If you are a business owner and you’re thinking about selling your business, it’s a wise idea to begin succession planning now. Even if you are not going to sell your business until you retire, it’s useful to start planning and understanding how you would like to sell your business one day.
Succession planning is a process in which you plan the transfer of your business and all of its components such as knowledge, skills, labour, management, and ownership of course. It can be a lengthy and complicated process and would be better off being done with the help of a professional business broker.
There are two main paths to selling your business, a share sale and an asset sale.
Generally, sellers want a share sale and buyers want an asset sale, sellers want the share sale, mainly for the tax benefits, and buyers want to try and avoid the potential contingent liabilities that may come with a business, in a share sale.
There are however, times when a buyer would strategically prefer to acquire the shares of a company in order to benefit from things like, difficult to obtain contracts, patents or licenses, brand name.
In a share sale, an individual (or individuals) sells their shares of a corporation directly to a buyer. Once you have sold the shares to the buyer, the buyer gains control of the business and all of its assets.
Generally, companies in a share sale are sold on a debt-free, cash-free basis, with only the liabilities that form normal working capital being assumed. A share sale is more complicated, mainly because of the due diligence that has to be performed due to the complexity. It is also much more involved from a legal standpoint as the final legal document, or sale agreement needs to be more comprehensive, to cover the potential eventualities and protect the parties to the contract.
You may wish to restructure your business as a corporation if you are a sole proprietor or a partnership. It is always recommended to seek professional advice to find out if changing your business structure before you sell would benefit you.
Eligible shareholders may qualify for a lifetime capital gains exemption. This means that you do not have to pay tax on capital gains, up to a certain amount, on the sale of your shares, which at the time of writing was approx. $892,218 for 2021, up from $883,384 in 2020, this amount is adjusted annually.
An asset sale refers to the selling off of all or a portion of the assets that your business owns. This may include, an entire division, land, equipment, buildings, investments and inventory, or contracts, patents, copyrights, trademarks and goodwill.
With an asset sale, you can choose what you’d like to sell. For example, you can keep your business name or equipment, whereas, in a share sale, everything is transferred to the new owner of the business. Furthermore, you retain ownership of the corporation, as a legal entity, in a share sale
You are not eligible for a lifetime capital gains exemption with an asset sale.
What you need to consider when selling your business
Since selling a business is quite a significant undertaking, here are some factors that you should consider when deciding on the type of sale for your business.
With a share sale, the buyer runs the risk of assuming some of the contingent liabilities that may come with the business. This is a situation that they will naturally want to avoid and will spend time during due diligence to ensure that there are not any “unforeseen” liabilities.
As a seller, it is best to ensure that the company is as “clean” as possible and that any “skeletons” that may exist, are fully disclosed, in this way, your broker can help navigate a resolution to any potential pitfalls that may sink the deal.
There can be a complicated process to see who assumes responsibility for employees during a sale. For example, sometimes a buyer does not want the employees, but the Sale of Business or Assets Act still needs to be complied with.
The employees will either have to be retained by the acquiring party, and employed as per their existing contracts, or will have to be terminated and severance paid, as there is a cost to either of these options. Negotiations between the buyer and seller will need to include how the employees will be handled.
Generally, in a share sale, the employees will maintain their employment after the sale of the business. This is because it is merely a change of, control over the ownership, so the company continues to function and exist as it did before the sale.
How to sell your business
If you are ready to start planning for a change of ownership, you can contact the team at the NAI M&A Advisory to begin. They can help guide you through the selling process and answer any questions you may have.
Not sure whether it’s best, to sell the assets or shares of your business? Contact us today, for a complimentary, confidential discussion about your options.
Damian Luke, CBB
Cell: (236) 999-5909
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