
If Life insurance is in place, the proceeds will:

Pay estate settlement costs.

Supply working capital for the temporary continuation of business.

Cash to pay creditors and suppliers.

Offset business liquidation shrinkage.
FAMILY RETENTION
The best solution to disposal may be to a family member, provided the right
conditions exist:

If there is a history of family ownership and family goodwill exists.

If the business produces a good return on investment.

If the family can provide competent management.

If the estate can provide liquidity for settlement of just debts and business
capital to continue.

If it is more profitable to continue than to wind-up the business.
PRE-ARRANGED SALE
A properly drawn, funded Buy-Sell Agreement will guarantee the asset value if an
employee (s) has shown the interest and ability to continue the business. Upon
completion of the agreement, Life Insurance should be purchased to fund the
agreed upon purchase price (or its evaluation process).
Why a sole proprietor needs a buy-sell agreement
As a sole proprietor, your client and their business are intertwined. Their death
could also mean the death of the business.
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That death could cause many problems including:

The employees could be out of a job.

Customers and clients could be at a loss for services.

Competitors could take advantage of a weakened business position.

Their estate could be in turmoil because of debts and tax liabilities.

Their heirs might have to settle for below market prices.
A buy-sell agreement can help the sole proprietorship by naming a buyer at a
pre-agreed price creating stability and peace of mind for their heirs. Flexibility can
create opportunities for a key employee to buy the business through life
insurance. They could also leave the business to a family member.
Premium payments may come from:

The employee’s earnings.

The employer could increase (bonus) the employee’s wages somewhat in
excess of the required premium.

The employer could loan the premiums to the employee and increase the Life
Insurance enough to fund the Buy-Out as well as pay the loan, plus interest at
death.
Funded by a split-dollar agreement:

At death funds are provided by the Buy-Sell.

At retirement prior to death, the cash surrender value can help provide
retirement funds, which are available, because the Buy-out has commenced.
Note: Insurance should stay in force until Buy-Out is complete. It would appear
prudent for the buyer to be insured by the retiree, especially in Sole Proprietor
and Partner Buy-Outs.
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Advantages of the insured employer-employee Buy-Sell agreement
To the Proprietor

A buyer for the business is established.

The proprietor is assured that the family will receive a fair price for the
business.

The business is stabilized. Customers, suppliers and creditors, aware that
plans have been implemented for the orderly continuation of the business,
may be more favourably disposed toward long-term business dealings with
the proprietor.

The services of the employee will be retained. Rather than eventually starting
a competitive business, the employee will be eager to do a bigger and better
job for the present employer.
To the Estate and Heirs

The estate receives full value for the business immediately.

The estate can be settled promptly and efficiently.

The family is relieved of business worries.
To the Employee

No fear of a job loss upon owner’s death.

Guaranteed funds to purchase the business at exactly the needed time.

Removal of the burden of principle payments and interest payments typical of
all other forms of financing.

No need to contend with interference from executor / executrix who must be
chiefly concerned with protecting the interest of the beneficiaries.
HOW DOES A SOLE PROPRIETORSHIP PAY TAXES?
A sole proprietorship pays taxes by reporting income (or loss) on a personal
income tax return (form T1). The income (or loss) forms part of the sole
proprietor's overall income for the year.
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Their income tax return must also include financial statements or one or more of
the following applicable forms: Statement of Business Activities (form T2124),
Statement of Professional Activities (form T2032).
A sole proprietor must file a personal income return if they:
1. Have to pay tax for the year;
2. Disposed of capital property or had a taxable capital gain in the year;
3. Are required to make Canada Pension Plan payments on self employed
earnings or pensionable earnings for the year;
4. Received a demand from Canada Revenue Agency (CRA) to a file a return.
This list does not provide all situations whereby the sole proprietor must file a
return. If unsure, contact a tax services office.
HOW DOES GST/HST AFFECT A SOLE PROPRIETORSHIP?
As a sole proprietorship, they have to register for the GST/HST if their worldwide
annual taxable revenues exceed $30,000. Sole proprietors have GST/HST
reporting periods for which a return has to be filed. The GST/HST reporting
period is based on their estimated total annual taxable revenues.
2. PARTNERSHIPS
A legal form of business operation between two or more individuals who share
management and an expectation of mutual profits from the joint venture. They
may each have similar or different talents. A partnership is a business formed by
two or more co-owners. Like a sole proprietorship, a partnership is easy to form.
Just a simple verbal agreement is sufficient but if money and property is at stake,
a formal agreement should be written. A partnership can be formed either as a
general or limited partnership.
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What should be included in the partnership agreement?
The partnership agreement should outline the following: objectives of the
partnership; amount of investment of each partner; how are gains/losses divided;
duties/participation of partners; provision for death, retirement, or succession;
any special conditions; and dissolution of the partnership.
If the business will be owned and operated by several individuals, you’ll want to
take a look at structuring your business as a partnership.
If you decide to organize your business as a partnership, be sure you draft a
partnership agreement that details how business decisions are made, how
disputes are resolved and how to handle a buyout. You'll be glad you have this
agreement if for some reason you run into difficulties with one of the partners or if
someone wants out of the arrangement.
The agreement should address the purpose of the business and the authority
and responsibility of each partner. It's a good idea to consult an attorney
experienced with small businesses for help in drafting the agreement.
Here are some other issues you'll want the agreement to address:

How will the ownership interest be shared? It's not necessary, for example,
for two owners to equally share ownership and authority. However, if you
decide to do it, make sure the proportion is stated clearly in the agreement.

How will decisions be made? It's a good idea to establish voting rights in case
a major disagreement arises.

When just two partners own the business 50-50, there's the possibility of a
deadlock. To avoid this, some businesses provide in advance for a third
partner, a trusted associate who may own only 1 percent of the business but
whose vote can break a tie.

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When one partner withdraws, how will the purchase price be determined?
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One possibility is to agree on a neutral third party, such as your banker or
accountant, to find an appraiser to determine the price of the partnership
interest.

If a partner withdraws from the partnership, when will the money be paid?
Depending on the partnership agreement, you can agree that the money be
paid over three, five or 10 years, with interest. You don't want to be hit with a
cash-flow crisis if the entire price has to be paid on the spot on one lump sum.
What are the Advantages and Disadvantages of a Partnership at a Glance?
Advantages:

Easy to set up - a partnership is easy to form.

Low start-up costs - partnerships usually have low start-up costs.

Minimal registration requirements - certificate of compliance, business
license, and GST registration.

Government regulations - minimal government stipulations to follow.

Tax advantages - lower tax rate and losses may be applied against other
income of partners.

Continuity of business - partnership will continue till one of the partner’s
death or if one of the other partners decides to dissolve business.

Incorporation – it is not difficult to convert a partnership to a different
business structure.
Disadvantages:

Unlimited liability - creditors can look beyond business assets to the
partner's personal assets for payments.

Difficulty in finding partners – it is difficult to find a compatible partner to do
business with.

Difficulty in obtaining start-up costs - the amount of equity that can be
raised is limited to the partner's personal wealth. Due to the risk of
partnerships, it is often difficult to obtain financing.
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
Employment insurance benefits - if the business does not succeed the
partners are not eligible to collect employment insurance benefits.

Tax disadvantage - profits must be added to personal income.

Sharing of control/profits - partners need to compromise and agree on
beneficial terms.

Potential of conflict - since everything is shared great potential for conflict.

Termination of business - legal life of business terminates with death of
partner unless partnership agreement states otherwise and the partners
decide to continue the partnership.
THREE GENERALLY ACCEPTED “TESTS” INDICATING A PARTNERSHIP:
1. Carrying on business in common with a view to profit.
2. Joint and several liabilities.
3. Each member of a partnership can bind all members by their business
decisions.
Partnerships can be informal or formal:

Commence operation and proceed as “partners”.

Execute a legally drawn “Partnership Agreement”.
The Partnership Acts that exist have many more options than the Incorporation
Act and work in many cases as a default system. The partners are empowered
to draw up agreements, but in the absence of such an agreement, the law has
rules and legal solutions in place.
THERE ARE TWO TYPES OF PARTNERSHIPS:
1. Commercial Partnership.
2. Professional Partnership.
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1. Commercial Partnership
In the Common-Law Provinces Commercial Partnerships come in two main
classifications:
A. General Partnerships.
B. Limited Partnerships.
In Quebec the classifications are known as:

Commercial Partnerships (Dealing with Commerce).

General Partnerships (Registered Name).

Anonymous Partnerships (No Name or Firm as such).

Limited Partnerships (General and Special Partners).

Civil Partnerships (Professional, Realtors).
A. General Partnerships
The general partners own and operate the business and assume liability for the
partnership, while the limited partners serve as investors only; they have no
control over the company and are not subject to the same liabilities as the
general partners.
Personal liability is a major concern if you use a general partnership to structure
your business. Like sole proprietors, general partners are personally liable for the
partnership’s obligations and debts. Each general partner can act on behalf of
the partnership, take out loans and make decisions that will affect and be binding
on all the partners (if the partnership agreement permits). Keep in mind that
partnerships are also more expensive to establish than sole proprietorships
because they require more legal and accounting services.
All the partners share in gains/losses and all have unlimited liability for all
partnership debts, not just some particular share. The way partnership
gains/losses are divided is described in the partnership agreement.
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B. Limited Partnerships
Unless you expect to have many passive investors, limited partnerships are
generally not the best choice for a new business because of all the required
filings and administrative complexities. If you have two or more partners who
want to be actively involved, a general partnership would be much easier to form.
One or more general partners has unlimited liability and runs the business for
one or more limited partners who do not actively participate in the business. A
limited partner's liability for business debts is limited to the amount contributed to
the partnership. This form of organization is common in real estate ventures, for
example.
Each Province, except PEI has a Limited Partnership as well as a Partnership
Act. These Acts define a Limited Partnership as one with one or more General
Partners and one or more Limited Partners. The Limited Partner’s liabilities are
limited to the amount of investment they provide.
They can contribute capital to the firm as an investment and are entitled to a
return on their investments as well as a portion of the profits, but have no
authority to transact business for the firm or bind it. They can give counsel and
have the right of examination.
PARTNERS CAN CONTRIBUTE

Investment capital and credit or cash.

Property or patents.

Skills and labour
There are no legal restrictions on amounts invested. All property, supplied or
purchased becomes partnership property. It is held in Trust for the partners as a
group. There is no ownership of individual property, only partnerships interest in
the firm. Partners are entitled to share in the ownership, profits and liabilities and
debts.
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Partnership Details
In all the following cases a partner must give a true accounting:

Receipts and expenses received on behalf of the firm.

Profits – combined return on capital and labour.

Private profits – are accountable to the firm for profits arising from any
partnership transaction that resulted in personal profit.
Liabilities
Jointly
Each partner is liable jointly with all the other partners for debts and obligations.
Severally
Each partner is responsible for each other partner’s debts and obligations.
New Partners
No prior liability, unless by agreement.
Retiring Member
Liable for pre-retirement liabilities, unless agreed upon otherwise. If notice is
given at large to the public, liability for post-retirement obligations ceases at
retirement.
Classes of Partners
General Partner
Has an equal interest to all others.
Active Partner
General partner, listed on the firm name.
Silent Partner
Name does not appear in firm name.
Ostensible Partner
Lends their name and credit, has no financial interest, but is equally liable.
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Nominal Partner
Represented as a partner, personally or by the firm as a partner, becomes fully
liable.
Limited Partner
Contributes capital is liable only to the extent of contribution.
Dissolution and Wind-up
The partners cease to carry on business together and this is known as
dissolution. The business if it ceases to do business is said to be “wound-up”.
This involves the liquidation of the Company property, payment of debts and
distribution of the net proceeds.
The dissolution of the partnership does not automatically lead to a wind-up of the
business. It may be restructured as a new partnership, sole proprietorship or
even as a Corporation, if all parties are in agreement.
Causes of Dissolution
Expiration or Term (Partnership was for a fixed term of months or years),
termination of undertaking, death of a partner, insolvency of a partner, and any
event that makes it unlawful to carry on business.
Actions that initiate Dissolution

Giving notice in accordance with the partnership agreement.

