Your small business has done well for you. But is it ready for a buyer?
Angela Mulrooney had a thriving dental practice in Calgary and expected to run it for several decades. Unfortunately, she developed a medical condition which meant that the demanding physical side of dentistry just wasn’t possible anymore.
She had to sell her practice, but to whom? “I started emailing everyone I knew,” Angela says. It worked: she found a dentist via her professional network and sold the practice for a profit. “I didn’t have much choice and I was heartbroken, but that’s life.”
Fortunately, Angela launched a second career as a business coach. In her new job, she coaches entrepreneurs who want to sell but haven’t really thought of their services as a business. As a result, their companies aren’t appealing to buyers.
For some people it can be a struggle to sell even a successful business when they’re ready to retire. Most entrepreneurs are so focused on their customers or clients that they don’t have time to think about the business side of the operation or boosting growth, which is what many buyers want to see. “They don’t have the energy to put into thinking about it as a business,” says Angela. “As long as there is money in the bank, they feel good.”
If you’re contemplating selling your business, you’ll need to ensure that a future buyer can expand it or at least see an opportunity for growing its success. Knowing how to sell a business can be the difference between selling it at a great price and struggling to find a buyer. If you plan ahead and think a little more like an entrepreneur, then selling a business you’ve spent your career building up should be a lot more feasible. Below are some useful tips on how to sell a business in Canada.
Get help early
Selling a small business in Canada takes time, so Angela recommends that you start planning for a sale up to five years in advance. Bring in professionals, including a business consultant to help make your business more profitable, and an accountant to better organize the company’s finances.
You should check in with your financial planner early and also talk to your tax advisor several years before a planned sale. This will allow you to examine any tax-planning opportunities and appropriately structure your business for a tax-efficient sale. If you wait until you’re about to sell your business, your options might be limited.
Gather essential documentation
Potential buyers might want to see your financial statements, profit and loss accounts and tax returns going back at least three years. If any assets are to be included in the sale of the business (such as any business equipment, computer hardware, etc.), list them, alongside approximate current values.
A list of your suppliers would also be helpful, along with any contracts you may have in place with them. You should also provide details of the status of your business premises (mortgage, rental lease or ownership).
Get your business valued
When you first start looking at how to sell a business, one of the most important steps is to get an accurate estimate of what it’s worth. It could make sense to speak with a chartered business valuator (CBV) or business broker to help gain a realistic idea of its value. A CBV will generally look at all sorts of financial and growth metrics which can help you decide on a fair selling price.
Having a CBV help you determine the value of your business will also give the selling price more credibility.
Find a buyer
As Angela can attest, having a vibrant professional network can help get the word out to prospective buyers, such as your current colleagues and competitors. It’s best to nurture a wide network in advance of a sale, if at all possible.
Know the limits of selling a business alone, though. Neil Hiltunen was ready to sell his half of a dental partnership by himself. When a prospective buyer contacted him from out of area, he realized it was better to use a business broker who knew the ins and outs of selling a small business.
“Do you want to spend hours and hours interviewing people and showing them the area?” Neil asks. “The broker saved me a whole ton of time.” Indeed, his broker came through and succeeded in selling Neil’s portion of the partnership.
Sort out staffing issues now
Potential buyers not only want to buy a client list and future growth potential, they also want capable staff. Make sure your staff has contracts with clear job descriptions. Often, entrepreneurs don’t have their team on contracts, and that can be a red flag for a buyer.
Also, consider getting an audit to determine whether staff are using their time effectively. “If you have the business open for 40 hours a week, but you’re only really working 30, you need to trim that down,” Angela says. “That creates upside for the new buyer.”
If you’re overstaffed, you may have to let some employees go before selling your business, so it’s a good idea to consult a human resources lawyer once you find a buyer. They can help you determine who to let go and what severance to pay.
What to do with the proceeds
This is where your accountant and IG Consultant are really valuable. Collectively, they can help you to minimize your tax obligations from selling your business (which could be considerable if you sell it for a substantial profit).
Your IG Consultant can also go over the best options available to you for using the money, whether that might be to save for retirement, pay off debts or provide retirement income.
What happens if you can’t sell?
It’s important to understand whether selling your business is even feasible. If there’s a high demand for your services, such as a general medical practice, new doctors may be able to acquire clients quickly after graduation without having to buy an existing practice.
If that’s the case, and your business doesn’t sell, you could stop operating, sell some assets, such as furniture and equipment, and if the business is incorporated, consider what to do with the corporation after retirement.
Before doing anything drastic, though, it’s a good idea to talk to your tax advisor about the best course of action. If you wind up the corporation, there could be immediate tax consequences. If you keep the corporation, you could maintain tax deferrals and only be taxed on the money you pull out of the business, as well as on investment income earned in the corporation.
Getting prepared for selling a business might take a little longer than you’d hoped, but it pays to do what you can to get your business to the level that people will be clamouring to buy it.
Seek advice first
Now you know how to sell a business in Canada, you should talk to your professional experts before moving forward. Your IG Consultant can help you to decide on how to invest the proceeds, and how this big life change will impact your overall financial plan and retirement goals. Discuss your plans with your IG Consultant as soon as you make the decision to sell your business. If you don’t have an IG Consultant, you can find one here.
Written and published by IG Wealth Management as a general source of information only, believed to be accurate as of the date of publishing. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice.