Passing the baton

Many Canadians have built their wealth by operating a small business. Now, with an aging workforce and an economy on the upswing, many owners are weighing the benefits of selling their business to a third party or of transitioning it to a family member.

By Anthony Maiorino | September 1, 2010 | Last updated on September 1, 2010
6 min read
  • An experienced tax advisor to ensure the sale is managed in the most tax-efficient manner.
  • A lawyer to prepare the necessary legal documentation, including the sale-and-purchase agreement, so all the contingencies are covered and the risk of future litigation is minimized.
  • A professional business valuator, as emotion, history and lack of access to relevant information can cause owners to overestimate or underestimate the value of their business. Buyers often evaluate a business on its projected cash flow for the next few years to assess its value against the business risks. To allow potential buyers to more clearly assess the value of the cash flow of a business, Lalonde should work with his tax and legal advisors to remove non-core assets. Assets that might be considered non-core can include real estate such as open land held for future development, surplus cash or portfolio investments not required to meet current cash flow needs, business divisions or business lines that operate with little or no relation to the core business, and the building or facilities in which the business operates.
  • A business broker to act as his agent in identifying a purchaser and to facilitate negotiations.

    Gather essential information

    Lalonde will need to gather key information to incorporate into his succession plan. This will include at least three years of corporate tax returns and financial statements, as well as a list of fixtures, equipment, employees and customers, copies of loans, payment schedules and relevant lease agreements, and a summary of his professional advisors.

    Be discreet. While negotiating the sale, Lalonde has to be very careful not to divulge information about his day-to-day business activities that could be used against him by his competitors. He should ask any potential buyer to sign a non-disclosure agreement and then provide financial information only to potential buyers who have paid a deposit. This will also help confirm whether a potential buyer is serious.

    Maintain focus. It will also be important for Lalonde to not let the business decline while he’s preoccupied with the sale. He should maintain his premises, inventory levels, and normal business hours and practices.

    Cutting the tax

    There are a number of tax strategies that can be leveraged over time to avoid leaving money on the table during the sale of a business.

    The following strategies can help Lalonde minimize the tax consequences when selling GiftCo to an outside buyer. Some strategies must be undertaken well before the closing date, so he should start as soon as he can.

    If the purchaser is buying the shares of GiftCo, Lalonde may be able to claim the capital gains exemption if his shares qualify. To qualify, substantially all of his business assets must be “active Canadian business assets” at the time of sale and at least half of the assets must be active assets during the 24 months before the sale. But given the size of the investment portfolio, it’s quite likely assets will have to be removed from the company to purify it so it’ll meet tax requirements and potentially qualify for this exemption.

    A corporate reorganization could be considered as a way of providing potential buyers with a clearer view of Lalonde’s operating business. This may include the separation of the land for future use from the corporation that contains the giftware distribution business. Involvement on the part of Lalonde’s accountant and lawyer would be required to arrange any restructuring needed for the business.

    Lalonde should consider the pros and cons of setting up an individual pension plan or a retirement compensation arrangement, which may help to defer some of the tax upon a future sale and be a potential use of some of the funds in the investment portfolio.

    If Lalonde’s sale of GiftCo is still a few years away and the value of his business is increasing, an estate freeze may allow for future capital gains to accrue for other family members and possibly multiply the use of the capital gains exemption.

    Lalonde could consider using some of the sale proceeds to make a charitable donation in the year of sale. The donation tax credit may help him minimize the tax on any capital gains realized on the sale.

    If Lalonde provides some of the financing for the purchaser in the form of vendor take-back financing, he may want to consider receiving the sale proceeds over several years to use the capital gain reserve to spread the gain over a longer period for tax purposes.

    As Lalonde’s example shows, business owners looking to sell their businesses in the near future have a number of critical decisions to make in order to prevent accepting low offers and paying too much tax. To do so, they need to enlist the help of professionals who can walk them through the steps of a successful succession plan.

    Anthony Maiorino

  • An investment advisor who can create a financial plan, assess the level of after-tax proceeds adequate to meet his retirement goals and oversee the investment-of-sale proceeds.
  • An experienced tax advisor to ensure the sale is managed in the most tax-efficient manner.
  • A lawyer to prepare the necessary legal documentation, including the sale-and-purchase agreement, so all the contingencies are covered and the risk of future litigation is minimized.
  • A professional business valuator, as emotion, history and lack of access to relevant information can cause owners to overestimate or underestimate the value of their business. Buyers often evaluate a business on its projected cash flow for the next few years to assess its value against the business risks. To allow potential buyers to more clearly assess the value of the cash flow of a business, Lalonde should work with his tax and legal advisors to remove non-core assets. Assets that might be considered non-core can include real estate such as open land held for future development, surplus cash or portfolio investments not required to meet current cash flow needs, business divisions or business lines that operate with little or no relation to the core business, and the building or facilities in which the business operates.
  • A business broker to act as his agent in identifying a purchaser and to facilitate negotiations.

    Gather essential information

    Lalonde will need to gather key information to incorporate into his succession plan. This will include at least three years of corporate tax returns and financial statements, as well as a list of fixtures, equipment, employees and customers, copies of loans, payment schedules and relevant lease agreements, and a summary of his professional advisors.

    Be discreet. While negotiating the sale, Lalonde has to be very careful not to divulge information about his day-to-day business activities that could be used against him by his competitors. He should ask any potential buyer to sign a non-disclosure agreement and then provide financial information only to potential buyers who have paid a deposit. This will also help confirm whether a potential buyer is serious.

    Maintain focus. It will also be important for Lalonde to not let the business decline while he’s preoccupied with the sale. He should maintain his premises, inventory levels, and normal business hours and practices.

    Cutting the tax

    There are a number of tax strategies that can be leveraged over time to avoid leaving money on the table during the sale of a business.

    The following strategies can help Lalonde minimize the tax consequences when selling GiftCo to an outside buyer. Some strategies must be undertaken well before the closing date, so he should start as soon as he can.

    If the purchaser is buying the shares of GiftCo, Lalonde may be able to claim the capital gains exemption if his shares qualify. To qualify, substantially all of his business assets must be “active Canadian business assets” at the time of sale and at least half of the assets must be active assets during the 24 months before the sale. But given the size of the investment portfolio, it’s quite likely assets will have to be removed from the company to purify it so it’ll meet tax requirements and potentially qualify for this exemption.

    A corporate reorganization could be considered as a way of providing potential buyers with a clearer view of Lalonde’s operating business. This may include the separation of the land for future use from the corporation that contains the giftware distribution business. Involvement on the part of Lalonde’s accountant and lawyer would be required to arrange any restructuring needed for the business.

    Lalonde should consider the pros and cons of setting up an individual pension plan or a retirement compensation arrangement, which may help to defer some of the tax upon a future sale and be a potential use of some of the funds in the investment portfolio.

    If Lalonde’s sale of GiftCo is still a few years away and the value of his business is increasing, an estate freeze may allow for future capital gains to accrue for other family members and possibly multiply the use of the capital gains exemption.

    Lalonde could consider using some of the sale proceeds to make a charitable donation in the year of sale. The donation tax credit may help him minimize the tax on any capital gains realized on the sale.

    If Lalonde provides some of the financing for the purchaser in the form of vendor take-back financing, he may want to consider receiving the sale proceeds over several years to use the capital gain reserve to spread the gain over a longer period for tax purposes.

    As Lalonde’s example shows, business owners looking to sell their businesses in the near future have a number of critical decisions to make in order to prevent accepting low offers and paying too much tax. To do so, they need to enlist the help of professionals who can walk them through the steps of a successful succession plan.