Giving notice at any time, in the absence of an agreement.

Apply for a court order when a partner has been found:

Mentally incompetent.

Permanently incapable of performance.

Prejudicial conduct.

Wilfully breaking the agreement.
The partnership can also be divided if the partnership is being operated at a loss
or other justifiable circumstances.
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PARTNERSHIP AGREEMENTS
Partnership Agreements provide a basis of agreement and “spell out” in detail
how this particular partnership will operate and what rights the individual partner
will have in relationship to the business and each other.
They should include:

Names of partners and firm.

Nature and place of business.

Terms of partnership.

Capital contribution and distribution.

Management, special duties, financial authorization including Company
books.

Financial arrangements: expenses, profits and draws.

Agreement specifies resolution of: death, disability, disillusion, expulsion and
retirement.

Sale or assignment of interest.

Methods of evaluation of partnership interest.

Causes and methods of firm wind-up.

Arbitration of disputes, non-competition clause, insurance arrangements and
anything else felt to be vital to the firm’s well being.
How Partnerships are registered
A limited partnership is not deemed to exist until it is registered with the Province
of domicile. Partnership entities are allowed between 15 days to 6 months to
register in various Provinces. Until it is registered it is liable as a General
Partnership.
Registration consists of filing in the appropriate office a declaration signed by all
partners.
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A general partnership must contain:

Each partner’s name and address (residence).

Name of the firm and its mailing address.

Date of formation.

A statement specifying that those named are the only partners.
Limited Partnership must include this additional information:

General nature of the business.

Each special partner(s) name, residence and amount of capital subscribed.

Time of dissolution.
A new filing is required when there is a change:

In membership names.

Firm’s Name.

Dissolution of firm.

Extension of agreement beyond expiry date.
Failure to do so results in Limited Partners being deemed as liable as General
Partners. All partners cease to be members, but remain liable.
TAXATION OF PARTNERS AND PARTNERSHIPS
An interest in a partnership is treated as a Capital Property. It can be acquired
and disposed of by a partner and results in a capital gain or loss.
While a partnership is not taxed as a separate entity, it can enter into
transactions (endeavours) the results of which are taxable incomes or losses for
the individual partners on a “flow through” basis. (Section 96 ITA)
A partnership by itself does not pay income tax on its operating profits and does
not have to file an annual return. Instead, each partner includes a share of the
partnership income or loss on a personal, corporate, or trust income tax return.
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Each partner also has to file either financial statements or one or more of the
following applicable forms: Statement of Business Activities (form T2124),
Statement of Professional Activities (form T2032). The partner does this whether
or not he actually received his share in money or in credit to his partnership's
capital account.
A partnership has to a file a partnership information return if, throughout the fiscal
period, it has six or more partners or if one of its partners is a partner of another
partnership.
How does the HST/GST affect a partnership?
A partnership is considered to be a separate person and must file a GST return
and remit tax where applicable.
SOURCES OF PARTNERSHIP INCOME OR (LOSSES)
Business Income
Made on an accrual basis, however for professional partnerships they may elect
to modify the accrual basis and a farming operation can elect the cash method.
The Partnership as a business can deduct:

Business expenses (including depreciation of fixed assets and goodwill).

Capital Cost Allowance
Individual Partners can deduct:

Depletion allowances.

Exploration and development expenses.

Charitable donations.
Capital Cost Allowance (CCA)
This is an allowable deduction for depreciation and/or obsolescence of capital
property called a capital cost allowance. It applies usually to buildings and
equipment by class to a prescribed maximum.
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The CCA is claimed by the partnership but upon wind-up (or disposition), it is
recaptured by each individual partner.
How income is allocated
Partnership Income is allocated on a “flow through basis: and is based on the
terms of the partnership agreement. The flow through carries with it all the
attributes of source and is taxed at personal Income Tax rates along with nonpartnership income and losses of a similar source and type.
The individual partner is entitled to:
Dividend Tax Credit
If an individual has received dividends from a taxable Canadian corporation, they
must be grossed up by one-quarter when they are included in taxable income. A
dividend tax credit equal to two-thirds of the gross-up amount, or 13.33 per cent
of the full taxable amount, reduces the federal income tax payable for the year.
Dividends from non-resident corporations must be included in income, but are
not subject to either the gross-up or dividend tax credit.
Stock dividends are treated as ordinary taxable dividends, which are added to
the cost-base of the shares held. Unlike stock dividends, stock splits are not
taxable.
Foreign Tax Credit
All Canadian residents are taxed on world income from all sources. Income
earned in other jurisdictions may have tax withheld. Foreign tax paid may be
claimed as a tax credit against Canadian tax, subject to limitations. A separate
credit calculation is required for business income and non-business income for
each country of source.
Canadian Small Business Deduction (CSBD)
If the partnership is a Corporation, Canadian-controlled private corporations
(CCPCs) are eligible for a tax rate reduction known as the SBD.
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For 2012, this deduction lowers the basic federal tax rate on the first $500,000 of
active business income of CCPCs from 28 per cent to 11 per cent. CCPCs with
more than $15 million of taxable capital employed in Canada are not eligible for
the SBD while CCPCs with between $10 million and $15 million of taxable capital
employed in Canada have reduced access to it.
Further deductions for:

Business Loss carryovers.

Charitable Donations.

Expenses incurred earning Partnership Income, but not reimbursed by the
partnership.

Partnership costs incurred in earning dividends from a Canadian Corporation.
Notes:

Forward averaging and Farm averaging are available to individual partners
after combining partnership and non-partnership income losses.

Partnership may deduct spouse salaries.

Income splitting can be advantageous to Partner’s employee spouses.

Canada Revenue Agency may challenge income and losses attribution to
partnership share if it deems the allocation is made to reduce or postpone
Income Tax.
PARTNERSHIP INTEREST (P.I.)
When a partnership interest is disposed of, it creates a Capital Gain (or loss).
Capital gains that have accrued since December 31, 1971 are subject to income
tax. Capital gains are realized when ownership of capital assets is transferred for
proceeds that exceed the original cost and selling expenses.
Only 50% of any capital gains you realize are included in your taxable income. If
the value of property held at December 31, 1971 exceeds the original cost, you
can use this higher amount in computing your capital gain.
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Capital gains are also realized for tax purposes on any capital property you own
on your death — at that time, you are deemed to dispose of all your capital
assets at their fair market value.
Partnership Interest = Cost of Partnership + share of gains and capital
Contribution – all losses and distribution of profits or gain.
Cost of Partnership Interest (Post Dec.31, 1971) is purchase price plus expenses
incurred to gain it.
Property transferred to the partnership or P.I. that was gifted or inherited is
valued at Fair Market Value (F.M.V.).
Adjustments to Partners A.C.B. (post Dec. 31, 1971)
Additions:

Share of Income

Contribution of Capital

Share of capital dividend received

Share of net proceeds of a Life Insurance Policy (Proceeds less ACB) of a
policy contributed by a shareholder from a liquidated corporation including
policies on their own lives.
Deductions:

Share of Losses

Share of charitable gifts

Share of distribution of profits or capital
DISPOSITION OF PARTNERSHIP INTEREST
Disposition occurs at:
1. a sale of P.I. to an outsider:
Fair Market Value is generally the sale price. The seller receives the proceeds
as a capital gain or loss and the buyer acquires the P.I. and an A.C.B.
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2. At Wind-up:
a) If assets are liquidated, the proceeds are treated as proceeds of disposition.
b) If assets are transferred to partner, they are deemed to have been disposed
of at F.M.V.
c) Disposal may result in a partnership gain or loss (including recaptured
C.C.A.). This realization then flows through to each partner.
Note: The two level taxation (Partnership Property and P.I.) can be offset by
Buy-Sell Agreements drawn to cover death, disability, disillusionment and
retirement.
3. Withdrawal of a Partner (Disillusionment or Retirement):
a) Partnership interest can be sold to existing partner(s). The amount paid
increases the purchasers A.C.B.
b) Partnership assets may be allocated to the withdrawing partners in return for
their partnership interest. Since this is in effect a partial wind-up, the tax
implications (Tax at two levels) apply.
4. Death of a Partner:
When a partner dies, they are deemed to have disposed of their interest
immediately prior to death, and the proceeds are equal to the F.M.V. less the
A.C.B. This will result in a taxable Capital Gain or a Deductible Capital Loss in
the year of death plus the immediately preceding year.
The P.I. passes to the Deceased Estate and becomes the Cost Base to the
estate.
If the Partnership is subsequently:

Wound-up, the FMV received by the estate becomes the proceeds for the PI.

If sold, the sale price becomes the proceeds of disposition.

If the PI is transferred, the beneficiary’s ACB is equal to the FMV credited to
the deceased partner.
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4. Property Transfers:
a) Transfer of property passes at the FMV.
The transfer of property passes at the FMV as to partnership property and
interest. This results in a Capital Gain or Loss to the partners. Under specified
conditions this result can be transferred.
b) Transfer of Capital Property to the Deceased’s Spouse.
If both the deceased and their spouse are Canadian residents, the Capital
Property transfers to the spouse (or spousal trust) at the deceased’s ACB. In
that event no Capital Gain or Loss is realized, but is deferred. The legal
representative can elect; however, to precipitate the Capital Gain or Loss, which
will affect the terminal tax returns.
c) Transfer from a Partnership to a Sole Proprietor
Three months after a Canadian Partnership is wound-up, if a single partner
carries on the business, there will be a deemed realization at FMV of the
Partnership Interest transferred. The disposition will be received by the
partnership as a gain or loss.
Professional Partnership
Little needs to be said of a Professional Partnership, since they operate in similar
fashion to their General or Limited counterparts. The main difference is how the
partnership interest and their assets are evaluated at death or withdrawal from
the practice.
The major problem is the valuation of goodwill. The deceased or withdrawing
partner generated part of the goodwill, but the remaining growth was from the
contribution of the remaining partner(s).
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The purchase price of the partnership interest depends on the following four
values:
1. Tangible assets.
2. Share of account receivable generated by deceased partner.
3. Value of work in progress.
4. Goodwill.
Several solutions or a combination are available to fund the buy-out. A properly
funded, binding Buy-Sell Agreement will go a long way to guarantee the desired
result.

Lump sum payment for the full value.

Continued payments for accounts receivable and work in progress until value
received.

Agreed upon percentage of the firm’s income for a certain number of years.
DEATH AND THE PARTNERSHIP
For ease of understanding, we will consider the partnership to have two partners,
one of which has just died. (Little would change for several partners)
It is no longer a partnership and the survivor becomes a “Liquidating Trustee”.
The business as the partners knew it ceases to operate.
The surviving parties (survivor and the Estate of the deceased) cannot:

Draw Income

Enter into new contracts

Accept new orders

Borrow money
Business can only be carried on until it has been wound-up, reorganized or
liquidated.
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If the surviving partner decides to carry on, they are responsible for:

Any new losses

Paying interest on the deceased capital to the estate

Paying one-half of all profits earned to the estate
Without a Partnership Agreement, the survivors are faced with one of several
choices. If the deceased did not have a valid will, the process is further
complicated. Since any partner or their representatives can apply to the courts to
wind-up the partnership, a successful organization could be ordered into a forced
liquidation or sale.
If reorganization is elected, there are several options available, each with its own
concerns:
1. Surviving partner buys out the heirs:

Requires agreement on price.

