When we meet with small business owners who are approaching retirement age and who are beginning to plan for selling their business, we frequently ask them how much they think their business is worth. The answer to this question is often very interesting.
One of the most common answers is: “In order to retire, I need to get X dollars when I sell the business.” Unfortunately this is not the best approach to determining the real value of their business.
We often tell the business owners that the true value of their business is the highest amount that someone is willing to pay for the business. This does not mean that a potential buyer is completely in control of determining the price in a potential transaction. It simply means that the seller needs to be realistic in their expectations as to how much they can sell their business for. The best way to do this is to try to take a fresh look at your business and try to put yourself in the shoes of a potential buyer.
There are multiple factors that drive the value of a business for a buyer. If planning for a sale is done early enough, we can work with the business owner to help them understand these different factors and to focus on improving these factors prior to selling. For example, depending on the industry, some of the steps below can be undertaken to improve the value of the business in the years leading up to a sale:
- Cut operational costs to improve net income (discretionary expenses are normalized in a valuation)
- Raise prices to increase revenue, and secure stable long-term sales contracts if possible
- Increase advertising expense to drive an increase in sales
- Pay down high interest debt to improve the balance sheet (low interest debt improves cost of capital)
- Upgrade to newer, more efficient equipment
- Sell old or underutilized assets
- Don’t make yourself irreplaceable – this will increase the risk of your business failing under new ownership, and decrease the perceived value to the buyer
- If there are other minority shareholders in the company, ensure a shareholders’ agreement is in place
Another key factor in how much you ultimately receive on the sale of a business is how much tax you pay on the sale. Proper planning in advance can help reduce the tax bill that is triggered by a sale.
For example, if you sell the shares of the corporation, will the sale qualify for the Lifetime Capital Gains Exemption “LCGE”? If it does not currently qualify for the LCGE, are there steps that can be taken to get onside with the complex rules for the LCGE? In some cases the steps to get onside with the LCGE rules must be taken at least two years prior to selling. Therefore, it is essential to begin planning well in advance of the time when you actually want to sell.
Working with the team of Chartered Professional Accountants, Chartered Business Valuators and Tax Specialists at your local DFK affiliate firm, we can help you plan for the sale of your business in the years leading up to your retirement to ensure that you maximize the price you ultimately receive.
Fall 2016 DFK Newsletter Article
Other articles in this issue: Amendments to the Principal Residence Exemption Rules | US Election Could Affect “Canadian” Estates
Author: Jeff Saunders, CPA, CA. & Rylan Melles, CPA, CA. Teed Saunders Doyle & Co Chartered Professional Accountants