Like many entrepreneurs and owner-operators, you may have a significant portion of your net worth tied up in your business. And, like every business owner, you will eventually reach a point where you will want or need to exit that business. This might be a result of age, a health concern, or simply a desire to pursue other entrepreneurial opportunities or life goals. Unfortunately, many business owners attempt to exit their companies without a clear plan. Regardless of your ‘why’, it’s a good idea to start planning your ‘how’ early, so you’re as prepared as possible when the right time arrives.
Although you may have thought about the possibility of selling your company or transferring ownership to a family member as part of your long-term business strategy, establishing an actual plan early is important. It will not only help maximize the proceeds from any future sale (or avoid a messy succession process) but can also help protect the value of your business should an unanticipated event or opportunity arise.
Choosing the right exit strategy
A good first step in successful exit planning is to identify a vision based on your goals and objectives for yourself, your family, your employees, and your company. Your vision should be aligned with your current and projected financial resources. Once you have this vison, you can select an exit strategy that will best help you to achieve it.
Note: your goals, objectives and resources may change over time, so it’s important to revisit your exit strategy annually.
Here are the most common exit strategies:
Transferring your business to a family member can be a great way to preserve your legacy. It also provides you with an opportunity to select and groom your own successor, and may allow you to keep a hand in the business if you wish to remain involved.
For this option to be successful, you will obviously need to have at least one family member involved in the business who is interested and capable of taking over. Properly training a successor can take years. It is never too early to start thinking about the skills or qualifications a successor may require and how you can best prepare them to run the business in your absence.
Note: transferring your business to a family member (or members) may not be the best option if you need to recover considerable funds from the business to finance your post-exit goals or lifestyle.
Selling the business to your management team or employees
A management team or employee buy-out can be a great option if you want to protect your legacy but don’t have a viable candidate for family succession. The sale involves a group of team members pooling their resources to acquire all or a part of your company. This option provides considerable stability to existing clients, partners, and other employees—as the new owners are already well-versed in the business and aligned with your company’s culture and values.
Note: this type of sale often results in a lower purchase price and may involve you loaning the buyers part of the required funds through vendor take back financing and/or the buyers financing the purchase through future cash flows from the business.
Selling to an outside buyer
Selling on the open market is the most common exit strategy, and is probably the best option if you’re looking for a clean exit with the highest payout.
Unfortunately, the majority of business owners are unsuccessful when they try to sell their company. This is often due to a lack of proper planning. If you determine that selling to an outside buyer is your best exit strategy, it will be important to plan carefully and take the necessary steps to make your business as attractive as possible to potential buyers. One way to help prepare for a sale is by identifying potential buyers well in advance and then strategically positioning your company accordingly.
Ensure your business is as strong and profitable as possible before you put it on the market. The majority of buyers will be looking for a profitable business (whether growing or stable) and your profitability will be the primary factor used to determine a purchase price.
Note: there are three primary methods of selling an incorporated business in Canada:
- a share sale
- an asset sale
- a hybrid sale (combining elements of a share sale and asset sale to balance risk)
Each option has its own short and long-term tax implications. We recommend that you review and discuss these options with your accountant or financial advisor before structuring a sale.
Liquidation basically involves closing up shop and selling your company’s assets. This isn’t the best option as it usually results in a low ROI, and the profits from the sale of assets must be used to repay creditors before your or any other shareholders receive any proceeds.
Another form of liquidation involves an owner extracting the value from their business over a period time through large salary or dividend payments instead of reinvesting profits in the business. This may be worth considering if you want to maximize your current lifestyle or invest the profits elsewhere.
Note: there are tax implications associated with making large salary or dividend payments to yourself or your family members. Make sure you discuss this with your accountant or financial advisor before pursuing this option.
Preparing for an exit
Once you’ve identified your ideal exit strategy, you need to create a plan that outlines the steps required to be as successful as possible in achieving it. Your plan should be somewhat flexible and include options that will allow you to pivot should your vision change or something unexpected occur.
Regardless of whether you’re transferring your business to a family member or selling it, an ownership change is a complicated process. In addition to undertaking a business valuation to establish a fair value for your business, you will also need to consider financing options, tax implications, the legal structure of the new business (especially if you are transferring the business to a family member), the timetable for the transaction, and how much, if at all, you want to remain involved following the transaction.
It is also important to ensure that your corporate files and records are up-to-date, accurate, and organized, and that all legal documents (Articles of Incorporation, corporate minutes etc.) are in order.
Note: preparing for the sale or transfer of a business takes time. Planning should begin at least 18 to 24 months before your desired exit.
Tax implications related to the sale of a business
If you are a Canadian resident selling qualified small business corporation (QSBC) shares, you can generally claim a lifetime capital gains exemption ($883,384 in 2020) to shelter all or part of the share sale proceeds from tax.
Business owners are encouraged to discuss the possibility of a sale with their accountants well in advance in order to ensure the company is properly structured to minimize tax liabilities. There may be actions you can take now—such as a reorganization or restructuring of shareholdings—that will help you achieve a better tax result in the future.
S+C Partners is committed to helping you
Our team is here to support you. If it’s time to sell your business, our expert advisors can guide you through the process and help you meet your unique objectives. Need to know how much your business is worth? Our Chartered Business Valuator (CBV) is available to assist you. We can also help with corporate reorganizations, evaluate a potential acquisition or sale transaction, and provide support with family law issues such as the quantification and division of net family property.
Please call us at 905-821-9215 or email us at firstname.lastname@example.org if you have any questions or require any assistance.