Method to finance the purchase.
2. Heirs buy-out the surviving partner:

Requires agreement on price.

Requires method to finance purchase.

Requires the experience to operate the business.

May have to employ a manager.

Exposes them to unlimited liability.

Disposed partner may become competitor.
3. Sale of Business to suitable outsider:

Purchaser must be acceptable to surviving partner.

Must have the cash or access to the cash to buy in.

Is available now and has the talent.

The purchase is a risk to all parties involved.
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4. Rollover to surviving heirs.

Heirs must obtain clearance from estate executor / executrix after debts;
taxes and administrative costs have been paid.

Heirs must have the time and talent.

Since this is a new arrangement, a new partnership balance must be found.
5. Disability buy-out.

Resembles the above and is outlined in Business Insurance and Disability.
Problem Solved!
A properly funded, binding Buy-Sell Agreement written prior to the death of a
partner provides for the most welcome alternative to the above. It produces a
willing knowledgeable buyer with cash who must buy-out the deceased
partnership interest.
It is wise to protect the working arrangement and succession of the business with
a Buy-Sell Agreement.
PLAN FOR CHANGES IN PARTNERSHIP OWNERSHIP WITH A BUY-SELL
AGREEMENT
Your partnership agreement isn't complete unless it governs what happens when
a partner leaves the business. Most business partnerships start with the best
intentions, but not every partnership ends that way. That's why buy-sell
agreements are so important. A buy-sell agreement is a contract between
business partners that dictates who can buy a departing partner’s share of the
business and establishes a fair price for the partner's stake. The agreement also
describes how to determine a company's value if all the owners decide to sell.
Many business partners overlook a critical element of their partnership
agreement that can save them both money and angst: buy-sell provisions.
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When you create buy-sell, or buyout, provisions for your partnership agreement,
you and your partners can prepare for events that have been the downfall of
more than a few successful small businesses -- namely, the death, divorce,
bankruptcy, or retirement of one of the owners.
What Events Should You Cover Under a Buy-Sell Agreement?
Your buy-sell agreement will instruct and remind you and your partners how you
have agreed to handle the sale or buyback of an ownership interest when one
partner's circumstances change.
Typically, the events that trigger a buy-out of a partner's interest under a buy-sell
agreement are:

An attractive offer from an outsider to purchase a partner's interest in the
company,

A divorce settlement in which a partner's ex-spouse stands to receive an
ownership interest in the company,

The foreclosure of a debt secured by an ownership interest,

The personal bankruptcy of a partner, or

The disability, death, or incapacity of a partner.
Partner Buyout
A typical buy-sell agreement covers a potential sale or buyback situation when a
partner leaves a business. The agreement may specify to whom a departing
partner can sell (usually they must sell to someone else in the business), and it
also sets a fair price for their share of the business. This protects the remaining
partners by guaranteeing that the departing partner will sell their share to a
suitable owner, and it protects departing partners by assuring them a fair price for
their shares of the business.
Business Buyout
it’s not easy to determine a fair price in advance. A company's owners must
agree on a price that, years from now, will represent their firm's true value.
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This is obviously a calculated risk: You cannot know today if your business will
prosper in the years ahead or struggle to make a profit. Still, picking a fair price
or a formula for setting the buyout price is essential.
There are five common ways to determine a buyout price:
1. Fixed price
The partners simply agree on a price for the business and put that number in the
buy-sell agreement.
2. Book value
The partners set a price based on the net value of the company’s assets minus
its liabilities as shown on its most recent year-end balance sheet.
3. Multiple of book value
If a small business has been up and running for several years, its real value is
probably greater than its book value. The multiple-of-book-value method takes
into account intangible assets that add to a company's worth such as patents,
copyrights, brand names and trade names.
4. Capitalization of earnings
This method measures a company's value based on its past profits. This works
well for established companies with a solid financial history.
5. Appraisal
A buy-sell agreement can stipulate that, at the time of a buyout, a professional
business appraiser will establish the company's value.
No matter which buyout method you and your partners choose, it's important to
have an agreement to avoid future disputes or lawsuits that may delay a
transaction or affect the value of your business.
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Types Of Agreements
The Buy-Sell agreements can take several forms, such as:

An agreement between the business and the individual owners (stock
redemption agreement or stock retirement plan).

An agreement between the owners (a cross purchase or "criss-cross"
agreement).

An agreement between the owners and key person, family member or outside
individual (a "third party" business buy-out agreement).

A combination of the foregoing.
Basically, these are either a Cross Purchase Plan or Entity Purchase Plan
Cross Purchase Agreement
Each partner agrees with each of the other partners to purchase his or her share
of the business at the time of death. The Partners may take out a life insurance
policy on the life of the other(s) to fund the obligation. At the time of the first
death, the surviving partner(s) collects the insurance proceeds. The survivor
then uses the insurance proceeds to buy the business share from the deceased's
family. This type agreement can be used with two or more partners.
Entity Purchase Plan
Each partner agrees that upon death his or her share of the business will be sold
back to the business. The business may buy life insurance policies on each of
the partners to fund the obligation. At the death of a partner, the business
collects the insurance proceeds and buys the business interest from the
deceased partner's heirs.
Transfer Restrictions
The agreements commit the owners not sell ownership in the business prior to
death, without first offering it to the persons named in the agreement. This is
called a right of first option or refusal.
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Life Insurance to Fund the Agreement
Whole life insurance has generally been used to fund a buy-sell agreement. In
recent years, Universal Life has been also been used for funding.
The life insurance industry also offers "Business Value Life Insurance" with a
death benefit determined by the value of the business rather than the terms of
the policy. The death benefit can grow as the value of the business grows.
Premiums may also be higher as the death benefit increases.
Purchase Price
The purchase price can be based on an appraisal, set predetermined price, book
value, or a formula of assets and earnings. Payment Terms Agreements may
provide that the price will be paid in cash, in instalments, or other means. You
may also select a combination of cash and instalments. Of course, if the
insurance proceeds are sufficient to pay the price in cash many agreements
provide that the purchase is to be paid in full in cash from the insurance
proceeds.
In the event that no legal contract exists, such as a Buy-Sell Agreement, Sole
Proprietorships and Partnerships will, by law, be shut down and the assets sold,
piecemeal or intact.
The owner(s) with foresight would certainly want to guarantee that their estate
would benefit from the business interest they laboured to create, rather than the
proceeds of a forced liquidation.
ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP?
Advantages
1. Easy to set up - a partnership is easy to form.
2. Low start-up costs - partnerships usually has low start-up costs.
3. Minimal registration requirements - certificate of compliance, business
license, and GST registration.
4. Government regulations - minimal government stipulations to follow.
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5. Tax advantages - lower tax rate and losses may be applied against other
income of partners.
6. Continuity of business - partnership will continue till one of the partner’s
death or if one of the other partners decides to dissolve business.
7. Incorporation - not difficult to convert a partnership to a different business
structure.
Disadvantages
1. Unlimited liability - creditors can look beyond business assets to the
partner's personal assets for payments.
2. Difficulty in finding partners - difficult to find a compatible partner to do
business with.
3. Difficulty in obtaining start-up costs - the amount of equity that can be
raised is limited to the partner's personal wealth. Due to the risk of
partnerships, it is often difficult to obtain financing.
4. Employment insurance benefits - if the business does not succeed the
partners are not eligible to collect employment insurance benefits.
5. Tax disadvantage - profits must be added to personal income.
6. Sharing of control/profits - partners need to compromise and agree on
beneficial terms.
7. Potential of conflict - since everything is shared great potential for conflict.
8. Termination of business - legal life of business terminates with death of
partner unless partnership agreement states otherwise and the partners
decide to continue the partnership.
3. THE CORPORATION
For many years now there has been a definite trend toward the corporate form of
doing business. The need for specialization of talents, wider ownership of the
business organization and increased capital needs lead many businesses to
select the corporate form instead of the proprietorship or partnership form.
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A corporation is a business created as a distinct legal entity composed of one or
more individuals or entities. Starting a corporation is somewhat more
complicated than starting the other forms of business organizations, but not
greatly so for a small business.
Forming a corporation involves preparing articles of incorporation (or a charter)
and a set of bylaws. Canadian firms can be incorporated under either the federal
Canada Business Corporation Act or Territorial Law.
Should you incorporate federally or provincially?
Provincially incorporated companies are legal entities in the province or territory
in which it's incorporated. The shareholders are not protected by limited liability if
it does business outside of its home province. Provincial incorporation is less
expensive than being federally incorporated.
What should be included in the bylaws?
The bylaws are rules describing how the corporation regulates its own
existence. For example, the bylaws describe how directors are elected. These
bylaws may be a very simple statement of a few rules and procedures, or they
may be quite extensive for a large corporation.
CORPORATIONS COME IN TWO TYPES:
Private and public corporations may be incorporated federally under the Canada
Corporations Act. A firm operating nationally or in several provinces may find
this advantageous. A federally incorporated business must still register in each
province in which it does business.
A Public Corporation is a legal entity that has a distinct personality for tax and
legal status in addition to its owners. Its original shareholders who provide the
start-up cash or assets in exchange for their shares start it. The Corporation may
eventually be owned by a large number of shareholders.
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Although the shareholder losses all rights to the cash or assets they invested, the
shares they purchased convey new rights. These include voting rights, the right
to elect directors, right to dividends (a share of profits), the right to buy and sell
their stock, the right to examine the Corporation books and finally to share in any
surplus on the winding up of the Company.
The shareholders liability is limited to the total sum of their financial investment,
except in the case of fraud or wrongdoing.
In a professional Corporation the shareholders are subject to unlimited liability in
the event of malpractice.
As a legal entity, the Corporation is subject to its own separate tax account with
the Federal, Provincial and Municipal authorities.
Private Corporations or closely held Corporations are Corporations that are
identical to Public Corporations except that the shares are owned by a very
limited number of shareholders, which usually personally manage the Company.
The Company may appear identical to a partnership with the major exceptions
being limited liability of the shareholders and its status as a separate legal entity.
STARTING A CORPORATION
Setting up a Corporation requires the application for a Charter or Articles of
Incorporation to be filed with the appropriate Provincial or Federal Regulators.
This is a contract that exists between the legal jurisdiction, the incorporations and
their shareholders. When approved a charter is granted.
Federally incorporated companies are considered legal entities anywhere in
Canada. Therefore, the shareholders are protected by limited liability anywhere
in Canada.
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Articles of Incorporation
The articles of incorporation should include the following:

Corporation’s name;

Location of its Head Office;

List of incorporations including addresses and numbers of shares held and
price paid for shares.

Authorized capital, classes of shares holding the capital number of shares of
each class and its issue price;

Any restrictions to sale of shares or classes of shares.

List of first directors including addresses.

Its intended life;

Its business purpose, and

Any additional information required by law.
This information must be supplied to regulators in the jurisdiction in which the
firm is incorporated.
By-laws
To set the new Company in motion, the Board of Directors at their first meeting
must present and choose the Corporation By-laws. This details the code of
regulations, instructions for operation, duties and obligations of the Company and
its officers.
By-laws usually include:

Date and place of the Shareholders Annual Meeting.

How special shareholder meetings are called.

Method of voting and choice of proxies.

How elections are held, terms of office for shareholders.

Order of business at shareholders meeting.

Duties and powers of shareholders.

Authority and duties of officers.
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
Corporate policy on dividends and debt repayment.

Rules on stock transfer.

