It's never too early to plan for the sale of your business
When you are in the thick of business ownership it can be difficult to put yourself in the mindset of someone ready to sell. After all, you have a general idea of when you’ll be ready and, right now, being at the helm feels pretty great.
Not to be contradictory, but it’s actually never too early to plan certain aspects of selling your business. Even if you are years away from moving on, there are steps you can take now that will make the eventual transition faster, easier and definitely more profitable for you.
The emotional factor
Think you care about the well-being of your business now? Wait until you’re facing the prospect of seeing it in someone else’s hands. As noted by a Harvard Business Review article in November, the difference between M&A success and failure often has more to do with relationships, culture and emotion than with strategy or finances. Much of the emotional impact of a sale rests with the seller – you – who may not even realize what the business truly meant until the transaction is underway, or completed. Even if you’ve dreamed for years of relinquishing the time commitment of being an owner and moving on to that yacht, cabin or snowbird lifestyle, your business has likely become a significant part of who you are. This sense of loss can impact the value you attribute to the company, if not on paper, then in your own mind.
One way you can prepare for the emotional impact of selling is to have a clear exit strategy in place long before the deal gets underway. Even if you plan to leave your business to family, mapping out a thorough succession plan can provide security and make the eventual transition more a reality than a possibility. It’s also important to think about what you’ll do after you sell. Will you invest the money realised? Use it as your pension? Travel ‘til your heart’s content? Whatever you decide to do with your newfound wealth, the sooner you have a plan, the better you’ll feel about moving on.
The sale of your business affects others besides you, and emotion can come into play when talking about the impact on employees. According to a 2013 report by consultancy theStorytellers, ‘the successful integration of people and culture is seen as one of the most important factors in making an M&A transaction a success’, ranking second in importance next to ‘Integrating systems and processes’. If your prospective buyer plans on keeping your staff in place post-sale, you’ll want to ensure goodwill is maintained and that dedicated staff feel there is a support system in place so they can transition smoothly.
The Capital Gains Tax is paid by every Canadian business owner who sells his or her business for more than was originally paid. If you bought your business 15 years ago for $180,000 and are now selling for $250,000, technically you are obligated to declare a $70,000 capital gain in the current tax year. Luckily in Canada we are privy to several exemptions that may reduce the amount of capital gains you must claim.
One exemption that applies specifically to business owners is the Lifetime Capital Gains Exemption, which as of 2013 stood at $750,000 and increased to $800,000 in 2014. As a Canadian who owns an active business that is based primarily in this country, you are entitled to this reduction in capital gains upon selling shares of your business, or farming/fishing property.
There are a couple of provisions to keep in mind that can further enhance the capital gains exemption. While your personal exemption is limited to the total gains on qualifying property over the course of your life, you aren’t required to claim the exemption all at once. Also, to be able to claim the exemption, you or a relative must have owned the shares for two years prior to sale. And during those two years, more than 50 per cent of the company’s assets must have been used in an active Canadian business or invested in other, small corporations. If you own investments or other assets that aren’t used in the active business, you should consider setting up regular withdrawals to remove the excess cash and assets, as an unexpected event like the death of a shareholder could trigger the sale of the shares for tax purposes.
Having your spouse or adult children own shares in the company can increase the available exemption. Consider a family trust as a way of doing this, so that family members can take advantage of their exemptions when the time comes.
Imagine a seasoned business owner, Mr. Booker, is selling you his 25 year-old printing and design business, along with his warehouse full of paper stock, various industrial printers and a decade’s worth of invoicing and tax filings, all stored in an internal computer system. While you have experience as a graphic designer and plan to hire an operations manager, you have little hands-on knowledge of running a company of this size or of the high-tech machinery involved. The day of the sale, Mr. Booker congratulates you, hands you the keys and drives away, never to be heard from again. It’s pretty obvious what’s missing from this (slightly far-fetched) equation; Mr. Booker has provided you with no training, coaching or know-how in actually running the business. In other words, you didn’t purchase any intellectual capital along with the tangible assets.
If you are selling a complex business that requires knowledge above and beyond the normal scope of ownership, you should consider staying on to help with training and to assist in relationship building between the new owner and existing clientele. Apart from helping to ensure the business you’ve built continues to thrive, sharing your intellectual capital can increase the value of the business and therefore the sale. The possibility of spending six months to a year with the business after it is sold is something you should take into account well before you sell, as it will affect your plans to retire or move on to another venture.
Selling your business can be joyful, nerve-wracking, liberating or a time of contemplation about your future. The more you can plan for an eventual sale now, the more mentally and emotionally prepared you’ll feel down the road. Feel free to contact me with questions at email@example.com or call 1-902-368-2643.