Are you a business owner without a family member or unrelated successor in mind? Many Canadians find themselves in this predicament. They have spent most of their adult lives building up a business, only to reach retirement without a succession plan. Creating a plan to sell your business doesn't have to be difficult. In this regard, an early start can be most helpful. Relatively small changes starting at least three to five years in advance can potentially reduce the complexity of the sale and increase the selling price.
Income statement – different set of eyes:
Prior to selling your private business, it is likely that the only outsiders that have seen your "numbers" were your lenders and the tax authorities. From an income tax perspective, since most people like to pay as little tax as possible, owners often try to defer income when possible to reduce their immediate tax burdens. When you are thinking about selling your business, the reverse becomes true. You want to be able to show your financial statements to prospective buyers and put your best foot forward. A track record of higher net income over a number of years generally generates a higher selling price.
Balance sheet – clean it up:
A buyer is primarily interested in your business's operating assets. Anything else on the balance sheet will only serve to complicate the sale. If you have excess cash or investments, or hold non-operating assets such as land or buildings (unrelated to your business), now is the time to consider moving these assets off the balance sheet (out of the company). If there is no pressing need for cash, these assets can usually be transferred to another corporation on a tax-deferred basis to avoid triggering any immediate tax obligations. Furthermore, depending on your personal circumstances, many of these steps are required to access your lifetime capital gain's exemption, which could lead to significant tax savings. Make sure to consult first with your tax advisor.
Increase the level of assurance:
Consider upgrading the level of assurance your accountant provides with respect to your financial statements (i.e., a review or an audit engagement). These are more involved and more costly than a Notice to Reader. Put yourself in the shoes of the buyer. When they read your accountant's Notice to Reader, they may be skeptical about the reliability of the financial statements due to the lack of assurance. Moreover, several years of reviewed or, better yet, audited statements may inspire more confidence and less due dilgence and potentially generate a higher selling price.
Start identifying special purchasers:
Often misunderstood, special purchasers are those who, for their own reasons, are willing to pay more for your business than a pure financial investor would. Typical examples of special purchasers include competitors, suppliers, customers and company management.
The catch, however, is that even special purchasers will not pay any more than they absolutely have to. For example, if there is only one special purchaser who would be willing to pay $1 million for your company, but every other potential purchaser will pay only $500,000, then the special purchaser needs to offer only $500,001 (a nominal amount more) to be the successful bidder. When it's time to put your business up for sale, the more special purchasers you can attract the more likely they will bid against one another, therefore increasing the selling price.
If you are fortunate enough to have a family member ready to succeed you after you retire, there are very different concerns to keep in mind. In a future issue of Comments, we will provide a follow-up to this topic, entitled, "Passing your business to the next generation."
Mitchell Ornstein is a specialist in Soberman's Business Valuations & Litigation Support Group. He has been with the firm since 2008. He is both a chartered accountant and a chartered business valuator. Mitchell is knowledgeable in a wide range of audit and assurance services, as well as business and intellectual property valuations, and succession planning.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
