You’ve worked hard building your business to where it is today, but if you’re considering exiting your business, it’s key to understand the personal and financial implications of the available options.
To help, we’ve outlined the steps that you can take to help you determine whether now is the right time to develop an exit strategy, the advantages and disadvantages of various exit options, and the associated tax implications for your small business.
Determine whether you should sell your business
Any decision about your exit plan—including its timing—comes down to your unique situation and goals. There are important questions to ask that can help you assess when the right time is to plan an exit.
How much is my business worth today?
Understanding the current market value of your business impacts any decision you make regarding your future, but getting a proper estimate is a complicated task. The timing of your next steps may change depending on your expected price and the fact that selling your business can sometimes take nine to twelve months. Working with a professional can ensure that you don’t overestimate the value of your business or underestimate its potential for future growth.
2. Is my business in demand?
Consider the demand for businesses in your sector and privately held businesses overall. The Canadian marketplace has seen significant M&A (mergers and acquisitions) activity that has created opportunities for both buyers and sellers. Market conditions can change quickly, so it’s important to understand how the cyclical nature of the M&A landscape could affect your sale prospects.
3. What are my personal goals?
Our personal or financial goals help determine when to exit and your best options. For example, the decision to move on to the next chapter of your life as soon as possible can require more funds upfront, so it’s important to understand the timelines associated with various exit strategy options.
Check out common exit strategies
Transition your business to a family member
Consider transferring ownership or control of your business to a family member if you want it to continue in its present form but would like some relief from the mantle of responsibility. With Bill C208 in effect, you may be able to transition your family-owned business, with prudent succession planning, to the next generation without the adverse tax consequences
To ensure a smooth transition, it’s important to carefully identify and train your successor to handle both short- and long-term decisions and responsibilities. Transferring business ownership to a family member is often part of a succession plan, though this option may fall short of your needs if you require a more rapid exit or payout.
2. Sell your business to your existing partner or employees
A management buyout or sale to an existing team member allows individuals familiar with the culture and processes to acquire the company and take control of ownership. This provides continuity in your business and can mean a smoother transition that requires less time to transfer your day-to-day responsibilities. Selling to your employees, however, can result in a lower sale price, and it may take longer to fully realize the funds from the sale, although ultimately the sale price will depend on what is happening in the market.
3. Sell your business on the open market
If your business is profitable and demand is strong, it could draw potential buyers and sell for optimal price. This option requires grooming the business for sale, including making sure that your financial records and asset inventories are current and your processes are adequately documented.
Understand the tax implications of selling your business
The tax implications of stepping away from your business will depend on how you exit. For example, if you choose to hand down your business to a family member—whether through a sale or a gift—the business is deemed to transfer at fair market value, which means that you’ll be taxed on capital gains based on the value of the business. There are exemptions and strategies—such as an estate freeze—that can help you make the transfer as tax efficient as possible, though it’s crucial to plan these in advance of the transaction.
If you’re opting to sell your business, you’ll want to consider the after-tax return on the proceeds of the transaction. Depending on the nature of sale—whether you’re selling only parts of the enterprise or the entire business, or if you’re looking to sell only an equity interest in the business—capital gains exemptions and tax deferrals may be available to you. If you’re thinking about including contingent or earn-out components to the sale of your business, there may be other tax implications to consider.
There are also tax considerations associated with liquidating your business assets. The proceeds of an asset sale will be used to repay outstanding debts owed to creditors, and the remaining proceeds, depending on the ownership structure of your business, may be distributed to you as taxable dividends.
Understanding the risks and options available can be overwhelming. We’ll work alongside you to develop clear solutions to plan your exit strategy to meet both your short- and long-term financial goals. Give Petrina a call to find the way forward today.
Petrina draws on her extensive experience assisting clients at any stage of their journey. She focuses on anticipating client needs and staying informed on complex tax issues while providing advice on corporate domestic tax, succession and estate planning, mergers and acquisitions, and personal tax planning. While challenges are inevitable in today’s business landscape, Petrina’s goal is to bring clarity and provide tailored solutions and insight.
Petrina Brake, CPA, CA Principal—Tax Services | Newfoundland and Labrador
+1 709 634 8293 or Petrina.Brake@ca.gt.com