If you are planning to sell your business to a non-family member, you are not alone. Many business owners in Canada will exit their business by selling to a non-family member, but only a small percentage of owners planning to transfer their business in the near future have a succession plan. This apparent lack of succession planning is often due to the difficulty in finding a suitable buyer with financing to close the purchase.
If you’re selling your business outside the family, consider the factors that can make your business 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 its profitability.
Valuation is of central importance. You can get an indication of this by researching the selling price of similar businesses in your area. Remember that small businesses can sell for significantly less than the asking price. Buyers may evaluate your business on its projected cash flow for the next few years and assess the value of that cash flow against the business risks.
To help you find a purchaser and obtain a better offer:
- Have a valid reason to sell – But try not to disclose personal information that could weaken your negotiating power.
- Don’t wait until you’re under pressure to sell for economic or emotional reasons – This could force you to accept a poor offer.
- Gather essential information – This may include:
- Three years’ financial statements and tax returns
- Lists of fixtures and equipment
- Lists of employees and customers
- Copies of leases for premises and equipment
- Franchise agreement
- Lists of loans and payment schedule
- Names of professional advisors (for example, business broker, qualified legal advisor and tax specialist)
- Have financial statements audited or reviewed by a professional for the sale – This will increase potential buyers’ confidence in the accuracy of the documents you provide.
- Consider hiring a business broker to help you identify a purchaser – A broker can act as your agent while you’re looking for a purchaser and during the negotiations.
- Maintain confidentiality – Don’t divulge information about your day-to-day business activities that can be used by competitors. Ask a potential buyer to sign a non-disclosure agreement and provide financial information only to potential buyers who have paid a deposit.
- Don’t let the business decline while you’re preoccupied with the sale – Maintain your premises, inventory and normal business hours.
- Learn to judge whether a potential buyer is serious – Don’t waste time on tire kickers.
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. By working with your RBC advisor, you can create a financial plan that will give you an idea of what the amount of after-tax sale proceeds that will be adequate to meet your retirement goals. They can also help you manage the investment of the sale proceeds.
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Business planning quick tip
Keep your business going strong right up until the time you sell it. The tendency among many business owners is to start winding things down as they approach their retirement date. However, an actively managed business that’s still growing will be much more attractive to potential buyers and will likely fetch a higher selling price.
Hiring a business broker
Give your broker information about your business and then follow their advice. Here are some factors to consider:
- You can maintain confidentiality during the early stages of the sale process and let the broker deal with potential purchasers on your behalf until they identify an acceptable prospect.
- Potential buyers may be more comfortable talking to an intermediary.
- Some brokers specialize in a particular industry and may have contacts at corporations that may be 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.
We strongly advise you to consult an experienced legal professional when you’re selling your business. A professionally prepared document 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. Some strategies must be undertaken well before the closing date, so remember to plan ahead.
- If the purchaser is buying the shares of your business, you may be able to claim the capital gains exemption if your shares qualify as QSBC shares
- Consider the pros and cons of setting up an IPP or an RCA, which may help you defer some of the tax on a future sale.
- If you have a prospective purchaser of your unincorporated business, consider incorporating and selling the shares to utilize the capital gain exemption.
- If the shares of your business are sold, 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 the sale isn’t imminent and the value of your business is increasing, an estate freeze and reorganization of your corporation may allow future capital gains to accrue to other family members and possibly multiply the use of the capital gains exemption.
- If you pay yourself a retiring allowance before the sale, you may be able to transfer a portion to your RRSP, tax-deferred, if you had years of service before 1996, irrespective of your available contribution room.
- Use some of the sale proceeds to make a charitable donation in the year of sale. The donation tax credit may help you minimize the tax on any capital gains realized on the sale. If your donation is expected to be at least $25,000, then consider the benefits of setting up your own charitable foundation in the year of sale through the RBC Charitable Gift Program.
- Consider receiving the sale proceeds over several years using a capital gain reserve to spread the gain and the resulting taxes payable over a longer period of time.
- If you are selling to management or employees, consider setting up a share purchase plan to facilitate the transition. This type of plan can help you ease into the transition and allow them to fund the purchase over time.
Please ask us for more information on making the most of your business sale proceeds for your retirement. We can help you develop a comprehensive financial plan and provide a wide range of retirement planning and investment services.
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The RBC Charitable Gift Program is specifically designed for individuals and families wishing to support charitable causes in a meaningful way, without the time and cost associated with establishing a private foundation. It is an easy and convenient way to support charitable causes you care about, today and in the future, while receiving important tax benefits. Through this program, you can make initial and ongoing contributions to a charitable gift fund administered by the Charitable Gift Funds Canada Foundation (CGFCF), one of the leading charitable foundations in the country. Ask your RBC advisor for our brochure on the RBC Charitable Gift Program and how this form of charitable giving may be right for you.