Method of amending the Charter and By-law.
HOW IS A PUBLIC CORPORATION MANAGED?
The management of a company is divided into two parts. One is the day-to-day
operation and management of a company that is provided by the officers of a
Company and the other is broad long rang management that is overseen by the
Board of Directors and the Shareholders.
Shareholders do not exercise direct control, unless they are Officers or Directors
(or both), but indirectly since they elect the Directors. Shareholders do have a
great interest in the financial well being and direction of the Company since they
have and are part owners of the company assets because of the shares they
own and this gives them certain basic rights.
Shareholders rights include:

Sale or transfer of shares.

Pre-emptive right (purchase of new share issues proportionate to what they
already own).

Dividends and profits (in proportion to the number of shares they own).

Inspection of Company’s books and financial statements.

Attend shareholders meetings and exercise their “common stock” right to
vote.
Annual General Meeting (AGM)
The Shareholders Annual Meeting is usually held once a year. A Shareholder
has one vote for each voting share they hold (Common Shares usually).
If they do not attend they can vote by proxy, which is written permission for
someone else to vote for them.
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Shareholders give direction by voting on a variety of issues presented such as:

Election of Directors

Appointment of Auditors

Approval of Pension Plans

Increasing Capital Shares or Bond Issues

Amendments to the Charter
Since proxy casts the vast number of votes therefore control generally resides
with the Officers and the Directors of the Company. If the Company Officers
(President etc.) control the proxies, they control the Board, not vice versa.
The Board of Directors is elected by the Shareholders and is the managing body
of the Corporation. The authority they exert rests in them as a group and not
individually. The Shareholders elect the Board and the Board elects the Officers,
thereby delegating the management authority to them.
Limitations to the Board’s power are outlined in Law, legal procedure and in the
Corporations Charter and By-laws.
Official decisions are outlined in the Board’s Minute Book (motions forwarded
and passed, defeated or tabled). These minutes give authority to a variety of
transactions, including the corporate accountant’s authority for entries regarding
the Corporate Capital.
Directors Duties and Obligations Include:

Set up and oversee the general business policies.

Establish Dividend Policies.

Appoint and terminate Senior Officers and establish their salaries and
bonuses.

Authorize Contracts.

Oversee financial transactions like loans.

Authorize Corporate Litigation.
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Directors can be held liable if:

They fail do disclose personal business dealings with the Company.

Voting on issues in which they have a personal interest.

Personal use of Company funds.

Violating the Company Charter or the rights of Shareholders.

Declaring illegal dividends.

Cancelling Capital Stock Subscriptions.

Making false reports.

Issuing stock at a discount (unless permitted by law).

Transferring Company property in the event of bankruptcy.
Company Officers
The number and type of Company Officers are set out in the By-laws.
They may include:

President and/or Chairman of the Board (one of which will be CEO).

Vice President(s) who oversee division or operations.

Secretary who records minutes and may combine duties with the treasurer.

Treasurer who handles finances and financial records.

Controller who hands on financial oversight.

A variety of other positions named in the by-laws.
HOW IS A PRIVATE CORPORATION MANAGED?
Private Corporations operate much in the same manner as Public Corporations,
except that their shares are owned by a small number of shareholders, maybe
one or two in number.
A basic conflict arises frequently between majority and minority shareholders
interest. Major Shareholders are active in management and want to reinvest
money and increase their income, whereas minority shareholders are not active
in the business, but may wish to increase their income through dividends, profits
and by limited executive incomes.
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THE CANADIAN BUSINESS CORPORATIONS ACT (CBCA)
Corporations operate under the regulation authority of the CBCA, but Financial
Sector intermediaries have their own rule markers (Act). The purpose of the Act
is to protect the interest of shareholders, creditors, management and the public.
The objectives of the Act are as follows:

An exact statement of Rights of the concerned parties and their rights to
judicial intervention.

Eliminates administrative discretion and ensures that all decisions are open to
appeal through the courts.

Disperses with excess formalities, the remainder of which is simple and
codified.

All regulations must be published 60 days prior to the effective date in the
Canadian Gazette.

Provides for minimum legal and accounting jargon.
The Act Contains

Interpretation section dealing in part with definitions.

Provides the Corporation with the rights and powers of a natural person,
except as limited by its charter.
Third parties are protected even if the transaction is contrary to the Charter,
leaving shareholders, directors and officers bound by the restrictions.
Requirements that a Corporation must maintain a Canadian office whereby the
Charter By-laws and records are maintained. Records may be kept in Microfiche
or computer records as well as written form.
Corporate rights to re-purchase their own shares by using corporate funds equal
to the amount that their surplus exceeds liabilities and capital. The corporation
must cancel their re-purchased shares and reduce their capital account
accordingly.
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What does Corporations Canada do?
Corporations Canada will check that your articles are complete and in proper
form, and that the proposed name is acceptable. If so, the Director will issue a
Certificate of Incorporation showing the date of receipt of your articles as the
effective date of incorporation. If you prefer, you may request a later
incorporation date instead.
A notice setting out your corporation's name and incorporation date and other
information will appear on Corporations Canada's website.
Please note that Corporations Canada processes applications for incorporation
within established timeframes, based on the method by which documents are
submitted.
HOW ARE CORPORATIONS FINANCED
Types of Financing
Starting a new corporation or expanding its operation requires capital. In a small
(and not so small) corporation, the initial financing may come from personal
capital sources or the original planners may go to the merchant bankers and the
marketplace for funds. After a company has been in operation for some time
they generally have a track record that they can trade on.
Long Term Financing
Generally, long term financing is accomplished through a new share issue (equity
financing) or the issue of various types of bond or debenture.
Bonds are a contractual arrangement for borrowing money secured by a pledge
of assets:

First Mortgage Bonds – Secured by assets such as buildings, land and
machinery.

Second Mortgage Bonds – Security pledged, already has been pledged for a
prior issue.

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Debentures – Bonds secured by the general credit of the organization.

Convertible Bonds or Debentures – Are issued with warrants.

Interest Bonds or Debentures – Pay interest only when a profit is earned.
Financing Providers
Large corporations go to the market place (stock market or brokerage market)
and an investment dealer will underwrite the issue or act as a commissioned
agent and sell to other investment dealers. The amounts raised are usually in
the millions of dollars.
Small corporations go to the banking industry or merchant bankers and get
financing, based on the securities they can provide. The amounts they can
borrow are generally much smaller that large scale bond issues.
Equity Financing
Share issues are handled much like bond issues.
Shares are issued as:
1. Initial Capital
Initial capital is usually from common shares. The common shareholder shares in
a portion of the remaining profits. Of course, the shareholder also has a vote and
can elect directors. The net earnings of a corporation are either paid out as
dividends or held as retained earnings and used for re-investment and
expansion.
The size of the dividend is regulated by how much net profit, board of directors’
intent, but also may have some restrictions due to bond guarantees as to
minimum levels of retained earnings.
Common Share Ownership has the following advantages:

Right to share in growth of earnings and assets.

Right to sell shares.

Right to vote on Board of Directors and certain issues.
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
Limited personal liability.

Right to attend company meetings and examine the books.

Right to an annual report.

Receives a tax credit on Canadian Corporate Share dividends.
Disadvantages:

Last to receive a portion of assets on wind-up of a company.

Dividends are only paid when declared and is related to amount of net
earnings.

Dividends (common shares) are paid after bond interest, and preferred share
dividends.
2. Preferred Shares
Preferred Shares rate higher than common, but are less guaranteed than bonds.
They are less an indication of company ownership and geared more towards
investment income.
Dividends are usually fixed by the share certificate, but affected by profitability of
the company and the intent of the board of directors.
Bonds (a debt) come before preferred shares at the wind-up of the company.
3. Internal Financing
Self-financing can take place from retained earnings and is the most secure
method of expansion. It works particularly well in small corporations, but some
Public Corporations have grown to huge proportions using their own money.
4. Alternate Methods of Financing

Short Term Financing – Less than 1 year – banks and trade credit.

Commercial Paper – A form of unsecured promissory notes that are sold at a
discount.

Account Receivables – The sale of accounts receivable for immediate cash.
The borrowing of money using the A/R as collateral.
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HOW DOES A CORPORATION PAY TAXES?
A corporation must file a corporation income tax return (form T2) within six
months of the end of every taxation year, even if it doesn't owe taxes. The
corporation must also attach financial statements to the tax return.
How does the GST affect a corporation?
A corporation must register for GST if its taxable worldwide annual revenues are
more than $30,000. Corporations have reporting periods for which a return has to
be filed.
ADVANTAGES OF A CORPORATION:
1. Ease of transferring ownership - ownership (represented by shares of
stock) can be readily transferred.
2. Limited liability - shareholders are not held accountable for corporation's
debt, obligations, or acts of the company over and above the amount paid or
owed for the purchase of shares.
3. Unlimited life - the corporation does not cease to exist, unlike sole
proprietorships or partnership, with the death of shareholders because it is a
separate legal entity.
4. Access to capital - corporations can raise capital by issuing and selling new
shares in the company or by issuing debt.
5. Tax advantages - lower tax rates.
DISADVANTAGES OF A CORPORATION:
1. Must pay taxes – a corporation is a legal entity and must pay taxes.
2. Double taxation - monies paid to shareholders in dividends are taxed again
as income to those shareholders. This means that corporate profits are taxed
twice at the corporate level when they are earned and again at the personal
level when they are paid out.
3. Added costs - additional costs are incurred due to the complexity and legal
requirements of incorporating.
4. More regulated - due to all legal and taxation requirements.
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4. CO-OPERATIVES
People around the world have been forming co-operatives for more than 150
years. In Canada, co-operative history began before the turn of the century. Our
first co-operatives were creameries and grain growers' co-operatives, but
gradually more types were added including retail stores, credit unions, a range of
agricultural co-operatives, and community service co-operatives such as
recreation, health clinics and daycares.
Co-operatives range in size from small agricultural co-operatives to large
industrial enterprises. They form a system of stable and enduring enterprises
which make tremendous contributions to the economic and social health of
communities, and provide thousands of jobs. They operate side-by-side with
privately-owned businesses operated as sole proprietorships, partnerships and
investor-owned corporations. Co-operatives are legally-established organizations
which conform to our provincial laws. They are financed by selling shares to
members, issuing securities approved by the Co-operatives Securities Board,
and by debt capital.
A co-operative is a corporation organized by people with similar needs to provide
themselves with goods or services or to make joint use of their available
resources to improve their income.
Their business structure ensures:

All members have an equal say (one vote per member, regardless of the
number of shares held);

Open and voluntary membership;

Limited interest on share capital;

