Business Management Articles
Selling Out: How to Cash in on your Business
Bob McMahon
Business Times
When you’re the owner of a small or mid-size business, your company is likely your most valuable asset. You may have dreams of selling the operation one day and using the proceeds to travel or invest in another business. Or maybe you’re considering selling part of the business in a few years so you can reduce the amount of time you spend working.
Optimizing the proceeds of a sale requires careful planning and timing -- especially within the context of a volatile economy and a vast number of baby boomer business owners who are contemplating the sale of their companies within the decade. Even if you don’t intend to sell your business for many years, having a strategy in place gives you control in determining the best direction, decisions and timing – so you realize the most value. Here’s how to get started.
Determine your goals
Begin by thinking about your long-term personal financial goals. Maybe you want to generate reliable income for your retirement. Perhaps you want to contribute a legacy to your community. Put money aside for the education of your grandchildren. Or build a valuable estate for your family.
At the same time, consider your long-term goals for your business; for example, do you visualize realizing the most value possible from the proceeds of a sale? Ensuring that your company carries on your name? Would you like to sell the company to family members? Or maybe you have a capable management team that you hope will carry on your operation. Or perhaps you’d like to take on a partner who will eventually purchase the company from you.
Every goal requires a different approach; therefore it’s important to think through what you want to see happen in the future. And if you are having difficulty narrowing down your goals or determining whether they are feasible, consult with your business advisors or financial professionals who can offer you an objective perspective.
Secure professional advice
In order to achieve your goals you need to structure your business and personal financial affairs appropriately. For example, selling shares has a number of advantages for sellers, such as the ability to utilize the $750,000 lifetime capital gains exemption for the disposition of shares of a qualified small business corporation. To qualify for the total exemption, however, 90% of a company’s assets must be actively used by the business for at least two years prior to a sale. So if the money in your corporation is earning passive investment income, you have to put it to work in order to realize the full benefit. At the same time, most purchasers prefer to buy assets rather than shares in order to minimize liabilities and obtain tax write-offs. Since the best solutions for seller and purchaser will impact on the financial, tax and legal situations of both parties, it’s important to seek professional advice.
Secure a business valuation
In order to realize the most value from a future sale, you need to know what your business is worth today – and what you can do to maximize future returns.
A valuation will provide you with information regarding potential sale proceeds, as well as insights into the strengths and weaknesses of your company. A professional valuator can also offer suggestions regarding how to add value to your operation such as strengthening cash flow, implementing cost controls, reducing debt, building the customer base, improving inventory turnover, and so on. When you have several years to address issues prior to a sale, you have an opportunity to realize substantially higher returns.
Document and communicate your strategy
Once you know what you intend to do and how you intend to achieve it, decide who you need onside to help you achieve your goals. If succeeding involves key partners or members of your management team, for example, discuss your plans and determine what agreements or contracts may be required or need updating, such as shareholder or partner agreements.
Then document your goals, timeline and the steps involved in preparing the company for a future sale. Be sure to communicate this strategy to all of those involved and then schedule regular discussions to ensure that you are addressing the issues that need to be resolved and to keep progress on track.
If you hope to “sell out” some day, now’s the time to get the process underway so that you can cash in on your business.
Bob McMahon is a partner of BDO Dunwoody LLP (www.bdo.ca). One of Canada’s leading accounting firms, BDO helps entrepreneurs and family businesses succeed. You can reach Bob in the Mississauga office at (905) 270-7700 or bmcmahon@bdo.ca.
