Optimizing the sale of your company

December 8, 2014
Category :  Articles

To fully leverage the sale of your company, the first thing to do is to set the highest possible asking price, which requires laying the proper groundwork and creating a solid negotiating strategy. Then, the transaction needs to be planned from a taxation perspective in order to minimize the tax consequences when the business changes hands. When you combine these different approaches, you are stacking the odds of a successful transaction in your favour.

1. Setting the best asking price

Preparation. Business owners intending to sell should start planning several years before the actual sale. Generally, you need at least three to five years lead time. This will give you the time you need to have your business valued. In fact, lack of planning is one of the primary reasons for failed business sales/transfers.  There are many factors that affect the value of the business. By identifying these factors and working on optimizing them, you can increase the value of your business and get the selling price you are after.

- Competent employees. “The quality of management in place and the competency of personnel are important for a prospective buyer and can boost your selling price,” explains Marcel Bergeron, a partner with FBL Chartered Professional Accountants. A solid management team is one of the factors that help to decrease the business risks for the buyer.

- Profitability. It is in your interest to enhance profitability because it is tied directly to your business’s sale price. You will need to optimize every sector of your business and assess the relevance of less profitable departments. If they are not strategic to the business itself or do not support your more profitable activities, consider disposing of them.

It is also preferable to retain within a company only those assets that are necessary to operations and to eliminate surplus assets. “Before commencing negotiations with potential buyers, be sure to reduce your working capital to a level that is truly representative of the company’s actual operating requirements,” stresses Mr. Bergeron.

- Settle your disputes. It is in your best interest to settle any legal action, environmental compliance issue or other situation that could be problematic for a buyer prior to starting the business transfer process.

Negotiation. The valuation approach is relevant, particularly as a starting point for negotiating the selling price, and serves as a base from which to begin adding value to your business. “An annual valuation can be a very profitable exercise as it helps to determine how your various initiatives are impacting the value of your business,” points out Marie-Lou Thibodeau, Business Valuator and Partner with FBL.

A prospective buyer looks at more than earnings. They also take your balance sheet into account. A business in good financial shape is a business that offers value to a potential buyer.

You might also consider conditioning your asking price on the company’s future performance by including an earn-out clause in the deal. This would offer the potential for a higher selling price by allowing for a bonus on the initial price, dependent on a certain level of earnings.

Offering to finance part of the transaction through a discounted sales price may also ultimately fetch you a higher closing price. This gives you some leverage with the buyer as it saves them dealing with financial institutions, among other things.

2. Reduce your tax burden

Focus on selling shares, not assets. If all the conditions are right, the seller may receive the first $800,000 of the capital gain on the shares tax-free. This tax relief is not allowed if the buyer purchases the company’s assets instead.

Multiplying the capital gains exemption. An inattentive business owner will not be properly set up to take advantage of the tax exemption when they sell their shares. However, business owners who think ahead will have done everything they can in advance to meet all the conditions that qualify them for the tax exemption on capital gains resulting from the sale of their shares. A very forward-thinking business owner will enjoy not only the tax exemption but also the benefits of a structure that multiplies access to the exemption.

So, when a family trust holds shares, members of the seller’s family can use the balance of the capital gains exemption.
Proper preparation, well-managed negotiations and a sound financial situation are a winning combination for extracting maximum value from the sale of your business. These three prerequisites will produce optimal results.

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