Get top dollar by making your business more attractive to potential buyers and minimize taxes on the sale
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 can 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 the confidence potential buyers will have 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 can give you an idea of what level of after-tax sale proceeds will be adequate to meet your retirement goals. They can also help you manage the investment of the sale proceeds.
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.
