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Thinking of Selling Your Business? Keep the Most Money and Minimize Taxes

Disposing of Corporate Assets and Retaining the Value of Your Business to Meet Your Long-Term Financial Goals

Today’s Simple Investing Take-Away: You worked hard to build your business and the corporate assets that it has accumulated. If you plan to sell your business, even if it is 10 years from now, start working now to build a team of experts. You can better protect your financial interests and ensure you leverage all possible corporate financial avenues and tax strategies to retain your business’ value and support your (and your family’s) short-term and long-term financial goals.

If you own a privately held business, you’ve probably spent years, conquered fears, and even shed a few tears to build your thriving venture. When it comes time to sell your life’s pursuit, how do you put a price on that?

Disposing of corporate assets is one thing. Then what? As an independent financial advisor, my role includes helping business owners plan for and manage the proceeds of a sale. Ideally, I or someone like me, is part of a unified team, dedicated to ensuring you make the most of the sale of your business—from the day you first imagine it, until long after you’ve got disposed of the corporate assets and have the funds available for your family financial planning.

Let’s take a closer look preparing your business for sale and adeptly managing the proceeds.

PART I: READYING YOUR BUSINESS A SALE

Putting a Price on It

What’s the right asking price for your business? To you, your corporate assets might seem nearly priceless—or at least worth considerable compensation. What are they worth to a would-be buyer? Likely not the same amount.

The trick is to negotiate the space between seller/buyer assessments, to arrive at a value both parties can agree on. A tax lawyer or accountant can assist with structuring the deal. But you’ll usually want to consult with a business valuator, corporate finance professional, or private equity specialist as well, to discover a fair price. Try to find a team of professionals with specific knowledge and experience in transactions that are comparable to yours.

Building a Saleable Business

You’ll also want to prepare your business for the most favourable sale of its corporate assets. By spending a little upfront time and money to make your business “saleable,” you may be able to significantly improve the outcome. It’s like adding a fresh coat of paint, fixing that dripping faucet, and sprucing up the landscaping when you decide to sell your home.

Beyond cosmetics, this generally means taking some time to tidy up your corporation investments and corporate tax-planning. Again, you’ll want to engage with specialized professionals to assist, but here are a few typical considerations:

Managing Capital Gains: If you own a privately held Canadian business, you may be eligible for a lifetime capital gains exemption (LCGE) on at least a portion of a sale’s gains. Family members who are shareholders may be eligible as well.

Corporation Investments vs. Operating Income: Is your business “purified”? As described by the Canadian Federation of Independent Business (CFIB), at least half of your corporate assets “must have been used in an active business in Canada for 24 months prior to the sale” to qualify for the LCGE. If you hold too much in corporation investments and not enough in operating income, you may be ineligible.

Salaries vs. Dividends: Have you been taking personal income as a salary, dividend, or both? While this point isn’t directly related to selling your business, it’s another angle of small business tax planning worth thinking about sooner than later. It may all seem like the same pot of money to you. But how you’re drawing income out of your corporate assets can determine whether you qualify for government benefits in retirement, and shape how and whether you can contribute to a tax-favoured RRSP along the way.

Talking About the Timing

In short, while tending to your income stream and optimizing your business for a sale can take several years, the payoff can enhance your corporate investments, corporate tax planning, family financial planning, and tax-planning strategies.

So, don’t wait to consider whether it’s worth restructuring, reassigning ownership shares, and/or managing your corporate assets. Unless you absolutely must sell in a rush, give yourself ample runway to make the most of your years in business.