Surplus is returned to members according to amount of patronage.
There is no requirement to incorporate as a co-operative in order to run your
business collectively and cooperatively.
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However, it is illegal in Ontario to use the word "co-operative" in connection with
the name of an enterprise unless the group is incorporated under the Cooperative Corporations Act.
There are three important differences between co-operatives and other
types of business:
1. Purpose,
2. The way financial surplus or profit is used or distributed, and
3. The ownership and control structure.
PURPOSE OF CO-OPERATIVES
The purpose of a private business, whether it is the corner drugstore or the
largest manufacturer, is to make a profit for its owners on the capital they have
invested. This is done by offering goods and/or services for sale to the public.
The purpose of a co-operative business is generally to provide its members with
goods and/or services, usually at competitive prices. Savings, which belong to
the members, are fundamentally different from profits on invested capital. For
example, a member of a retail co-operative may receive his or her saving through
lower prices at the time of purchase, as in a direct-charge co-operative, or
through a patronage refund at the end of the year. The amount of the refund
depends on the total surplus earned by the co-operative, and on the dollar-value
of a member's purchases. Refunds, also called patronage refunds, are in
proportion to a member's use of the co-operative. The greater the use, the
greater the potential savings.
DISTRIBUTION OF SURPLUS
In a private business, profit is the money left after all expenses are paid. Profits
or earnings can be reinvested in the business, or distributed to the owners in
relation to the number of shares they own. Shares are a specific portion of the
capital of a co-operative.
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The more money invested, the greater the potential for profit. In the case of an
investor-owned corporation, the part of the profit which is returned to
shareholders is distributed as dividends paid on shares. Such dividend rates are
normally set by a corporation's board of directors.
In a co-operative business, any surplus at the end of the fiscal year is allocated
to members' accounts as a patronage refund. All or part of these funds may be
paid to the members, or kept in the business as additional members' shares or
loans. In either case, the amount allocated to a member is in proportion to that
member's use of the co-operative. In a worker co-operative, patronage dividends
are normally based on hours worked and, in effect, increase the members'
wages.
WHERE IS THE CONTROL IN A CO-OPERATIVE?
In most businesses, control is in the hands of the owners, whether one or many.
Further control is determined by the individual or group which owns the most
voting shares.
In an investor-owned corporation, shareholders vote according to the number of
shares they own. The more shares, the more votes. If individual shareholders
cannot vote or choose not to, they may assign their voting rights to other
individuals who then become the absent shareholders' proxies. Thus, even in
large corporations, if one person owns enough shares (either directly or by
proxy), that person can effectively control the operation.
In a co-operative, each member has only one vote regardless of the amount of
money that member has invested in the co-operative, and proxies are not
permitted. Thus, the control structure of a co-operative is democratic.
Another important difference in the ownership and control structures of private
and co-operative businesses is the way boards of directors are chosen. In nonincorporated private businesses, individual partners usually exercise direct
control.
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Public and private investor-owned corporations have boards of directors who
guide the affairs of the corporation in the interests of the shareholders. They are
elected by the shareholders, and those with the most shares exercise greater
control. The directors may or may not be shareholders themselves.
Incorporated co-operative businesses and organizations also have boards of
directors. These directors are members (or delegates in the case of federations
or other co-operatives with delegate structures) who have been democratically
elected by other members or delegates.
LOSS OR LIABILITY PERTAINING TO THE CO-OPERATIVE
In a sole proprietorship or partnership, the owner or partners are legally liable for
all debts, operating losses or other liabilities incurred by their business. In all
corporations, including co-operatives, the liability of shareholders is limited to the
value of the shares they hold.
COMMUNITY SERVICE ORGANIZATIONS (NON-PROFIT CO-OPERATIVES)
Organizations such as child care centres, community recreation halls, and
community health clinics may be incorporated as community service cooperatives, non-profit corporations or business corporations. Boards of directors
are elected in all cases. In co-operatives, the principle of "one member-one vote"
is mandatory. In non-profit corporations, voting may be restricted to one memberone vote, but the restriction must be specified in the articles or bylaws. In
business corporations, voting is based on the number of shares a person holds.
In community service organizations, whether co-operatives or charitable nonprofit corporations, any surplus must be retained within the organization or
donated to another non-profit organization or co-operative. It is never distributed
to members or shareholders.
If the co-operative is set up as a community service co-operative (non-profit), it
must be noted as a restriction in the articles.
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It could be worded as "this organization is established as a community service
co-operative, and any surplus resulting from the yearly operation shall be
transferred to reserve for future use and no part of the surplus shall be payable to
any member."
INFORMATION ON FEDERAL CO-OPERATIVES
Federal co-operatives fall under the Canada Cooperatives Act. Federal cooperatives are registered through the Corporations Directorate of Industry
Canada. Fees are now $200 when submitted on-line and $250 for all other
means.
To apply for incorporation, at least three persons, or one or more
cooperative entity, must send the Director, appointed under the Canada
Cooperatives Act, the following:

Articles of Incorporation, Form 3001

Notice of Registered Office, Form 3003

Notice of Directors, Form 3006

A declaration signed by all the applicants that, after incorporation, the cooperative will be organized and operated and will carry on business on a cooperative basis, and that forms 3003 and 3006 filed with articles of
incorporation indicate that the cooperative, when it comes into existence, will
be in compliance with the Act.
If the proposed co-operative is a non-profit housing co-operative or a worker cooperative, a declaration signed by all the applicants that the co-operative will be
in compliance with either Part 20 or 21 of the Canada Cooperative Act. Part 20
includes specific provisions applicable to non-profit housing co-operatives and
Part 21 includes specific provisions applicable to worker co-operatives.
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A name search report, specifically a Canada-biased NUANS report. The name
must not be confusing with other names, including corporate names, and it must
include the word "co-operative", "cooperative", "co-op", "coop", "coopérative",
"united" or "pool" or another grammatical form of any of those words.
Anyone wishing to form a co-operative association under federal law must
complete certain forms. The following fees are required for document filings and
services rendered.
Note: The Canada Cooperatives Act came into force on December 31, 1999.
The Canada Cooperatives Act replaced the Canada Cooperative Associations
Act on that date. The new Act modernizes the corporate governance rules
relating to non-financial cooperatives and is partly modeled on the Canada
Business Corporations Act.
The legislation provides cooperatives with greater flexibility in responding to the
demands of the competitive domestic and global marketplace. Cooperative
principles and values are set out clearly in the Act. Any actions a cooperative
takes must be consistent with these principles.
The Canada Cooperatives Act governs the incorporation of federal co-operatives.
Co-operatives are business organizations owned by the members who use their
services. They are a separate legal entity which may enter into contracts in their
corporate name. Generally, each member of a co-operative is entitled to one
vote. Surpluses are shared by members in proportion to the degree they use the
services. The members elect the board of directors and decide what should be
done with any profit that is generated in the co-op.
ADVANTAGES OF CO-OPERATIVES:
1. Owned and controlled by members
2. Democratic control: one member, one vote
3. Limited liability
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4. Profit distribution (surplus earnings) to members in proportion to use of
service;
5. Surplus may be allocated in shares or cash possibility of development of
conflict Between members
DISADVANTAGES OF CO-OPERATIVES:
1. Longer decision making process
2. Requires members to participate for success
3. Extensive record keeping necessary
4. Less incentive to invest additional capital
5. FRANCHISES
An important step in the small business start-up process is deciding whether or
not to go into business at all. Each year, thousands of potential entrepreneurs
are faced with this difficult decision. Because of the risk and work involved in
starting a new business, many new entrepreneurs choose franchising as an
alternative to starting a new, independent business from scratch.
Definition
When it comes to starting a business, many people think of buying a franchise as
a shortcut to success. While there is some truth to this, not all franchises are
created equal, and not everyone is cut out to be a franchisee.
Franchising in its truest form is the art of taking a successful operation and
multiplying this success by selling to entrepreneurs the concept method and
usually the supplies that will create the identical success, many times over.
One of the biggest mistakes that business people make is to hurry into business,
so it's important to understand their reasons for going into business, and to
determine if owning a business is right for them.
If they are concerned about the risk involved in a new, independent business
venture, then franchising may be the best business option for them.
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But they should remember that hard work, dedication, and sacrifice are essential
to the success of any business venture, including franchising.
A Legal and Commercial Relationship
A franchise is a legal and commercial relationship between the owner of a
trademark, service mark, trade name, or advertising symbol and an individual or
group wishing to use that identification in a business. The franchise governs the
method of conducting business between the two parties. Generally, a franchisee
sells goods or services supplied by the franchisor or that meet the franchisor's
quality standards.
Franchising is based on mutual trust between the franchisor and franchisee. The
franchisor provides the business expertise (marketing plans, management
guidance, financing assistance, site location, training, etc.) that otherwise would
not be available to the franchisee. The franchisees bring to the franchise
operation the entrepreneurial spirit and drive necessary to make the franchise a
success.
There are primarily two forms of franchising:
1. Product/trade name franchising and
2. Business format franchising.
In the simplest form, a franchisor owns the right to the name or trademark and
sells that right to a franchisee. This is known as "product/trade name
franchising." The more complex form, "business format franchising," involves a
broader ongoing relationship between the two parties. Business format
franchises often provide a full range of services, including site selection, training,
product supply, marketing plans, and even assistance in obtaining financing.
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PROBLEMS OF THE FRANCHISORS
Franchisors must convince themselves, purchasers of any shares and their
financial institutions, that their products or services can be franchised. They
must produce a detailed business plan to secure financing and to attract anyone
interested in buying their franchising their name.
Questions that the bank will want answered prior to providing financing to
franchisors

Are others successfully offering the product or service to be franchised
already?

How much of its own capital has the franchisor already committed to the
enterprise?

Are premises already owned or secured on long-term leases?

What length and quality of experience do the franchisor and its key persons
possess?

Can the franchisor show a background of entrepreneurial achievement?

Will the franchisees make substantial money commitments? Will the
franchisees be required to give personal guarantees to the franchisor? Will
franchisees be required to possess at least one-third of their start up costs?

Will the franchisor commit itself to the point of providing buy-back guarantees
to its franchisees?

After the franchisor passes the scrutiny of the above questions, they will
usually provide loans to finance the purchase of land, construction of
buildings, acquisition of inventory, machinery and equipment, as well as any
other capital expenditures.
A bank will want from the franchisee

Personal guarantees from shareholders and their spouses.

General insurance coverage on all physical assets, with benefits assigned to
the Bank.
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
Assignments as required under the General Security Agreements, chattel
mortgages or perhaps debentures secured by the assets of the corporation.

Agreements from the franchisor to buy-back inventory on a formula basis.

Commitments from the franchisor that the franchisor will make every effort to
replace a failed franchisee with another in the same premises.

Life insurance on the franchisee (s) at least sufficient to cover term and
operating loans, with policies assigned as collateral to the Bank.

At least a minimum percentage of all costs provided from the franchisee’s
own pocket.

Profit and loss statements on a regular monthly or quarterly basis

Audited financial statements, annually

An agreed upon loan ceiling and a maximum debt / equity ratio.
ESTATE PROBLEMS IN FRANCHISING
Franchisor

Repayment of debt, last expenses, capital gains and income taxes on death.

Franchisors will usually execute estate freezes in order to split income, capital
gains and capital losses with family members.

Provide for buy-sell agreements between themselves and employees,
competitors, family members, partners and fellow shareholders.
Franchisees
Even though the business operation is usually incorporated, the franchise
arrangement is essentially dependent on the commitment of individuals to the
franchisor. Not all agreements will allow the sale of the operation to others.
Some may even define would be purchasers as well as a detailed formulae for
determining the price at which a business may be sold.
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Questions to be answered when setting up an estate plan

Does the franchise agreement specify buy-back procedures on a franchise’s
insolvency, disability or death?

Will the franchisor buy back inventory, machinery and equipment, etc.; at their
full wholesale values? If not, what discount formula will be applied?

May the franchisee transfer the franchise to heirs? Under what conditions?

