Colleen Ellison, Business Advisor, CPA, CA and CGA
How to plan for a successful sale
Selling a business is a complicated, time-consuming process. In order to meet your objectives, such as maximizing your selling price or continuing your corporate culture, it’s important to plan.
Here are seven things to address before the For Sale sign goes up:
1. Get your advisory team in place, including your accountant and lawyer.
2. Determine a realistic idea of the value of your business from an objective source, such as a professional business valuator, accountant or business broker.
3. Ensure that your financial records are in order. Prospective purchasers will want 3 years’ worth of financial information to determine what they think your business is worth. Most purchasers prefer financial statements prepared by a CPA firm rather than those prepared internally.
4. Understand the true profitability and cash flow that your business generates. Cash flow is a major driver when it comes to business value; the more confidence a buyer has that money will keep flowing after the sale is made, the better. Your financial information should demonstrate sustainable cash flow. For example, if your business had some unusual expenses, such as a large legal bill or moving expenses, you should provide documentation.
5. Get your legal paperwork in order, e.g., incorporation documents, licenses, permits, lease agreements, customer/vendor contracts.
6. Figure out who you think you’ll be selling to. Will it be a key employee, family member or outsider? If it’s internal, start to implement a succession plan.
7. Decide if you’re going to sell assets or shares. There are two basic ways to buy or sell a small business: through the sale of assets or the sale of shares.
Asset Sale: An asset sale is the transfer of ownership of a company’s assets, such as equipment, accounts receivable, inventory and leasehold improvements and potentially goodwill. If a buyer’s willing to pay a price for the business in excess of the value of hard assets, the excess is goodwill.
Share Sale: The vendor sells their actual company shares to the purchaser. Potential tax advantages exist for the vendor as they may be able to claim a capital gains exemption on the sale of their shares if the business is incorporated. There are potential advantages and disadvantages to the purchaser on a share purchase. Both parties should get their own independent accounting and legal advice.
Whether it’s best to sell a company through assets or shares depends on individual circumstances. If you have the same company for sale under the two options, you’ll likely get a lower sale price on a share sale because the buyer may be taking on more risk. Your tax bill may also be less with a share sale, so you still may be better off.
There’s much to consider when selling your business, so speak to your CPA early in the process.
Colleen Ellison is a Chartered Professional Accountant, CPA, CGA, CA and Partner with Presley & Partners, CPAs and Business Advisors, in Courtenay, BC. She can be reached at 250.338.1394 or firstname.lastname@example.org.