A Scout’s Guide To Selling Your Business
Thinking of Selling your Business? Stop focusing on the purchase price and start thinking about profits. A clean, well-protected and tax-efficient sale requires planning to maximize profits and minimize liability.
Key themes reminiscent of Boy Scout mottos:
Do your best; and be prepared.
Whether the transaction will be the sale of assets or shares, the purchaser is going to conduct due diligence to get a clear picture of a business beyond the balance sheet. As the vendor, you should openly and honestly respond to all questions put to you. The due diligence process can consume a great deal of time, so it pays to keep your records in order. To assist your lawyer in satisfying the inquiries of the purchaser it could be necessary to have certain key employees assist in that process; enlisting an employee can free up your time to focus on sustaining the value which the purchaser is looking to buy.
The purchaser will investigate issues such as leases, litigation, employee remuneration and outstanding tax liabilities. Many vendors try to conceal the flaws, hoping this will drive up the purchase price. Remembering that the goal is profit over purchase price, the savvy vendor will address their flaws during the due diligence process to limit their post closing liability. A decision to mask a flaw at this stage of the sale could result in costly litigation after closing and erode profits.
The structure of the deal can further maximize your profits. We all know that one of the certainties in life is taxes: with some planning and foresight those taxes can be minimized, resulting in greater profit.
The purchaser will focus on paying the lowest purchase price and this can be used to your advantage if you are prepared. The vendor can use tax advantages of a share sale at a lower purchase price to maximize profits. In particular provided your corporation meets certain asset and shareholder tests and is a Canadian Controlled Private Corporation, then the individual vendor may qualify for the capital gains exemption (the “CGE”) selling up to $750,000.00 worth of shares without paying any tax on the capital gains. As most private corporations shares are initially purchased for nominal value, it is conceivable that you could sell the shares for $750,000.00 taking full advantage of the CGE.
Your accountant will be able to review your books and advise you whether the shares of your corporation qualify for the CGE.
Focusing on the difference between maximizing the profits over purchase price we can see that selling the shares of your corporation for an amount that falls within the CGE can produce greater profit than selling the assets at the same or even a higher purchase price. With this knowledge, a vendor can determine the purchase price at which an asset sale (less tax liability) is as profitable as a share sale under the CGE.
A further benefit of the CGE is that it applies per individual. A well planned corporation will have maximized the number of shareholders so that multiple individuals will qualify for the CGE. This planning must occur at least two years in advance, however a husband and wife who each own the shares of a private corporation could sell their shares for $750,000.00 under the CGE. Conversely, an individual shareholder could not sell the shares of a corporation for $1,500,000.00 without encountering tax liabilities. A corporation with two shareholders will derive greater profit than a single shareholder corporation sold for the same purchase price if that price exceeds the CGE.
The goal when selling your business is profits. This goal is achieved not through seeking the highest purchase price, but by preparing your business for sale and structuring it with focus on profits. Do your best, be well prepared and you will sell a business, perhaps not for the highest purchase price- but certainly for the most profit.