Are termination fees payable on bankruptcy, disability, death or other
disposition of the business by a franchisee?
This type of business arrangement may not be suitable for everyone, but it will
certainly appeal to some business individuals.
Caution should be exercised as to what franchises an individual wishes to
consider. Your prospects and clients should always be advised to seek legal
advice when entering into a franchise contract.
HERE ARE DEFINITIONS OF SOME KEY FRANCHISE TERMS:
Acknowledgement of Receipt
This document states that you received the legal franchise documents on a
certain date.
Advertising Fee/Fund
A fee or fund paid by franchisees for advertising expenditures. The fee usually is
less than 3 percent of the franchisee's annual sales and is in addition to royalty
fees.
Arbitration
An alternative to a lawsuit in which a neutral third party hears both sides to a
dispute and renders a decision.
Area Development Rights
Optional right to develop multiple individual franchises in a specific geographic
area.
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Assets
Owned property that can be used for payment of debt.
Balloon Payment
A final payment due at the end of a loan.
Business Plan
A detailed document that defines a business's development goals and plots how
and where the resources needed to accomplish the objectives will be obtained
and used.
Collateral
Assets used as security for a loan in the event of default.
Company-owned
An outlet owned directly by the corporation.
DBA
DBA stands for "doing business as." For example, if the name of your corporation
is XYZ Co. but is known to the public as ABC Co., your business would be
classified as XYZ Co. d/b/a ABC Co.
Default
Failure to meet terms of an agreement.
Designated Supplier
Exclusive suppliers of products and/or services used in the franchisee business.
Distributorship: A business authorized to sell the products or services of a parent
company. This is usually a manufacturer/reseller relationship, not necessarily a
franchise.
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Earnings Claims
Statements of sales, profit or other financial information made by the franchisor
regarding their franchisees.
Exclusive Territory
A specifically defined geographic area in which franchisees retain the sole right
to operate.
Franchise
A legal and commercial relationship between the owner of a trademark, service
mark, trade name, or advertising symbol and an individual or group wishing to
use that identification in a business.
Franchise Agreement
The franchise contract.
Franchisee
A franchise owner.
Franchise Fee
The amount of money you need to pay the franchisor to purchase a franchise
concept.
Buying a franchise can be a quick way to set up your own business without
starting from scratch. But there are also a number of drawbacks.
ADVANTAGES OF BUYING A FRANCHISE
1. Lower Failure Rate - When you buy a franchise, you are buying an
established concept that has been successful. Statistics show that
franchisees stand a much better chance of success than people who start
independent businesses; independent businesses stand a 70 to 80 percent
chance of NOT surviving the first few critical years while franchisees have an
80 percent chance of surviving
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2. Help with Start Up and Beyond - You get a lot of help starting your business
and running it afterwards. Many franchises are, in fact, turnkey operations.
When you buy a franchise, you get all the equipment, supplies and instruction
or training needed to start the business. In many cases, you also get ongoing
training, and help with management and marketing. Your franchise will reap
the benefit of the parent company’s national marketing campaigns, for
instance.
3. Buying Power - Your franchise will benefit from the collective buying power
of the parent company as the franchisor can afford to buy in bulk and pass
the savings along to franchisees. Inventory and supplies will cost less than if
you were running an independent company.
4. Star Power – Many well-known franchises have national brand-name
recognition. Buying a franchise can be like buying a business with built-in
customers.
5. Profits - A franchise business can be immensely profitable. (Think of
MacDonald’s and Tim Horton’s, for instance.)
DISADVANTAGES OF BUYING A FRANCHISE
1. Their Way or The Highway - The main disadvantage of buying a franchise is
that you have to do it their way - sometimes right down to the way the napkin
holders are filled. As a franchisee, you are not the one actually running the
show, and some franchisors exert a degree of control that you may find
excruciating.
2. Ongoing Costs – Besides the original franchise fee, royalties, a percentage
of your franchise’s business revenue, will need to be paid to the franchisor
each month. The franchisor may also charge additional fees for services
provided, such as the cost of advertising.
3. Ongoing Support? - Not all franchisors offer the same degree of assistance
in starting a business and operating it successfully. Some are just start-up
operations – and everything after start-up is up to you. Others make promises
of ongoing training and support that they don’t follow up on.
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4. Cost - Buying into well-known franchises is very expensive. If this is your
choice, you will have to have extremely deep pockets or the ability to arrange
the necessary financing.
5. Shark-Infested Waters - Buying a little-known, perhaps inexpensive
franchise can be a real gamble. Just because a business is offering
franchises is no guarantee that the franchise you buy will be successful. In
some cases, franchising is the business; all the franchisor is interested in is
selling more franchises. Whether or not the individual franchises are
successful is irrelevant to them. This is not to say that no little known,
inexpensive franchises are worthwhile, but just a reminder that any franchise
you're thinking of buying needs to be investigated carefully.
TO BE OR NOT TO BE – A REVIEW OF INCORPORATION
Some sole proprietorships and partnerships are larger than some incorporated
Canadian businesses. There are both tax and non-tax reasons for considering
the corporate form of business organization.
Many factors influence the decision of whether to incorporate or not, but the
following are some of the many advantages.
There are some potential significant tax benefits of incorporation for an
active Canadian business:

A tax deferral is possible by retaining earnings in the corporation.

The $750,000 capital gains exemption (effective March 19, 2007)
available for sale of a small business can only be claimed on the sale
of shares of a qualifying corporation and not for the sale of a sole
proprietorship or a partnership.
However, a corporation is a separate taxpayer with its’ own tax rates. A
corporation which is incorporated in Canada and is controlled by private
corporations or individuals who are Canadian residents will normally qualify as a
"Canadian-controlled private corporation".
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This status allows it to claim the small business deduction, a reduction of the
normal corporate income tax rate on the first $500,000 of a corporation's annual
taxable income earned from carrying on an active business in Canada.
The tax advantage which the shareholder of such a corporation with active
business income will enjoy is the ability to defer the payment of some income tax.
A corporation eligible for the small business deduction pays federal tax of 11%
on its first $500,000 of taxable income. The remaining tax, which is paid by the
shareholders upon receipt of dividends from the corporation, is deferred until
dividends are paid. When dividends are paid the balance of the tax is levied on
the Shareholder.
The deferral is significant, especially for a taxpayer in the top marginal tax
bracket, and means that approximately twice the funds are available for
investment, since in effect tax money is being retained in the corporation and
invested.
Investment Income
The Canadian tax system is designed, in certain instances, to be neutral between
incomes earned personally or through a corporation. As a result, after the
shareholder pays tax on his dividends, the total tax burden will be approximately
the same amount he would have paid if the income was received directly.
This neutrality means that for non-active income of a corporation such as
investment income or capital gains, the corporation effectively pays tax at the
same rate as an individual. Accordingly there is no material tax deferral possible
on passive income.
Capital Gains Exemption
The other main tax advantage to incorporation of a small business is the ability to
claim the $750,000 capital gains exemption on a sale of the business.
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The complex rules provide, in effect, that to claim the exemption the shares must
be of a Canadian-controlled private corporation, at least 90% of the assets of
which are used in an active business carried on in Canada, or a holding company
which owns such shares.
Where the shares qualify, the owner can sell them and the first $750,000 of
capital gains are exempt from tax. Note that the exemption applies to the
individual and not the corporation. Once an owner has claimed $750,000 of
capital gains exemption, the exemption is no longer available on a sale of other
qualifying shares.
Limited Liability
Liability protection is generally the main non-tax reason to incorporate, and is the
main motivation for most incorporations to take place.
While a sole proprietor or partner in a general partnership has unlimited liability to
creditors of the business, shareholders of a corporation have no such risk.
Without the protection of limited liability most entrepreneurs would not take the
risks of going into business.
Director's Liability
While shareholders have limited liability, directors of a corporation are subject to
various liabilities. These include liabilities for unremitted source deductions,
unremitted P.S.T and G.S.T. and certain environmental liabilities.
Furthermore, passive directors who may not be involved in running the business
may still be subject to certain of these liabilities. Passive directors should be
aware of what the corporation is doing and should ensure that director's liability
insurance is in place to protect them.
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DISADVANTAGES OF INCORPORATION
Losses Trapped
Any business which is not operating at the break even point should not
incorporate from a tax point of view, although it may be sensible to incorporate
when considering limiting liability. A loss earned in a corporation cannot be
transferred to its shareholders. Conversely, owners of an unincorporated
business would be able to utilize losses which they incurred against other
sources of income or against future earnings. Losses which arise in a corporation
can only be offset against earnings in that corporation.
Double Taxation
A potential double taxation trap exists if an active business earns too much profit.
Corporate profits from active business income in excess of $500,000 per year
are taxed at full corporate rates. Integration of the personal and corporate tax
systems does not work at that rate, resulting in an element of double taxation.
Therefore all income in excess of $500,000 should usually be paid out of the
corporation by way of salary or bonus to avoid this double taxation trap.
If the corporation requires the funds for operations, the income can be paid to the
shareholder and then loaned back to the corporation. The salary receipt is,
however, taxable to the shareholder.
Other Disadvantages
A corporation is also subject to strict rules governing the taxation of shareholder
benefits, such as shareholder loans or the use of a company car.
Finally, the transfer of the unincorporated business or partnership to a
corporation will be a taxable transaction unless a rollover agreement is made and
the appropriate election is filed with Canada Revenue Agency. Provided such an
election is made, however, the transaction can be free of any immediate adverse
tax implications.
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Life Insurance
When a proprietorship or a partnership incorporates, it is generally a good idea to
consider any life insurance needs. Upon the incorporation of a partnership, a
shareholders agreement will normally be entered into, often requiring funding
through life insurance. An incorporated sole proprietorship may not have any
additional life insurance requirements, but in certain circumstances, such as the
entrepreneur being a single parent, additional life insurance to pay for any
deemed capital gains incurred on the death of the shareholder might be
appropriate.
BUSINESS FINANCIAL STATEMENTS
All business operates using financial statements. Not only do these statements
tell us the Company’s current position, but to some extent they also reveal the
financial history as well as forecast the future.
As important as this information is, just as important these documents give us,
besides the obvious ones such as Buy-Sell Agreements and Key Personnel
Insurance, Corporate needs we might have missed had we not examined them.
Lastly they often provide us with key information that will help locate the
additional premiums that will be required.
There are many types of financial statements, but we will only examine three of
them. All other statements seek to interpret the date revealed by them.
The Main Financial Statements are:
1. The Balance Sheet
2. The Income Statement
3. The Statement of Retained Earnings
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1. THE BALANCE SHEET
A balance sheet is a snapshot of a business’ financial condition at a specific
moment in time, usually at the close of an accounting period. A balance sheet
comprises assets, liabilities, and owners’ or stockholders’ equity. Assets and
liabilities are divided into short- and long-term obligations including cash
accounts such as checking, money market, or government securities. At any
given time, assets must equal liabilities plus owners’ equity. An asset is anything
the business owns that has monetary value. Liabilities are the claims of creditors
against the assets of the business.
What is a balance sheet used for?
A balance sheet helps a small business owner quickly get a handle on the
financial strength and capabilities of the business. Is the business in a position to
expand? Can the business easily handle the normal financial ebbs and flows of
revenues and expenses? Or should the business take immediate steps to bolster
cash reserves?
Balance sheets can identify and analyze trends, particularly in the area of
receivables and payables. Is the receivables cycle lengthening? Can receivables
be collected more aggressively? Is some debt uncollectible? Has the business
been slowing down payables to forestall an inevitable cash shortage?
Balance sheets, along with income statements, are the most basic elements in
providing financial reporting to potential lenders such as banks, investors, and
vendors who are considering how much credit to grant the firm.
The Basic Formula for a Balance Sheet is:
ASSETS = LIABILITIES + SHAREHOLDERS EQUITY
ASSETS
Assets are subdivided into current and long-term assets to reflect the ease of
liquidating each asset. Cash, for obvious reasons, is considered the most liquid
of all assets.
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Long-term assets, such as real estate or machinery, are less likely to sell
overnight or have the capability of being quickly converted into a current asset
such as cash.
Assets are listed in order of their liquidity:
1. Current
2. Fixed
3. Other
1. Current assets
Current assets are any assets that can be easily converted into cash within
one calendar year. Examples of current assets would be chequing or money
market accounts, accounts receivable, and notes receivable that are due within
one year’s time.
Cash
Money available immediately, such as in chequing accounts, is the most liquid of
all short-term assets.
Accounts receivables
This is money owed to the business for purchases made by customers,
suppliers, and other vendors.
Notes receivables
Notes receivables that are due within one year are current assets. Notes that
cannot be collected on within one year should be considered long-term assets.
2. Fixed assets
Fixed assets include land, buildings, machinery, and vehicles that are used in
connection with the business.
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Land
Land is considered a fixed asset but, unlike other fixed assets, is not depreciated,
because land is considered an asset that never wears out.
Buildings
Buildings are categorized as fixed assets and are depreciated over time.
Office equipment
This includes office equipment such as copiers, fax machines, printers, and
computers used in your business.
Machinery
This figure represents machines and equipment used in your plant to produce
your product. Examples of machinery might include lathes, conveyor belts, or a
printing press.
Vehicles
This would include any vehicles used in your business.
Total fixed assets
This is the total dollar value of all fixed assets in your business, less any
accumulated depreciation.
3. Total assets
This figure represents the total dollar value of both the short-term and long-term
assets of your business.
Other Assets
Other assets cover a wide variety of items not expected to be converted into
cash within one year, and are not used actively to produce the company’s
products.
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Other assets can include items such as:

Cash value of life insurance policies.

