“Action is the foundational key to all success.” — Pablo Picasso
According to the study done by the Royal Bank of Canada, one in four business owners who are at the age of 50 of small and medium-sized business want to sell their business within the next five years. Unfortunately, 77 percent of owners do not have a plan on how they want to do it. How to plan ahead and what do you need to contemplate if you want to sell your business in the near future?
If you are planning to sell your business, there are a few things you should consider. The most important issues are (but not limited to): Taxes, Company Financials, Legal agreements and contracts, Assets registrations, Consents with customers, Obligations for your employees, Dealing with CRA, Indemnity Agreement, etc.
Taxes. The most important is the tax issue. When businesses are sold, the previous owner faces taxes on capital gain or dividend tax. If the seller receives a lucrative offer to sell the business and does this without any planning, the amount that is left after taxes is questionable? The tax rate on capital gain after capital gain exemption (for 2016 is $ 824,177) is very high.
There are few strategies that could help a business owner to reduce a tax hit.
- First is to make a charitable donation to a registered charity or own charitable foundation in the year of sale. The tax will be reduced by the amount of the donation tax credit.
- Second is to sell shares rather than an asset and use one-time capital gain exemption, which is $824,177 for 2016 and deduction is 50%. The exemption amount is indexed each year.
- Third is to invest in another Canadian business in the year of sale or within 120 days after the year of sale and defer all capital gains until the sale of new business through Holding Company.
- The fourth strategy could be setting up an individual pension plan prior to a sale of business. That will result in a tax deduction for the corporation, tax-free growth for the asset in the plan and a lower capital gain on a sale.
- The fifth strategy, which is very common, could be “estate freeze.” It will allow the business owner to share business growth with other owners – family members. This will let to distribute capital gain exemption use for several family members and splitting income generated by the business.
- The final strategy is to convert part of a capital gain into dividends that will be taxed only on the amount of distribution to the owner and pay it over a period of several years. Do not forget to calculate Safe Income on Hand (SIOH) amount.
All above tax strategies have limitations depending on the situation and circumstances. If these issues were straight forward, your accountant would be starving.
Company Financials. When selling a business, the buyer often wants to see hard historical numbers and could request an additional audit. The request could be for several years with other breakdowns. If you notice that some of your documents are not in order, then you might consider getting in touch with your accountant. It is best to prepare your skies in the summer.
Legal agreements, documents, and contracts. We come across certain companies that have oral agreements with their customers on certain points of business. You may want to formalize it in writing before selling your business. Please ensure that all documents are in order. Before selling a business, all minute books and registers need to be in order with all required records. If your business has any loans, you should review it with your lenders, and make sure it will not trigger any changes as a result of a sale. Certain contracts might have a clause on customer consent or notice in prior selling the business (“change of control” terms). Earlier internal due diligence helps you down the road and will eliminate any potential risks on valuation.
Assets registrations. When selling your business, you need to make sure that all assets in the company are registered in the name of the company. A common issue is that some assets, real or intellectual property, are recorded in the name of founder or owner of business. To avoid those problems, it is important to review all documents and transfer all assets that are issued not on the company’s name, but considered as a part of a business to company’s name.
Obligations for your employees. There were cases when a buyer did not want to inherit all of the employees of the seller. Thus, a seller may be obligated to pay severance, associated with the termination of some employee contracts. Knowing legal issues of applicable employment laws would help to determine costs and would assist you with planning right strategy.
Indemnity agreement. When selling a business, the seller is usually on the hook for a few years under the Indemnity Agreement. In the case when the seller has broken tax and legal regulation prior the sale, any liability arising because of that could be transferred back to the exchange after many years of transfer.
Dealing with CRA. If you are planning to close your corporation or business, after the sale of assets (as a business sale) to the buyer, there are a few things you should consider such as notifying Canada Revenue Agency (CRA), filing a final tax return, paying any outstanding tax amounts, and financing your succession planning.
Closing accounts. Here is a list of things you should do if you are planning to close a business:
- Cancel your business registration for your sole proprietorship or partnership OR
- Voluntarily dissolve your corporation
- File the last tax return, if you have dissolved a corporation
- Close your sales tax, payroll accounts with the appropriate provincial agency
- When closing your business, remember to complete the required Canada Revenue Agency forms.
Dissolving a corporation.
Dissolving your company is the legal act of ending its existence. Regardless of the jurisdiction in which your business is incorporated, when the time comes to dissolve your corporation, there are several factors to consider. In the same way, you undertake certain formal procedures to create a corporation you must file forms with the appropriate governments to dissolve it.
Before filing articles of dissolution, you may need to:
- Confirm that you have the authority to terminate the business
- File all applicable tax forms
- Ensure the corporation is in good standing
- Distribute remaining assets, property or liabilities
There are other complications that might arise due to the organisational structure. It is advised to involve your tax accountant earlier in the sale, which in the future would save your money.