10 key decisions for business owners
Key decision 8 - Will you sell your business?
Many business owners in Canada will exit their business by selling to a non-family member. However, only a small percentage of owners planning to transfer their business in the near future have a succession plan.
If you’re selling your business outside the family, bear in mind the factors that can make it more attractive to a prospective purchaser. It will be easier to find a buyer for a business that has potential for future growth. Other corporations in your business sector may also be interested in acquiring your business with a view to improving profitability.
Valuation is of central importance. You can get an indication of this by researching the selling price of similar businesses in your area.
To help you find a purchaser and obtain a better offer:
- Have a valid reason to sell
- Don’t wait until you’re under pressure to sell for economic or emotional reasons
- Have financial statements and other essential information professionally prepared for the sale
- Consider hiring a business broker to help you identify a purchaser
- Don’t let the business decline while you’re preoccupied with the sale
- Learn to judge whether a potential buyer is serious
Assemble a team of experts to help you
Your team of experts should include an experienced tax advisor to ensure you have planned your sale in the most tax-efficient manner, a qualified legal professional to prepare legal documentation and a business valuator.
Hiring a business broker
Consider hiring a business broker to help you find a purchaser. Consider these factors:
- Potential buyers may be more comfortable talking to an intermediary.
- Some brokers specialize in a particular industry and may have contacts at corporations potentially interested in buying your company.
- Brokers’ fees are usually a percentage of the final sale price. Weigh this expense against the benefit they provide before you hire them.
You are strongly advised to consult an experienced legal professional when you’re selling your business. A professionally prepared document, prepared by your broker, summarizing your business for potential purchasers can be invaluable and may help you avoid potential litigation and suggestions of misrepresentation if the purchaser finds the business less successful than expected. Your legal advisor should also prepare the sale and purchase agreement so that all contingencies are covered and you minimize the risk of future litigation.
Tax minimization strategies
The following strategies may help you minimize the tax consequences when you’re selling your active business to an outside buyer.
- Consider the pros and cons of setting up an Individual Pension Plan or a Retirement Compensation Arrangement, which may help to defer some of the tax upon a future sale.
- If you have a prospective purchaser for your unincorporated business, consider incorporating and selling the shares of your business to utilize the capital gains exemption, if your shares qualify.
- If the shares of your business are sold, then consider reinvesting some of the proceeds in the shares of another active Canadian private company in the year of sale or within 120 days after the year of sale in order to defer some of the capital gains tax on the sale.
- If your sale isn’t imminent and the value of your business is increasing, an estate freeze may allow future capital gains to accrue to other family members and possibly multiply the use of the capital gains exemption.
- Consider receiving the sale proceeds over several years using a capital gain reserve to spread the gain over a longer period.
Scott Donovan,B.A. | Investment Advisor |RBC Dominion Securities Inc. |
T. 519-747-0133 | F. 519-747-1808 | 95 King Street South, 3rd Floor | Waterloo, ON N2J 5A2 |
This article is supplied by Scott Donovan, an Investment Advisor with RBC Dominion Securities Inc. Member-Canadian Investor Protection Fund. This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article.