Prepaid expenses or deferred charges in excess of one year.

Investments in other companies.

Mortgages receivables.

Intangible assets including leases, patents, copyrights, franchises,
trademarks and goodwill.
LIABILITIES AND OWNERS’ EQUITY
This includes all debts and obligations owed by the business to outside creditors,
vendors, or banks that are payable within one year, plus the owners’ equity.
Often, this side of the balance sheet is simply referred to as “Liabilities.”
1. Accounts payable
This is comprised of all short-term obligations owed by your business to
creditors, suppliers, and other vendors. Accounts payable can include supplies
and materials acquired on credit.
Notes payable
This represents money owed on a short-term collection cycle of one year or less.
It may include bank notes, mortgage obligations, or vehicle payments.
Accrued payroll and withholding
This includes any earned wages or withholdings that are owed to or for
employees but have not yet been paid.
2. Total current liabilities
This is the sum total of all current liabilities owed to creditors that must be paid
within a one-year time frame.
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Long-term liabilities
These are any debts or obligations owed by the business that are due more than
one year out from the current date.
Mortgage note payable
This is the balance of a mortgage that extends out beyond the current year. For
example, you may have paid off three years of a fifteen-year mortgage note, of
which the remaining eleven years, not counting the current year, are considered
long-term.
3. Owners’ equity
Sometimes this is referred to as stockholders’ equity. Owners’ equity is made up
of the initial investment in the business as well as any retained earnings that are
reinvested in the business.
The investment is represented by Capital Stock and is evidenced by share
certificates issued by the Company.
The Company may be authorized to issue more than one class of shares. The
shares may have a par or stated value, but current practice and Corporate Law
may dictate that no par value or fixed value is shown. The Directors acting in the
best interest of the Company then will set Price.
The Canada Business Corporation Act (CBCA) provides that all proceeds from
the sale of “without par value shares” must be credited to the Company’s capital
stock account.
Common stock
This is stock issued as part of the initial or later-stage investment in the business.
4. Retained earnings
These are earnings reinvested in the business after the deduction of any
distributions to shareholders, such as dividend payments.
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The amount listed is derived from the statement of retained earnings and
represents the accumulation of all earnings retained since the Company’s
incorporation.
Shareholders equity cannot be considered to be the true new worth of a
Company, due to several accounting functions.
Depreciation reduces the income for the year and in turn reduces the retained
earnings. As a result, any under valuation of fixed assets is compensated for an
under valuation of retained earnings.
5. Total liabilities and owners’ equity
This comprises all debts and monies that are owed to outside creditors, vendors,
or banks and the remaining monies that are owed to shareholders, including
retained earnings reinvested in the business.
Liabilities are a firm’s obligation to outsiders and represent debt, which must be
paid at some time in the future. They represent creditor’s claims on the asset
values of the business and with the exception of the mortgage obligation, are not
attached to any one’s individual assets, but to the company’s assets as a whole.
The assets supplied by the creditor may already have been sold and converted
into cash or accounts receivable.
Liabilities are listed on the balance sheet at the current value owed, not due, plus
accumulated interest. Liabilities can be categorized as either current or long
term. The more liquid the liability, the higher it is placed in the liability section.
Other current liabilities can include:

Next 12 month mortgage payments, Income and corporate taxes,

CPP, EI, WCB payments as well as employees contributions to registered,
pension plans owing but not yet forwarded,

Dividends owing but not paid.
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Note on Depreciation
Depreciation is an accounting technique that spreads the cost of an item over its
expected usual life.
This annual cost of the items is deducted as an expense on the income
statement and deducted on the balance sheet. At the end of each accounting
period, the asset value is reduced by the annual depreciation cost.
Depreciation can be calculated as a straight line or declining balance method.
Class of assets shows the accumulative depreciation and the dollar amount
shown on the balance sheet represents the remaining un-depreciated part of the
cost, not the fair market value.
In some classes of assets, such as a building, the depreciation listed for a current
period, may in fact be offset by a current increase in the fair market value due to
inflation.
2. THE INCOME STATEMENT
The Income Statement may also be known as:

The profit and loss statement

The operating statement

The statement of earnings

The statement of revenue and expense
Where as the balance sheet targets the financial condition of a business at a
given date the income statement indicates the financial performance during the
same period.
An income statement, otherwise known as a profit and loss statement, is a
summary of a company’s profit or loss during any one given period of time, such
as a month, three months, or one year. The income statement records all
revenues for a business during this given period, as well as the operating
expenses for the business.
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What are income statements used for?
You use an income statement to track revenues and expenses so that you can
determine the operating performance of your business over a period of time.
Small business owners use these statements to find out what areas of their
business are over budget or under budget. Specific items that are causing
unexpected expenditures can be pinpointed, such as phone, fax, mail, or supply
expenses. Income statements can also track dramatic increases in product
returns or cost of goods sold as a percentage of sales. They also can be used to
determine income tax liability.
It is very important to format an income statement so that it is appropriate to the
business being conducted.
Income statements, along with balance sheets, are the most basic elements
required by potential lenders, such as banks, investors, and vendors. They will
use the financial reporting contained therein to determine credit limits.
1. Sales
The sales figure represents the amount of revenue generated by the business.
The amount recorded here is the total sales, less any product returns or sales
discounts.
2. Cost of goods sold
This number represents the costs directly associated with making or acquiring
your products. Costs include materials purchased from outside suppliers used in
the manufacture of your product, as well as any internal expenses directly
expended in the manufacturing process.
Gross profit
Gross profit is derived by subtracting the cost of goods sold from net sales. It
does not include any operating expenses or income taxes.
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3. Operating expenses
These are the daily expenses incurred in the operation of your business. In this
sample, they are divided into two categories: selling, and general and
administrative expenses.
Sales salaries
These are the salaries plus bonuses and commissions paid to your sales staff.
Collateral and promotions
Collateral fees are expenses incurred in the creation or purchase of printed sales
materials used by your sales staff in marketing and selling your product.
Promotion fees include any product samples and giveaways used to promote or
sell your product.
Advertising
These represent all costs involved in creating and placing print or multi-media
advertising.
Other sales costs
These include any other costs associated with selling your product. They may
include travel, client meals, sales meetings, equipment rental for presentations,
copying, or miscellaneous printing costs.
Office salaries
These are the salaries of full- and part-time office personnel.
Rent
These are the fees incurred to rent or lease office or industrial space.
Utilities
These include costs for heating, air conditioning, electricity, phone equipment
rental, and phone usage used in connection with your business.
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Depreciation
Depreciation is an annual expense that takes into account the loss in value of
equipment used in your business. Examples of equipment that may be subject to
depreciation includes copiers, computers, printers, and fax machines.
Other overhead costs
Expense items that do not fall into other categories or cannot be clearly
associated with a particular product or function are considered to be other
overhead costs. These types of expenses may include insurance, office supplies,
or cleaning services.
4. Total expenses
This is a tabulation of all expenses incurred in running your business, exclusive
of taxes or interest expense on interest income, if any.
5. Net income before taxes
This number represents the amount of income earned by a business prior to
paying income taxes. This figure is arrived at by subtracting total operating
expenses from gross profit.
6. Taxes
This is the amount of income taxes you owe to the federal government and, if
applicable, provincial government taxes.
7. Net income
This is the amount of money the business has earned after paying income taxes.
Income Statements Made Easy
Although these mnemonics may not account for every line on an income
statement, these two will help you remember the major parts, and the order in
which they appear. The word "SONAR" identifies the major sales and earnings.
The word "EDIT" summarizes major expenditures.
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As you look vertically down the first row of letters, you should discover the
spelling of "SONAR." The vertical set of letters in the second column spells out
"EDIT."
S = Sales (gross)
O = Operating income (before interest and taxes)
N = Net earnings
A = Available earnings for common stock
R = Retained earnings
E = Less expenses (general operating expenses and cost of goods sold)
D = Less depreciation
I = Less interest
T = Less taxes
The Importance of the Income Statement to Investors
The income statement provides the investor with much insight to the company's
revenues and expenses. You can identify where the company spends much of its
income and compare that to similar companies. You can also compare a
company's performance with previous years. Most importantly, the income
statement tells an investor if the business is profitable. If the company continually
makes substantial profits, it indicates to bondholders that it is a stable company.
The savvy investor will compare income statements of similar companies.
3. STATEMENT OF RETAINED EARNINGS
Retained earnings statement shows the accumulation of that portion of the
shareholders equity derived from profitable operation since the corporation
commenced business.
What are Retained Earnings?
Retained earnings are the amount of money that a company keeps for future use
or investment. Another way to look at it is as the earnings left over after dividends
are paid out.
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Generally, a company has a set policy regarding the amount of dividends it will
pay out every year. In this case, 70% of net earnings become retained earnings.
Calculation of retained earnings:
Retained Earnings = Net Earnings – Dividends
To better understand retained earnings, we need to explain the nature of
dividends. Dividends are cash payments made to the owners or stockholders of
the company. A profitable year allows them to make such payments, although
there generally are no obligations to make dividend payments. When a company
has both common and preferred stockholders, the company has two different
types of dividends to pay.
Every publicly traded company has common stockholders. Dividend payments to
common stockholders are optional and up to each company to decide how (or if)
it will make such payments. A firm may decide to plow all of its earnings into new
investments to promote future growth. Preferred stockholders are in line before
common stockholders if a dividend is declared. However, not all companies have
preferred stockholders.
As an investor, it is important to know what a company does with its net earnings.
An investor needs to know the company's dividend and retained earnings policies
to decide whether the company's objectives are in line with the investor's.
If the company pays dividends it is income-oriented. If it retains earnings for
future expansion, it is growth-oriented.
Knowing the sources of income and expenses is necessary when reading an
income statement. Two helpful mnemonic devices have been created out of the
major components of the income statement.
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Cash Flow Statements
Cash flow statements report a company’s inflows and outflows of cash. This is
important because a company needs to have enough cash on hand to pay its
expenses and purchase assets. While an income statement can tell you whether
a company made a profit, a cash flow statement can tell you whether the
company generated cash.
A cash flow statement shows changes over time rather than absolute dollar
amounts at a point in time. It uses and reorders the information from a company’s
balance sheet and income statement.
The bottom line of the cash flow statement shows the net increase or decrease in
cash for the period. Generally, cash flow statements are divided into three main
parts.
Each part reviews the cash flow from one of three types of activities:
1. Operating activities
2. Investing activities; and
3. Financing activities.
1. Operating Activities
The first part of a cash flow statement analyzes a company’s cash flow from net
income or losses. For most companies, this section of the cash flow statement
reconciles the net income (as shown on the income statement) to the actual cash
the company received from or used in its operating activities.
To do this, it deducts from net income any non-cash items (such as depreciation
expenses) and any cash that was used or provided by other operating assets
and liabilities.
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2. Investing Activities
The second part of a cash flow statement shows the cash flow from all investing
activities, which generally include purchases or sales of long-term assets, such
as property, plant and equipment, as well as investment securities. If a company
buys a piece of machinery, the cash flow statement would reflect this activity as a
cash outflow from investing activities because it used cash. If the company
decided to sell off some investments from an investment portfolio, the proceeds
from the sales would show up as a cash inflow from investing activities because
it provided cash.
3. Financing Activities
The third part of a cash flow statement shows the cash flow from all financing
activities. Typical sources of cash flow include cash raised by selling stocks and
bonds or borrowing from banks. Likewise, paying back a bank loan would show
up as a use of cash flow.
A Corporation will usually issue their statement showing two successive periods
for comparison, and may show the dividends as a dollar value per share.
The total accumulated retained earnings do not normally reflect a cash position,
but reflects the value of equipment, machinery or inventory and other assets.
Instead of paying out all revenue each year as received in salaries or bonuses,
the portion is retained to replace equipment and inventory and to finance
expansion.
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A Financial Statement can be expressed as in the following example:
Any Company Inc.
Statement of Retained Earnings for year ending April 1, 2012
a) Retained earnings beginning of the year
$30,250
Income for the year $60,250
Sub total $90,500
Less Dividends ($15,400)
Retained earnings end of year $75,100
b) Income for the year
Less Dividends
Earnings retained during the year
Add previous year balance
Year-end retained earnings
$60,250
($15,400)
$44,850
$30,250
$75,100
Financial Ratios
Financial reports by themselves provide only a part of the financial picture of a
corporation. From these reports are drawn a series of financial ratios which
when viewed several years in succession and compared, if possible, with similar
companies ratios will clarify the company’s position and point out weaknesses
and financial strengths.
The list of ratios is long and detailed, but the most important ones and their debt
paying ability are as follows:
Working Capital = Current Assets – Current Liability
Current Ratio = Current Asset
Current Liabilities
= 39,500
15,200
=
2.6
1
This can be expressed as 2.6 to 1 or simply 2.6.
Generally a 2 to 1 ratio is considered to be a minimum safety requirement.
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Quick Ratio
If we eliminate the long-term assets and liabilities, we obtain the figures for a
quick ratio, which indicates the company’s ability to pay immediate debts.
Quick Ratio = Quick Assets = 31.500 = 2.1 or just 2.1
Quick Liabilities
15,200
1
Cash Ratio
If a truly immediate picture is required, only assets that could be taken to the
bank and converted to cash are considered.
Cash Ratio
= Cash + Marketable Securities =.60
Current Liabilities
1
Cash Flow
Another method of analyzing a company’s ability to pay debt is cash flow. Cash
flow is best-expressed and understood in terms of inflow and outflow. Inflow is
increased by additional sales, new investments and borrowing. The timing of
payments, replacing of equipment or postponing expansions, can control outflow.
Performance Ratios
Profit originates from new business obtained. Since any decline is vital to the
survival of the company and any increase is indicative of future growth, the
tracking of successive years of cash flow and the ratios obtained from this type of
record keeping is vital to the company manager and investors.
Profit exists as the result of spending less than the revenues taken, and therefore
prudent managers are constantly examining, managing and forecasting what
these figures will be.
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Ratio of Operating Cost to Revenue
Since the profitability of a Company depends on it spending less than it earns,
both of these figures are of key importance, if they are examined in subsequent
years, the company’s direction can be determined.
2011
2012
Change
Revenue
275,000
275,000
.00%
Operating Costs
135,000
145,000
+7.00%
Gross Profit
140,000
130,000
-7.14%
Ratio of Gross Profit to Revenue
This measures the ratio of operating costs to revenue. The sum total must
always equal 100%.
Amount
Ratio
Net Revenue
525,000
100.00%
Operating Costs
402,000
76.57%
Gross Profits
123,000
23.43%
Net Profit Ratio
Net Profit Ratio = Income for the Year
Net Revenue = 525,000
32,500
= . 0619 or 6.19%
Return on Investment
The ratio of Net Profit to equity shows the shareholders the percentage of return
they are receiving on this investment.
Return on Investment is Income for the year = 32,500
Equity 75,000 = .433 or 43.3%
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Since some of these figures may not truly reflect the actual company worth,
(using Book Value rather than Market Value) the results may appear misleading
until they are tracked several years. All of these ratios are yardsticks (measuring
devices) as against clear-cut illustrations of performance.
Trading on Equity
One of the benefits in being a majority shareholder is the advantage on trading
on equity. That term means borrowing money on the strength of the company
performance and profitability, so as to invest more money in the business and
obtain a larger percentage of these profits. This technique works well when the
additional return is higher than the interest charged but can mean substantial
losses in down cycles.
Notes to Financial Statements
Financial statements are kept clean and uncluttered as to extraneous
statements. Giving a more detailed explanation of some entries, will follow most
financial statements.
These notes often give more information on:

