Planning can help you significantly reduce your tax liability in a succession. Failing to do so could mean the business has to close or be sold. Or perhaps it might have to incur an unhealthy level of debt.

Taxes are one of the main considerations when it comes to family succession. Without proper planning, you can wind up with a larger-than-expected tax bill in a family succession and have no way to pay it.

It’s important to get started early on to structure the transaction in a way that minimizes your tax liability. It can take several years to implement the optimal structure.

Here are the steps to consider. (Note: You should get professional tax advice about your specific situation. Also, rules differ for fishing and farming businesses.)

1) Start early—Consult a tax expert early on about the tax consequences of a succession. Many entrepreneurs wait too long and the transition ends up happening in a crisis—for example, due to a health issue or death. That can lead to lost opportunities to save on taxes.

The worst-case scenario is that the business passes to a child on death, but the family doesn’t have the means to pay the tax on the accrued capital gain.

2) Minimize capital gains tax—Whether you pass on your business in a sale or give it as a gift to a family member, it’s deemed to be disposed of at its fair market value. You are taxed on half the gain in the company’s value (as a capital gain) at your top tax rate. The capital gain is calculated on the difference between the business’s initial share cost and today’s share value.

(There is an exemption for a transfer to a spouse, in which case the gain and tax are deferred until the spouse sells or gifts the business.)

If the business is a qualified small business corporation, you can claim a lifetime capital gains exemption to reduce this tax. The exemption is $824,176 in 2016, meaning a gross gain of up to this amount is tax-free. The exemption is indexed to inflation and, hence, increases each year.

To qualify for the exemption, a company must meet several conditions. For example, it must have been owned by the same person for the past 24 months, and at least 90% of its assets must be used for business primarily in Canada at the time of transfer. See a detailed list of the conditions here and more information on the capital gains exemption here.

3) Consider an estate freeze—An estate freeze is a way to essentially lock in the gain (and capital gains tax) based on the company’s value. A common way of doing so is by exchanging your common shares in the company for fixed-value preferred shares, and then issuing common shares to your children. Any future growth in the company’s value goes to the common shares and isn’t taxed until your children in turn sell or gift their shares. The shares can be held by the children directly or in a trust.

4) Think about incorporating—If you haven’t already incorporated your business, think about doing so. Owners of an unincorporated business don’t qualify for the lifetime capital gains exemption and generally can’t do an estate freeze.

5) Defer taxes—You may be able to defer some of the capital gains tax if you help finance the sale and are being paid over several years. In this case, you may be able to declare the capital gain over the duration of the payments, for up to 5 or 10 years depending on the circumstances.

Planning a successful business succession takes years. According to experts, transitions can take up to five years to complete and, in the case of a family business, as many as 10, depending on the firm’s size and complexity.

A recent survey of 2,500 entrepreneurs found that five out of six entrepreneurs surveyed estimate that the process will be completed in two years or less from the time they meet with potential buyers to the moment the eventual sale goes through.

For entrepreneurs planning to sell their business, the best strategy is usually achieved by not rushing things and by taking the time needed to ensure a smooth transition.

Creating a succession plan is a great way to ensure you get the full value for your business or are able to pass it along the way you had hoped. This is especially true if unexpected trouble arises, such as a surprise health problem.

Here are five reasons why you shouldn’t wait to start succession planning.

1. It clarifies your options

You may have an idea in your mind of what your succession will look like, but you may be in for a surprise when you go ahead with it. For example, your plan may be to sell your business to an external buyer. But many entrepreneurs struggle to find an outsider willing to purchase their company. Instead, an internal successor—such as a family member or manager—may be your best candidate to take over.

2. You can prepare your successor

If your successor is a family member or manager, you need time—five years or more is normal—to get them ready. They need to learn how all parts of the business work, gain needed expertise and build relationships with employees, suppliers, and customers.

3. You can prepare your company

You need time to optimize the sale value of your company. This means making sure it has good growth prospects, a record of profitability and a solid balance sheet. You may need to invest in the business, remove personal expenses from the books and consult an accountant on how to structure the sale to minimize your tax liability.

You also need to prepare your company to operate without you. For example, you should document your business processes so that someone new can easily take over. Your employees should get training so they consistently execute these processes as documented.

4. You can arrange financing

You need to start talking early on with bankers about financing for the transition, especially if it involves an internal successor who doesn’t have a lot of capital to invest. You may have to use a mix of financing, including the buyer’s investment, vendor financing, a term loan, and mezzanine financing.

5. It’s an emergency plan

Many entrepreneurs have a hard time letting go of their business. But having a succession plan in hand is useful as a just-in-case emergency contingency, even if you’re not planning to exit any time soon.

If you leave it until a health issue comes up and you need to sell, you’re not going to optimize your company’s value and you’re probably going to leave your family with a larger-than-expected tax bill. And that’s not to mention that the business will have a hard time continuing normal operations.

Financial projections will help you anticipate your cash flow needs

It’s the start of a new year, and you’ve got big plans for your company—an expansion or a major equipment purchase.

How will your plans affect your cash flow? Will you need financing, and if so how much?

These are typical questions to ask as part of your company’s annual financial planning.

Many neglect financial projections

But a surprising number of entrepreneurs fail to make financial projections for their company. And the result can be serious, unexpected trouble.

Making cash flow and other financial projections each year is a vital tool for keeping your business healthy and on a sustainable growth path.

The idea is to have a reference you can review through the year, so you can make adjustments as needed. Without this, you’re basically leaving everything up to chance.

How to make financial projections

Here are five steps to creating and using financial projections to guide your business.

1. Plan your year

First, think about what you want to accomplish over the next 12 months. This should be based on your strategic plan for your business.

With a clear idea of what you want to achieve, start estimating your annual expenses and consider the additional costs you will incur to implement your business strategy. These expenses should be added to the costs of running your day-to-day business, such as:

• payroll
• rent
• utilities
• interest
• loan repayments

Also, be sure to consider anticipated big-ticket items, such as buying a new truck, redesigning your website or updating your computers.

Next, estimate your annual sales and think about the effect your decisions will have on your cash flow forecast. Make sure you take into consideration your credit policy and when your customers pay to ensure your business has enough cash throughout its business year.

2. Make projections

Based on past experience and your plans for the coming year, prepare these three documents.

• A projected income (profit-loss) statement—Projected revenues, costs, expenses, taxes, etc.
• A projected balance sheet—Assets, liabilities, equity.
• Monthly cash-flow projections—Accounts receivable, accounts payable, investments, financing, etc.

It’s helpful to have different projected scenarios (optimistic, most likely and pessimistic) so that you can anticipate better the impact of each one.

3. Arrange financing

With your projections in hand, determine financing needs for the coming year and discuss them with your bankers and other financial partners.

The start of the year is a good time to arrange any needed credit lines or business loans. Working out your financing ahead of time improves your odds of getting approval and helps ensure the best terms.

If you come to your banker and tell them you need a $2 million loan next week, most probably he or she won’t be able to help you. Bankers don’t like surprises. They lend you money when you can show you understand what you’re doing.

Also, don’t make the common mistake of dipping into your working capital for long-term capital investments because you may end up facing a cash crunch. It’s better to use long-term financing for such projects.

4. Monitor and adjust

Finally, review your projections each month against the actual numbers to see if you’re on track. Variances can flag trouble spots in your business. Take an even closer look each quarter. Make any needed adjustments to your operations or changes in your planning.

5. Get help

Depending on your in-house resources, consider seeking outside help in creating your financial projections and monitoring your progress through the year.