The transfer of a family business is an increasingly common occurance in Quebec. In 2014, the Montreal Chamber of Commerce predicted that thousands of local small business owners would retire over the next ten years. They were right.
In fact, according to Repreneuriat Québec, more than 3,000 businesses each year are passing the torch to the next generation, and that number continues to rise. The cause of this phenomenon? An aging population.
Small local businesses, scattered throughout every city and neighbourhood in Quebec, are a central pillar of the Quebec economy. These small businesses are typically family-owned. The entrepreneurs of the 1960s, 70s, and 80s who founded these businesses were spirited and full of ideas back then, but their time has come. Retirement is approaching, and for many business owners, the question of who will take over the family business has quickly become the number one priority.
However, transferring a family business is a complex process that can easily lead to irreparable family conflicts and significant financial issues. If discussions about the future of your family business haven’t started yet, now is the perfect time to begin talking about it.
In this month’s feature, we explore the realities of this type of generational transition. We explain how a business lawyer can help you ensure a smooth handover without conflict or loss of efficiency.
Finding a Successor: A Major Challenge
Business owners often assume that, even as retirement approaches, finding a successor will be relatively simple. All they have to do is hire someone, right? It’s quite the opposite.
Family businesses are typically tightly knit. Family members are involved in various aspects of the business, and the team is small. The owner of a family business isn’t a distant CEO making broad decisions: they’re often another worker on the team. The owner is involved in every stage of the service provided. Moreover, it is often the owner who holds virtually all of the company’s institutional knowledge and accumulated experience. These intangible assets are extremely difficult to replace. No matter who replaces the retiring generation, that person will have big shoes to fill.
For the business to endure over time, the successor must know the production methods that work, the pitfalls to avoid, the successful strategies, and the established processes. Seamless transitions occur when the person assuming the role has been thoroughly prepared and trained for years before the actual handover. The only way to learn the methods and the market is for the eventual successor to start taking the wheel before the main driver steps down.
To plan your departure, you need to start talking about it now. With your family, to find somebody interested in taking over.
Family Business Transfer: A Way to Pass the Torch
In addition to these internal challenges, passing the torch to the next generation is a complex legal and administrative process that can lead to confusion and cause friction.
The transfer of a family business
Since 2024, intergenerational transfers—that is, simply transferring control of a family business to a family member—have become just as advantageous as selling to a third party. A capital gains deduction is available during such a transfer if specific criteria are met. The rules aim to ensure that the former owner is truly “released” from control over the business.
After the transfer, the parent must no longer hold legal control (a majority of voting shares) of the company. The parent must typically also transfer all their voting and participating shares within a certain timespan.
Under the new approach, the law requires not only a plan with a solid financial foundation, but also a comprehensive succession plan in terms of management. Businesses seeking a transfer must submit a plan that demonstrates both their intention to relinquish their voting shares and the timeline and process for transferring management of the business to the next generation. In business transfers, the lack of preparation on the part of entrepreneurs has typically been one of the biggest challenges. These changes are therefore directly beneficial, even if they require more work up front.
Conditions for transferring a family business
There are two types of transfers:
The immediate transfer (which may take place over 3 years or more following the transfer) in which the parent relinquishes all de facto control following the transfer of shares. The parent may still hold so-called preferred shares (without voting rights). During the three years following the transfer, the child who assumes control of the business must actively participate in the family business, while the parent must permanently cease all management activities.
The gradual transfer (spanning 5 to 10 years) in which the parent may retain a certain degree of de facto control for up to 10 years after the transfer but must reduce their ownership to a minority stake of 30%. For the five years following the transfer, the child must actively participate in the family business, and the parent must permanently cease management within the established period. This type of transfer typically spans 5 to 10 years but can be agreed upon for a longer or shorter period, depending on the situation.
These rules are relatively strict if the conditions established during the transfer are not met. In cases of non-compliance with the transfer conditions, the law considers the transfer to be a distribution of surplus, a taxable dividend. Furthermore, the parent transferring the business is held liable for the tax consequences if the child fails to meet the conditions. If the child chooses to change fields and loses interest, it is the parent who may bear the financial consequences.
The Dangers of Poorly Planned Business Transfers
These complex circumstances can lead to serious problems and may even tear families apart.
What happens if one of the children withdraws from a phased transfer following a major life change?
Or if a brother or sister turns out to be the best candidate, yet another sibling becomes the owner?
And what if the parent dies suddenly, leaving the business without a plan in place and the children to negotiate the company’s future among themselves?
Is it reasonable to sue a child or a parent if they fail to comply with the terms of the transfer?
The worst-case scenario would be for such a transfer to lead family members to seriously consider legal action. This type of family tragedy is relatively common and often easily avoidable.
In practice, the issues surrounding business transfers are complex. Regardless of the initial family dynamics and family members’ involvement in the business, transfers can cause significant harm. As the owner of a family business, you must equip yourself with a solid plan and a well-crafted agreement that will protect both your business and your family.
Difficult Discussions for a Successful Family Succession
It is not necessarily those family members who get along best that experience the smoothest family transfers. Rather, families that have difficult and serious discussions as early as possible are the ones that succeed best.
As business lawyers, we recommend initiating discussions and taking steps several years before the succession is due to take place.
A thorough assessment of the business’s assets, each child’s interests and shares, and how the business needs to change is essential to ensure the stability of the company’s operations and the family’s peace of mind.
The earlier you plan your transfer and the sooner you work out the details with an expert, the better off everyone will be.
Buying a Family Business or Selling a Family Business
In many other situations, the opposite problem arises. Family businesses are run by one generation, while the children have built their lives elsewhere or pursued different careers. Not every doctor, nurse, or teacher is able to take over the family farm or run the family garage.
In these cases, the family might instead consider selling the business to a third party, such as one or more long-time employees or a new interested investor. This allows family members to liquidate the business and obtain capital to use for their own purposes.
The process of buying a business can be complex. For more details, we invite you to read our recent article on our tips for a successful business acquisition.
Acquiring a family business, however, comes with its own unique set of challenges. Typically, most family businesses are built around the family core. It is common for the owner to hire family members to perform various tasks within the business. The spouse handles accounting, one of the children handles sales in the field, and so on.
If all family members leave the business, a buyer will have to replace the beating heart of the company. This is a challenge that is sometimes impossible.
In this situation, if some family members retain their roles, the buyer will have to carve out a place for themselves. Having to find a niche within this social and professional dynamic is a colossal challenge, which can also be difficult.
A concrete plan to carry out the transition—both legal and managerial—is necessary to ensure that the business maintains its productivity and value.
Un avocat spécialisé en droit des affaires pourra vous aider à effectuer le transfert d’une entreprise familiale.
In any case, transferring or selling a family business is a complex legal process fraught with pitfalls. These pitfalls are as much legal as they are social and strategic.
No matter your wishes for passing on your life’s work, you cannot leave anything to chance. Consult with a business lawyer for family businesses today. Our lawyers have helped numerous businesses through this process and are ready to find the necessary compromises for your business transfer or family business acquisition.
NOTE: This article does not constitute legal advice. It is provided for informational purposes only to help readers better understand certain aspects related to family business transfers, family business acquisitions, and commercial disputes. Since every situation is unique, we recommend consulting an attorney or a civil law professional for a personalized assessment of your case.