And, yes, even if you’re a small, private business owner, these are details worth tending to. You may feel you know every nook and cranny of your business, and how to make the most of it. But consider this summary of “The E-Myth Revisited”, by Michael Gerber:

“The E-myth is that most people who start businesses are entrepreneurs risking capital to make a profit. When in reality most people who start businesses are technicians, people who were good at an aspect of their job and decided to start their own show. The Fatal Assumption is that if you understand the technical work of a business, you understand a business that does the technical work. This is not true.” — Jeffrey Marr, “A Summary of the E-Myth Revisited”

PART II: AFTER THE WINDFALL

What’s next, after the sale is complete and the proceeds are sitting in the bank? While sudden wealth from selling your business may seem like a great “problem” to have, you may be surprised by how stressful it can be—especially if you’re not sure what to expect. Here are some of the typical challenges you may face as a former business owner.

Emotional Challenges

First, you may experience grief after the sale is complete. In her book, “No Longer Awkward”, grief counselor Amy Florian explains that some of life’s most positive events are also often your greatest challenges. She describes one of six main grief triggers as the “loss of one’s customary identity”, including the sale of a business.

Simply put, it can hurt to lose what may feel like a big piece of yourself. Remember this is normal and give yourself the time and space you need to make the transition, just as you would for any other significant loss in your life. If the feelings are extreme, don’t hesitate to seek extra, transitional support from a professional therapist. That’s what they’re there for.

Paying the Taxes Due

As described above, there are several tax-management moves you can make—such as leveraging Canada’s long-term capital gain exemption as you’re able. But I’d caution against seeking some magic wand that will whisk away all the taxes due on the successful sale of your business.

Anecdotally, I’ve heard you can measure the success of your business in $1 million increments. Early on, your goal is to earn $1 million in revenue. Next, you’ll celebrate making $1 million in profits. Your final and loftiest goal is to pay $1 million in taxes. If you’ve done what you can to manage the taxes, and you still owe a fair amount when you sell, it means you’ve been very successful. It may not feel like it at the time, but that’s actually a good thing!

New Wealth, New Financial Planning

Then there’s the money. Even if you’ve been accustomed to sensibly spending some of it today, and saving and investing the rest for tomorrow, it’s time for additional financial planning once you’ve suddenly got a whole lot more of it. Here are some financial questions worth revisiting:

Investing: How do your new long-term financial goals impact your investment portfolio? For example, you may now want to focus more on preserving the wealth you’ve got instead of pursuing higher expected stock market returns (along with the related risks).

Spending: What about your short-term financial goals? How much can you comfortably spend on a more lavish lifestyle? What existing debts can you now pay off?

Tax planning strategy: How might the extra wealth impact your personal tax planning?

Charitable intent: Do you have new philanthropic goals? Is it time to establish a foundation or Donor-Advised Fund (DAF)?

Risk management: What levels of insurance may now make sense? Old policies may no longer apply; new policies may be needed to protect evolving interests.

Estate planning: Should you now establish or update a family trust or similar estate planning structures designed to protect yourself or your loved ones?

Legacy goals: In any sudden-wealth scenario, you may discover family coming out of the woodwork with new expectations. Depending on your intent, it can be a pleasure or a burden to meet those expectations. I touched on that in a past post, “Retiring reliably, leaving a legacy or balancing both?”.

It Takes a Team

As I’ve recently covered, your wealth is best spent when it helps you “Wake Up Excited about Your Future”. That’s true no matter how much or little of it you’ve got. To help with that ultimate end goal, I recommend working with a reputable independent financial advisor early and often. A good accountant is going to become your best friend as well, along with the business sale specialists mentioned above.

If You Have Plans to Sell Your Business: Act Early to Leverage a Team of Experts to Ensure You Retain the Most Money to Support Your (and Your Family’s) Long-Term Financial Goals

We’ve only scratched the surface on the steps involved in converting your lifetime of corporate assets into the rest of your life’s ideal pursuits. If you’re thinking of positioning your business for a sale in the near or distant future, I hope you’ll reach out to me today to start the conversation. The sooner I’m aware of a business owner’s intent to sell their business, the more flexibility we have to make the most of the sale—before, during, and after it occurs.

Ready to imagine a brighter financial future?

Ready to imagine a brighter financial future?

Book a call to take your first step toward achieving your goals, whatever they may be.