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Staging your business for sale

Staging your business for sale 

Think of Deborah MacPherson as a stager for your business – the person who comes in to make sure it looks as good as possible when prospective buyers begin to pore over your books. “Selling a business is like your first time selling a house,” says MacPherson, National KPMG Enterprise Tax Leader in Calgary. Just because you’ve lived in it and made it into a home doesn’t mean you know how to look at it from a buyer’s perspective.

“Most business owners only sell their business once,” she says, “and that means that, while they’ve been really good at building the business, it doesn’t necessarily mean they know how to sell it.”


Financial Statements
First and foremost, prospective buyers will want to look at your company’s financial health, since they’ll likely base their offering price on some multiple of cash flow. So, can they rely on your numbers? “All financial statements are not created equal,” says MacPherson. For instance, you could produce your own set of financials but, she says, “the purchaser is going to be a little wary, because there’s been no outside accountant involvement at all.” You could enhance that creditability by opting for a Review Engagement: bringing in an independent accounting firm to gauge whether your numbers appear to be reasonable. If you’re looking at a potentially large sale price, chances are the buyer will expect you to have a full audit done, with an accounting firm actually giving an opinion on your financial statements as to whether they fairly present your business from a financial perspective consistent with generally accepted accounting principles.

As for how much this will cost you, it depends on the scope of your business. “But without a review or an audit, if a purchaser ends up asking more questions and wanting to know more about your numbers, you may need to get an audit or review done at that point, which may end up costing you more after the fact. If your numbers aren’t credible or you have weak internal controls, you might not get as much for your business,” says MacPherson.


Internally, you need to make sure that your accounting systems are appropriately matched to the size and scope of your business. “There’s a lot of maintenance that goes into accounting,” says MacPherson. If you’re still a relatively small shop, you might be able to get by with basic accounting software and a part-time bookkeeper. But if your outfit has grown in size and complexity, you might need to upgrade to a more sophisticated software package and bring in a professional number-cruncher – an accounting manager, controller, or chief financial officer – to oversee not just accounts payable and receivable, but also inventory, work in process, capital assets and reserves, and so on.


Tax planning
If you’re going to sell your business, you’re going to pay tax. “So you want to try to minimize the tax liability and maximize what goes into your jeans,” says MacPherson. But, she warns, many tax-planning initiatives require a considerable amount of lead time – which means you always need to be looking forward to a possible sale. “When we do tax planning and set up how a corporate group should be structured, we look ahead to an exit,” she says. “You don’t want to lock yourself in to an inflexible structure.”


For instance, when you sell shares in a qualifying business, you can get $800,000 in tax-free capital gains – but you generally must hold those shares for two years to qualify. Similarly, stock options are a great way to remunerate employees or to bring family into your business, says MacPherson, “but if you’re offering shares at below market, the new shareholder will have to hold the shares for two years.”


Do you have an operating company that owns assets like real estate or investments purchased with excess cash flow? If so, you might want to rethink that structure and separate those assets from your business assets by transferring them to another company. “If someone were to sue the business, they can only go after your business’s assets – and if you have real estate or other non-business assets within an operating company, they can be exposed to creditors and may jeopardize your eligibility for the capital gains exemption.” Transferring these assets out is called “purifying” your business, says MacPherson. “If you try to do these types of transfers too close to the sale, you may find that you can be limited in what you’re able to do on a tax-effective basis.”


If your company has expanded into the United States, and that wildly successful new subsidiary is owned by the Canadian company, you could risk your capital gains exemption, since it only applies to shares of Canadian operations. MacPherson suggests you look at creating a separate company for the US subsidiary that is owned by a holding company, as opposed to the Canadian operating company. “How you organize your corporate group matters when it comes to this exemption, the sale of your business and the repatriation of profits,” says MacPherson.


Another major tax-related consideration is how you want to sell your company: assets or shares or some combination of the two. “If you have a family trust which you can use to multiply access to the capital gains exemptions of your family members, then you probably want to sell shares,” says MacPherson, “but a review of your specific facts will be needed. The purchasers will almost always want to buy assets because they get an increase in cost basis.”


What does that mean? “Say you have a manufacturing facility as a business asset, and the underappreciated capital cost is $5 million, but it’s really worth $10 million today,” she says. “With an asset purchase, the purchaser can buy that asset for $10 million and can write off the $10 million in tax deprecation over time. If the purchaser buys shares, it inherits the $5 million cost base and can only continue to write off the asset from that point. That $5-million bump results in tax savings for the purchaser over the long-run that can be huge for them.” Bridging that gap between what you’ll want as seller and what the purchaser will prefer is part of the sale negotiations.


It all comes down to timing. “When you start to negotiate a transaction, too often tax is the last piece,” says MacPherson. “If you’re about to sell, you can’t get two years back. But if you do pre-sale planning, you know which way you want to sell and you’re talking that way throughout your negotiations.”


Valuations, marketing and agreements
What is the right price for your business? You should consider getting a professional valuation done of your business to see a range of possible sale prices and understand what will drive value for a purchaser. Also, speaking to a corporate finance professional early can kick start the process by identifying possible purchasers and how to approach marketing your business. Working with a corporate finance professional who is knowledgeable with a sale process is essential to translate your business value to cash. As with selling your house, you want to do a major clean-up before throwing open the doors to potential buyers, making sure all your documents, leases and contracts are in order – and that they exist in the first place.


Sometimes, smaller companies make verbal deals with customers, without having them sign contracts, says MacPherson. “But that makes it tough for purchasers because how can they be sure those contracts are going to continue?” If your operating company pays rent to a holding company, do you have the appropriate amount of rent and a lease agreement in place?


Some of this pre-sale tidying may not sound terribly exciting, but the last thing you want is for a few dust bunnies under the couch to kill the entire sale.

Staging your business for sale

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