Recent Statistics Canada information shows that over 70% of all farms and small businesses will be sold or rolled to the next generation over the next 20 years. And those owners looking at selling their business, need to know that timing matters when planning to sell your farm or small business.
Business owners and farmers need to give their accountants and other financial advisors a heads up soon as they start thinking seriously about selling. As there are many tax and other issues to consider, sufficient time is needed in order to ensure the company and its ownership are structured to maximize the sale proceeds.
The biggest benefit for Canadians is access to the Small Business Capital Gains Tax exemption on the first $800,000 of proceeds from the sale of shares as of 2014. This tax-free exemption is available to resident Canadians who have been shareholders for at least two years and their company meets certain other specific tests.
It’s important to discuss the prospective sale with all the stakeholders well in advance. A sale should benefit all the parties involved, so it’s best not to surprise one’s minority partners, family and managers. If unanimous shareholder approval is needed for a sale, agreement should be sought early in the process.
Some small business owners charge a number of non-business expenses to their companies to reduce income and the amount of tax they have to pay. This can create a problem when the company is listed for sale, since buyers rate profitability as the main measure of what they are willing to pay for any given business. The purchase price is usually based on a multiple of pre-tax earnings (plus interest and depreciation), so anyone thinking of selling their business in the next year or two should minimize all personal expenses.
Running a business is a hectic, all-consuming activity, and recordkeeping can sometimes suffer. But ahead of any sale, company files and records need to be in tip-top shape. If not, they’ll be penalized in the due diligence process.
The length of this process means entrepreneurs should hire a transaction advisor to help get the documentation organized. Prospective buyers will investigate products, customers, outstanding litigation, environmental issues and so forth. An advisor will prepare the vendors for these upcoming questions.
Buyers don’t like companies that are dependent on the owner to operate the business on a daily basis. A business owner needs a management team with enough independence to run things in the owner’s absence. Having good systems that automate the business will also help the sale process.
Once the decision has been made to sell, it’s time to hire an advisor or agent to manage the sale process. This shouldn’t be the company lawyer or accountant. It needs to be someone who specializes in selling businesses without conflicts of interest.
Few people sell their houses without a real estate agent. Selling a business is significantly more complicated. Hire someone with a long track record, good references and knowledge of the industry. That agent will help assemble an extensive document called a Confidential Information Memorandum, which summarizes all aspects of the business. He or she will also work with the business owner to put together a list of prospective buyers. After these steps are completed, the company is ready to go to market.
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