At BizON, we aim to provide our members with a resourceful experience and marketplace. With that said, we strongly believe that educating business buyers and sellers is extremely important to ones financial and personal future. Below is a guest entry from one of our partners in the accounting sector, Eddy Aceti. Eddy does an excellent job discussing what needs to be taken into consideration and important steps to take when planning for the sale of your business.
Planning For The Sale of Your Business
I am a professional licensed public accountant operating in Toronto Canada for over 10 years. Our client base & expertise is not limited to any one industry; in fact the only reasonable way to provide a general description of our client base would be to say we service small to medium sized business. The natural or perhaps unintended progression of our firm has resulted in a concentration of clients in the following industries:
- Mineral Exploration
- Medical & other Professional Services
- Information Technology
- Real Estate Holding
When I say small to medium sized companies it really is a broad stroke description because when you have multi-million dollar companies in the mix the medium range covers a lot of ground. There are a few factors that differentiate those at the small end of the range & those at the medium to large sized end & one of these factors is the propensity to plan for retirement or an exit strategy for the owner/manager, or so has been my personal observation. I have typically observed this to occur among owners of smaller business’ with gross annual sales of $1 million or less, whereby they’ve had a tendency to neglect this part of business ownership or fail to see their business’ as a commodity. In some cases clients had suggested that they were the driving force behind the business & when they leave there will be nothing left to sell; for those of you that feel this way I suggest that this does not have to be the case. More to the point business owners must make a concerted effort to shape the business so that it lends itself to being a commodity that can be sold & provide the business owner with a nest egg for retirement.
In Canada a job with a pension can be hard to come by & setting up a pension can seem complicated & expensive. While a pension can be a smart idea it is a topic for discussion on its own & right now I’ll simply focus on the portion of a business owners retirement that can be funded by selling his business. Suffice to say that selling your business can greatly improve your retirement nest egg even if you have a pension funded and in case you do not have one it might be all you’re counting on.
For professionals & highly skilled trades people that consider themselves the predominant or sole commodity in the business, it’s a flattering thought but you must remember that it is possible to sell to a younger individual educated in the same profession that can take your place or there may be someone very much like you wishing to expand his or her book of business. So when I say shape your business so that it lends itself to being a commodity what do I mean? Possible strategies could include:
1. Grow the business to a size that affords & accommodates support staff. A business will better resemble a saleable commodity if all aspects of the business do not necessarily rely on one individual. For instance with a publication design firm, having a receptionist that does billing & receivable calls, junior staff that help with aspects of the design process, & one senior staff to supervise & mentor the junior staffers, means that when a new owner takes over the firm not every aspect of the business has to be reinvented for the business to carry-on. A sizeable business also improves profit potential through economies of scale & makes your business more attractive.
2. Know your clientele very well & be able to communicate pertinent aspects of your book of business. Be prepared to clarify which clients are responsible for the largest portion of your gross annual sales & which the smallest portion, which clients you expect to provide repeat business over future years & those that may not be around next year, & what percentage of your sales will be new non-repeat business among other things.
3. Maintain a comprehensive list of your assets & their market value. A storage rack, an old worn concrete saw, or an old computer cash register may seem valueless but these items are necessities of doing business & the cost of starting from scratch & having to buy new heavy equipment & numerous business incidentals is very expensive; all this makes the prospect of buying your business with all these items already assembled look more valuable. With the help of your accountant consider whether it would be more beneficial simply to sell the assets of your business or the business as a whole, some buyers may prefer one over the other.
4. Keep complete & thorough records of your business activities & keep your tax filings up to date. Nothing seems more suspect than buying a business solely based on someone’s word. Keeping records gives a purchaser an opportunity to vouch your claims & review your records to get an idea of how the business will do when they own it, or how they can improve or add upon its performance. For those in the service industry this would include keeping time records so a purchaser can analyze what you are making per hour on particular jobs. Good records also support your position that all Revenue Canada filings are paid up to date & that no surprise liabilities will come with purchasing your business.
5. Structure your operations & holdings accordingly, this could mean having a piece of real estate corporately owned by a holding company separate from your main operations if you do not intend to sell the building with the business. If you do not own the space you operate out of have your property lease in the name of a holding company separate from your operating company so the transfer of ownership will not conflict with lease particulars. This is beneficial for others reasons which I will not cover here. Consider ownership of intellectual properties & how they will take part in the sale, securing a patent can increase their value to a purchaser.
6. Be prepared to work side by side with a new owner for a period of 2 to 6 months or more. This support is of great value to a purchaser because it reduces a buyers chance of failure, provides a sense of security to a buyer & to your clients. Your clients get an opportunity to become familiar with the new owner while you are still there which may improve client retention.
7. Where appropriate paper business dealings with other third parties keeping in mind the eventual sale of your business. Having a contract to provide products or services to a third party is something a business owner can bank on. Also consider where clauses in a contract might impact the transfer of ownership.
8. Talk to your accountant prior to closing a deal, there could be unintended consequences of selling your business such as triggering a year-end via change of control of the Company. Your accountant will tax plan with you, in some cases it would be recommended to review the structure of your business dealings 3 years prior to a potential sale to reduce tax liabilities. Speak to your accountant about withdrawing funds or other assets from the company prior to the sale in a manner that reduces the tax consequence of selling the business, such as having the Company repay a shareholder loan.
In some cases a business owner can benefit from the $750,000 lifetime capital gains exemption on qualified small business corporation shares. The sizeable tax savings offered by the exemption makes the prospect of selling your business very attractive & is one of the reasons business owners should give an eventual sale more thought.
Lastly I would like to add that planning for the sale of a business should not be confused with estate planning. When a person dies, Canada Revenue Agency considers that the person has disposed of all capital property right before death, this is called a deemed disposition. Also, right before death, they consider that the person has received the deemed proceeds of disposition. Even though there was not an actual sale, there can be a capital gain or, except for depreciable property or personal-use property, a capital loss. For depreciable property, in addition to a capital gain, there can also be a recapture of capital cost allowance. Also, for depreciable property, instead of a capital loss there may be a terminal loss. Your accountant can elaborate on how these matters could impact you personally but more importantly they will help you plan to reduce the burden on your estate. In some cases the tax liability left in an estate can be greater than the funds left over to pay the tax, leaving your beneficiaries with the bill. Some aspects of estate planning are similar to planning for the sale of a business but specific circumstances mean planning for one does not necessarily provide for the other.
These are some of the more obvious and general considerations that should be given thought even if an eventual sale is not for many years to come; after-all some of the preparations mentioned could take many years to address. There are other points that could be raised however many of them would only be applicable in specific circumstances that is why getting professional advice is important; there are many aspects of an exit strategy that best come to light by viewing the actual circumstance of each individual business & they would be too numerous to mention here.
Eddy Aceti is a CGA and partner at Aceti & Associates. Please feel free to email him if you’d like some more information or have any questions at firstname.lastname@example.org
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