Details of assets, revenues, expenses etc.

Statements to explain as to the methods of depreciation, valuation, dividend.

Remuneration of key company offices and directors.

Explanations of any Long Term Debt.

Any Capital Stock Issues.

Any extraordinary items such as the sale or purchase of capital equipment.

Any Contingent Liabilities such as pending lawsuits, long-term loans arranged
and any special salary agreements.
FAIR MARKET VALUE (FMV)
There are several variations of the description of FMV that have been found
acceptable to the Canadian Judiciary and the following is for illustrative purposes
only.
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Fair Market Value is defined as the highest price a willing buyer will pay, on an
open unrestricted market, to a willing seller, both being fully informed as to the
qualities of the property concerned and neither party is under pressure to
conclude the transaction.
In contrast the price is the amount asked by the seller and this amount may not
reflect the true fair market value if the buyer is not aware of some aspect of the
business or if the seller is under pressure to sell, then the price could very well
differ. For property that was owned prior to December 31, 1971 (Evaluation Day
for establishing the adjusted cost base for capital gains) proper documentation
needs to be retained to be able to establish the fair market value.
The owner can access the government database that contains specimen real
estate values in Canada, but these are estimates only and should not be viewed
as an effective alternative to the actual property value at that date. Another
instance where the FMV is pertinent is in the evaluation found in a buy-sell
agreement. There will likely be some hesitation between the parties involved to
establish a value that will undoubtedly change over the years.
A preferred method, although there are others, is to agree on a present day value
to start and to have it adjusted to reflect the changing nature of the business at
agreed upon intervals. Canada Revenue Agency (CRA) is not bound by terms of
the agreement and may arrive at a different price evaluation.
One method to obtain a present day value would be to obtain the services of a
professional evaluator. As a result of their investigation and experience a value
could be established that would, amongst other considerations, include the
following criteria:

The Business assets

Past performance obtained from the financial statements

Future potential

Human resources
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
Value of comparative companies

The industry in particular and the company in general

A large number of other variable such as – interest rates, competition,
financing, available markets, government regulations
Value Determined
Before an evaluation can be determined on which a business valuator can base
their proposals, a careful analysis of the company and their financial statements
will need to be conducted.
The valuator can use one of or a combination of one of these evaluation
methods:
A. Assets: A comparison of Book Value, Adjusted Book Value (CMV) and
Forced Sale (Liquidation) Value
B. A Combination of assets and earnings: A going concern evaluation combined
with assets and an estimate of the goodwill value.
C. Earnings capitalization: Earnings multiplied by a number of years,
e.g. $320.00 X 5 years = $1,600,000
Notes to Evaluation
Book Value
The value of an individual asset as recorded in the Financial Statements.
Book Value = Assets – Liabilities
Adjusted Book Value
Allows for a host of variables such as Bad Debts, Inventory, Patents, Copyrights
and Goodwill to arrive at the Current Market Value, which is reflected in the
Adjusted Book Value.
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Earnings Capitalization
Varies from industry to industry and needs to comply with what are common
accounting practices for their particular industry.
Liquidation Value
Is the break-up value or forced sale value of the business assets in whole or
piecemeal?
Goodwill
Goodwill is the excess profits earned over and above, which would be normal or
reasonably expected. This is sometimes referred to as Super Profits.
Goodwill = Super Profits X Capitalization (number of years)
Going Concerns Evaluation
The Going Concern Value is the sum of the adjusted book value, plus any
intangible assets at the date of valuation.
Capitalization
Capitalization is the multiplier (number of years) used to determine both the value
of goodwill and the value of earnings. This multiplier is always open to
discussion but must be reasonable to the industry concerned.
Estimating Future Earnings
Capitalization rests on a reasonable estimated of future earnings after tax. This
in turn is based on many factors such as past performance, normal business
income, future plans, market share, products and research and general
economic factors. Five years is a traditional multiplying factor.
Liabilities
In the evaluation process the funding of long-term debt is factored in because the
interest payments have been deducted as a business expense.
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Only Net Earnings are capitalized. Current Liabilities will show up in the
business evaluation and in the current ratio figures.
Prices versus Values
In a public corporation the “bid and asked” price is found daily in the financial
papers. Since our emphasis is primarily involved with businesses that are sole
proprietors, partnerships and closely held corporations the evaluation of these
companies are open to variation and negotiation.
Some of the factors that will affect the price are as follows:

Controlling interest usually commands a premium on evaluation.

Value in use takes into consideration special rights or uses that will
place the value above FMV. It can work the other way also if the building or
plant is worn out, due for replacement or about to be expropriated for an
expansion of an expressway.

Book value by itself can be very misleading and of diminished value in
determining price. It should be well defined and adjusted book value would
be a more recommendable term.
Technical Application to Sales
The ultimate purpose of examining financial statements, determining ratios and
establishing valuation is to obtain raw data. This will establish the business
needs on which to base our proposals and many times helps to find a source for
the premium dollars required to fund the purchase. Legal agreements form the
basis for many of the documents that sales are based on.
TIPS FOR BUILDING YOUR BUSINESS INSURANCE MARKETS
Most people have their first contact with an insurance company through an
insurance Advisor / Broker / Agent. These workers help individuals, families, and
businesses select insurance policies that provide the best protection for their
lives, health, and property.
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Many times we have a tendency to walk past Business Insurance opportunities,
because we either aren’t interested, or we figure that we do not know enough
about that aspect of the industry. When this happens, there is a chance to work
with some other person who specializes in the Business Insurance markets.
It is much better to receive a percentage of something instead of nothing.
Here are nine tips to help you increase your block of Business Insurance
and get the most of your time and money…
1. Do not act desperate for business.
You're at a social event. People want to talk to upbeat confident people. You
won't attract any business if you act desperate.
2. Stay focused on building your business.
Enjoy yourself, but remember why you are there. Pay attention to the people you
meet and what they say.
3. Mingle – don't sell.
This is a time to start some relationships and learn information that can be
followed up on. Keep it light. Don't try to do major business deals – save that for
later.
4. Know that you are being scanned.
People like to know who they are doing business with. Treat everyone with
respect and a positive attitude. This is not a time to air dirty laundry.
5. Set goals for each event.
Decide before you arrive at an event how many people you will talk to and what
information you hope to learn. You'll be amazed at how much more information
you'll learn with prior planning.
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6. Be prepared to follow up.
Send a "Nice to Meet You" note to everyone that you talk to. It can be an e-mail
or handwritten note. Find a way to personalize it to take away the feeling of a
form letter. It takes most people 6-8 exposures to remember and trust you. This
speeds up the process.
7. Be an interesting person to talk to.
Do your homework. Plan some casual topics for you to bring up that you like to
talk about. Being prepared will also help to build your confidence.
8. Have some good leading questions to ask others.
People love to talk about themselves. A great conversation starter is to ask what
they like to do when they're not at work. Many deals are done on a golf course!
9. Listen with both of your ears for opportunities.
Pay attention to conversations for problems that you can solve. Follow up with
the solution during business hours.
With these tips in mind, you can make any event a valuable networking
experience!
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