Four Tips to Profit from the Sale of Your Business

Four Tips to Profit from the Sale of Your Business
by Bryan Popowich

As part of my business I've helped hundreds of entrepreneurs buy or sell businesses. If you're thinking of selling your business, there are a lot of things to be considered, planned for and implemented - months and even years prior to your intended target sale date.

1. Surround yourself with good advisors. I always remind entrepreneurs to surround themselves to do this, and to ensure everyone is looking out for your best interest. Make sure these advisors communicate with each other - this is key to ensuring that any transaction you complete will be smooth and efficient. There are costs to having advisors assist with your sale, but compared to the costs if things are not done properly, it's a very worthwhile investment.

2. Be aware of current tax legislation. Tax laws that relate to business sales change every year. If you have an advisor, ensure they're on top of them; if you don't, you need to be. Some of the most recent ones are:

  • Restrictive Covenants. Most deals include some form of restrictive covenant. Ensuring it is done properly could be the difference between having a capital gain and having income. Most people prefer a capital gain because the tax rates are lower than those of income tax.
  • Section 55. These rules have created some rigidity in tax planning in many scenarios, but navigating within the new rules can still leave room for great tax opportunities.

3. If you're a senior, be aware of specific implications of your business sale. There are many, but the more prevalent ones are:

  • AMT (Alternative Minimum Tax). The tax is typically created when you take a large dividend or claim the capital gains exemption. It is a recoverable tax but if you don't have taxable income after your transaction because you retire, this could be a tax that is recoverable but will never be able to be recovered on. So...? You should plan to sell before a certain age to ensure you receive this? Or...? Not sure what the point of this is.
  • OAS (Old Age Security). Many seniors that complete transactions fall into a scenario where they have a high income in one year due to a one-time transaction, and without realizing it may lose their OAS payments as a result. OAS payments are based on a typical income threshold test, and a large income in one year can trigger the halting of future payments.

4. Start planning early. You can maximize your potential sale price if you take the time to get your business ready to sell. Three to five years out from your intended sales date is a reasonable amount of time to think about these things:

  • Structure for maximum tax efficiency. This means either having the least amount of tax to pay or getting a large deferral of tax to the future. Achieving this can take time and long term planning.
  • Maximize your valuation price.The means ensuring margins are increasing or remaining steady, and making sure all the "tax skeletons" have been dealt with. Ensure you try to have a turnkey business: Many purchasers will spend more money on companies that are well structured and have good processes and procedures in place.

And if you want to sell sooner? There are still things you can do, even if you plan to sell in 3-5 months, rather than 3-5 years. Some items like capital gains exemption use a "point in time" test so it can take some time to ensure that you meet the rules and criteria to get the most tax efficient end result.

The more time you have the better you can plan for the right tax and sales results. Addressing all potential issues in advance is the best insurance against disappointment.


Bryan Popowich (CPA,CA)

Bryan is a Partner with KPMG Enterprise Services in Saskatoon, Saskatchewan, Canada who has been advising entrepreneurs in the purchase and sale of companies for 15 years.