Contemplating retirement as a franchisor

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Local case study: Christine Pichard, 63

Christine Pichard has owned and operated three retail franchises for over 20 years. Mrs. Pichard is divorced, has two grown children with careers of their own, and would like to retire in two years.

Her home and cottage are mortgage-free and she has about $600,000 in retirement savings and investments. Mrs Pichard’s concerns are summarized in four points:


1) She’d like to take care of her long-term health-care needs and help her four grandchildren upon her death.

Mrs. Pichard is in good health and actuarial data indicates she should live into her eighties, which means she’ll need the funds she’s accumulated for her own use – thus, not enough money will be available to the grandchildren at the end of her life. Here are some of Mrs. Pichard’s options:

- A life insurance policy can be designed to be prepaid, guaranteeing that Mrs. Pichard’s wishes are realized;

- Acquiring a life insurance policy on each grandchild and having the cash value of the policy accumulate on a tax deferred basis, to eventually pass to the grandchildren without triggering tax;

- Purchasing a life insurance policy on Mrs. Pichard’s life and leaving the proceeds to go into a trust or directly to grandchildren.

That being said, costs associated to ill health, whether a terminal illness or chronic disease, are open-ended and difficult to plan around.

Here are some other strategies Mrs. Pichard could consider:

- Examine the merits of acquiring critical illness coverage to provide her with cash at time of illness, and by having this coverage not deplete the funds she has accumulated for retirement;

- Consider looking at a long-term care insurance product.

Milan Topolovec, TK Group


2) What tax structure should she consider when she sells her franchises?

Here are some tax-saving strategies that Mrs. Pichard could consider:

- Take advantage of the $750,000 lifetime capital gains deduction: When a business is sold, a number of conditions must be met at the personal and business levels to be able to use the CGD, so planning is important. If the franchises are unincorporated, the CGD will not be available and she would need to incorporate to qualify;

- Asset allocation: If the franchises are incorporated, then the corporate balance sheets should be carefully reviewed to ensure that all assets are used in an active business. Investments or other assets not essential to the business can prevent access to the CGD;

- The number of corporations: If the franchises are held within one corporate entity, she may be limiting the list of potential buyers. She should give careful consideration to spinning out the franchises into separate corporations so that each franchise can be sold separately, which may unlock additional value;

Caveats: A number of complex tax rules may prevent her from spinning out the franchises into separate corporations, or removing investment assets from the corporate structure, if done in anticipation of a sale – these steps must be undertaken at least 24 months before a sale, and well before a buyer is identified.

In a worst-case scenario where the franchises are sold and she can’t take advantage of the CGD, her tax liability won’t exceed 23.2 per cent of the gain. If the franchises are sold and Mrs. Pichard can take advantage of the CGD, her tax liability on the sale will be greatly reduced. And depending on how much she sells her franchises for, she may pay no tax at all.

J. Rolland Vaive, TaxAdvice


3) What should she review in her franchise agreement to best manage her situation?

Mrs. Pichard should ask her legal counsel to review the sections of her franchise agreement dealing with transferring a franchise. The focus of the review should cover the following points:

- First Refusal: In most franchise systems, the franchisor has a right of first refusal with respect to the sale of the franchise. This means that she may have to allow her franchisor the opportunity to repurchase the franchises from her, before looking elsewhere;

- Right of approval by franchisor: If the franchisor declines the above, the franchise agreement usually provides that upon a sale, the franchisor has the right to reasonably approve any potential purchaser; 

- Transfer fee and franchise agreement transfer: The agreement sets out the transfer fee amount she’d have to pay to her franchisor upon a sale, and whether or not the purchaser can assume her current franchise agreements or has to enter a new agreement; 

- Restrictive covenants: She should also note the applicable restrictive covenants – such as obligations relating to preserving confidentiality, non-competition and non-solicitation – which will continue to apply after the sale; 

- Release: Upon a sale, she should also ensure that her franchisor releases her (in writing) from her franchise obligations, other than those relating to restrictive covenants.

Denis Sicotte, lawyer and partner, Sicotte Guilbault LLP


4) What should she expect from her investments and how should she structure them?

As with everything in life, there are no silver bullets. Successful investing is a process. However, Mrs. Pichard could consider the following:

- Have a cash flow plan: Unlike a budget, what you are trying to do here is establish how much money you expect to spend during your retirement. This amount will depend on the level of activity during retirement, interests and health concerns;

- Consider the asset mix: How much money does she have to generate retirement income? Is this income generated from an active business, real estate holdings or passive investments in stocks and/or bonds?

- Be tax aware: Some investments are taxed differently than others, and some types of accounts allow you to benefit from tax advantages such as tax deferral or tax credits.

Business owners can also benefit from products such as individual pension plans that can help transfer capital from the business towards the owner’s retirement plans. Significant compounding and tax advantages can ensue.

Benoit Poliquin, CFA, vice-president and portfolio manager, Pallas Athena Investment Counsel

Organizations: Pallas Athena Investment Counsel

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