According to a recent report by the Canadian Federation of Independent Business, 76 per cent of Canada’s business owners plan to exit their business within the next decade (15 per cent within 12 months; 41 per cent within one to five years; and 20 per cent within six to 10 years). This points to a dramatic change in the business landscape, with more than $2 trillion worth of assets potentially changing hands—the so-called ‘Silver Tsunami’ that will see scores of Baby Boomers retire and seek to exit their businesses. That’s an astronomical number, yet only one in 10 business owners (9 per cent) have a formal business succession plan to ensure a smooth transition.
Further, 54 per cent of business owners cite finding a suitable buyer as the most common obstacle to succession planning, followed by business valuation (43 per cent), and reliance on the owner for day-to-day operations (39 per cent). Just less than half of owners (49 per cent) will exit by selling to an unrelated buyer or buyers, 24 per cent will sell to a family member, and 23 per cent to their employees.
Optimizing succession planning, transfer, and tax strategies is complex and requires a holistic approach. Success means considering all aspects of your personal and professional financial situation so that the right planning decisions are made for the right reasons. This is not something that can be done in a few months—it’s a multi-year, multi-stage process fraught with risk.
Poorly managed transitions can result in a premature sale that delivers less than the full value of your business, bankruptcy, closure, unnecessary job losses and/or reduced productivity. What’s more, you may be relying on the sale of the business as a source of income for retirement. Challenges encountered when trying to exit may extend beyond the business and affect the future financial well-being and total wealth of you and your family.
Starting the process of leaving
There are several factors to consider when looking to successfully exit a business, such as protecting current employees, getting the highest possible price, and finding a buyer who will ensure that investment in the company’s growth and success will continue (assuming that’s one of your exit goals).
As an entrepreneur, it’s important to determine if you want to retire and sell or transfer the business to a family member (options include gifting the business, selling it to a loved one, financing their purchase over time, etc.). All are viable options, but each comes with its own complications. Proposed changes to employee ownership trusts in Canada could make a sale to employees a more attractive option in future.
Before embarking on the process, seek professional advice from advisors such as your Chartered Professional Accountant, lawyer and a business broker experienced in business sales and transfers. This team will provide guidance throughout the process and help develop a comprehensive tax and financial plan that aligns with your overall objectives.
Important steps to a successful business succession
Once you have a team of professionals onside, expect them to walk you through these key business succession steps:
Determining the optimal sale structure: Tax implications are a major consideration when determining how to structure a sale. Selling shares or selling assets each have their pros and cons. The choice may depend on the type of business entity, potential tax liabilities and your financial objectives. An experienced tax professional can help you make an informed decision.
Valuation and Price Negotiation: Accurately valuing your business is crucial for establishing the right asking price and negotiating with potential buyers. A professional business appraiser can objectively assess worth based on financial statements, market trends, industry comparisons and other relevant factors. A proper valuation will help you present a realistic price to potential buyers and improve the chances of a successful sale.
Timing: For organizations that can attract a substantial price, it may be wise to time the sale to market conditions, while allowing time to prepare for an optimal result (enhancing financials to demonstrate profitability, locking in top talent with formal contracts, potentially acquiring rival businesses to boost the value of the core offering, etc.)
Capital Gains Exemptions: Understanding the criteria and requirements for claiming this exemption is crucial, as it can significantly reduce tax liability. A tax advisor can determine if you qualify and help maximize your capital gains exemption.
Pre-sale Tax Planning: To help reduce tax liability from a sale, consider restructuring the business in a more tax-efficient manner; deferring income or expenses; maximizing deductions; and minimizing recapture of capital cost allowance, to name only a few potential strategies.
Estate Planning: Consider how sale proceeds will be distributed and how that approach aligns with your long-term financial goals. An estate planning team—including trusted advisors such as your accountant, lawyer and financial planner—can ensure your estate plan is up to date and help you maximize tax efficiencies that benefit your heirs.
Due Diligence and Documentation: Organize and compile all necessary financial records, legal documents, contracts and permits. This will help to ease the sales process and instill confidence in potential buyers, while helping to secure a better deal.
The bottom line
Exiting a business in Canada requires careful tax and financial planning to ensure a successful and profitable transaction. By seeking professional advice, choosing the right sale structure, understanding capital gains exemptions, engaging in pre-sale tax planning, and organizing proper documentation, you can optimize sale proceeds while minimizing tax liabilities.
Remember that each business sale is unique. It’s crucial to tailor the approach to your specific circumstances with the guidance of qualified professionals.
Tony Sokic, Managing Partner
To learn more about our Strategic Advisory and Private Family and High Net-Worth services, contact a member of the Adams + Miles team today.
