For many entrepreneurs and business owners, their business represents their single largest asset. Depending upon the size of the business, it likely dwarfs the value of their home or other assets. Like selling your home, to attain the most significant selling price, you will have to invest some upfront time, money and energy into fetching the best asking price possible. That’s why trying to cash out and sell your business is a well planned out event. That’s why paying attention to these six factors will help your business survive and thrive through succession planning.
Planning serves a few different purposes, ready the business for your imminent departure, planning to minimize the amount of tax you’ll pay, find appropriate suitors, internal or external, to transition the company to new ownership.
I’ve talked to several business owners who wake up one morning and decide they want out as soon as possible. It’s as if they wake up one morning and say “ENOUGH”. I’ve always said that I’ll continue to work as long as I love what I’m doing, am healthy enough to continue to work, and have clients that want to deal with me.
In my last business, facing the financial crisis of 2008, no one was hiring employees, let alone looking to renovate their offices with new office furniture. I came to the office every morning with a painted smile on my face, but deep down inside, I was becoming resentful of the industry that I had decided to invest eighteen years of sweat equity into and wanted to get the hell out. Unfortunately, as a business owner, you can’t just hand in your resignation and push the do-over button.
Getting Cash out of Your Business Tax Effectively
It’s true; someone could come in and offer you a big cheque to buy your business tomorrow. This is unlikely, but I suppose it’s a possibility. If someone wrote you a cheque for $10 million, would you cash out? What if I told you that the amount you’ll walk away with might only represent a fraction of what the purchase price would be. A well-thought-out business succession plan considers transitioning the business to new owners and minimizing the amount of taxes you’ll ultimately pay.
Setting up an Individual Pension Plan (IPP), Retirement Compensation Arrangement (RCA), Insured Retirement Plan (IRP), utilizing your business to donate to a Charity or Charitable Foundation are a handful of ways to minimize your taxes today. Some of these methods may defer your taxes to a point down the road where you may be in a different income tax bracket, or if done correctly, avoid paying taxes altogether.
Another thing to consider is if you qualify for the small business Lifetime Capital Gain Exemption (LCGE). That could represent almost $900,000 in tax-free money per shareholder. There are ways to cleanse your company for you to qualify for the LCGE; otherwise, you may not be eligible to claim it, even if you are a Canadian Controlled Private Corporation (CCPC)
Identify Potential Successors Early On in the Process
Whether you’re selling your business internally or externally, it’s crucial to identify potential future shareholders and a senior management team within the company as early on in the equation as possible. Also, it’s essential to identify a succession team that is considerably younger than the present ownership. Why? Essentially, you don’t want to initiate another buyout because the potential buyers will retire simultaneously as the current owner. Existing ownership needs to identify and evaluate potential candidates for ownership at least ten years before the current owners plan on exiting the business. This will allow the company to prepare processes to ensure the company’s value doesn’t leave when the owner’s exits.
Ensure Company Value Doesn’t Leave When the Owners Leave
One of the primary reasons the valuation of a business is deemed to be higher is that too much of the value depends on the founder’s presence. Careful attention to ensure the value, customer-base, supplier relationships, employee loyalty and processes can operate efficiently without the original owner. Failure to do so will result in a devalued business, a suspect transition and a less than successful business transfer. The company that focuses on operating without the founder run the most significant potential for future success and continuity. Also, the company will fetch the most significant asking price.
The Value of a Share Freeze
A share value freeze or share freeze is used when looking at an inter-generational sale of a business or an employee that has significantly contributed to a company’s success. A share freeze allows for the value of the company to remain constant, making for an under-valued transfer of ownership. The owner’s share freeze is a voluntary act to ensure the company’s purchase price remains intact that the family member or valued employee isn’t penalized for increasing the company’s value and profitability. The share freeze will require an issue of a different class of shares for the owner, while the common shares remain frozen. A capital gain will have to be incurred by the owner for the company’s share value to be frozen.
Utilize a Network of Expertise
The sale of a business is complicated. Business valuation experts, tax experts, financial advisors, organizational structure experts, legal experts and business succession planning experts are necessary to ensure the company sale occurs. This process requires a tremendous amount of due diligence. The cost and time to provide this are high but necessary. Trying to navigate this road without this expertise on board is not recommended. This expertise is expensive because they’re experts in their chosen fields. What they cost you in fees will typically save you many times fold in expenses down the road. Don’t try to short rope the process. It’s necessary because it’s proven.
Through the bankruptcy of his first business, a strong balance sheet means nothing unless you can get the money out of your business and into your hands personally, tax efficiently, and creditor protected. Chris helps and coaches business owners to avoid a similar fate as he suffered in his first business.
Through several clever strategies, he illustrates how these little-known vehicles can get money out of your business efficiently, build your corporate brand and create a legacy through charitable means to help make a meaningful difference in the lives of others.
Also, he has seen the impact that mental health can have upon success within your business and your life and how the two are on a constant collision course. When Chris became aware that Entrepreneurs struggled with their mental health at more than twice the rate of average adults, he realized he wasn’t alone and made it his ambition to understand why and do something to help. His business, The Finish Line Group, aims to help support the entrepreneur’s financial, philanthropic, and emotional needs.
Chris’ Why Statement remains, “To openly communicate the lessons learned from my past so that others will thrive in their lives, minimize their setbacks and leave a positive and lasting legacy.”