If you’re a small business owner and are thinking about selling your business, it's a good idea to start succession planning.
According to the CFIB, the vast majority of business owners (81 per cent) intend to sell or transfer their business to retire, although only a fraction of them have started succession planning.
If you want to get the most out of the sale of your business, you need to start planning well before the sale date. There are two main ways you can sell your business: an asset sale and share sale. There are important tax implications associated with both.
If your business is incorporated, you can sell the corporate shares of your business. Once you sell the shares, the buyer automatically gains control of the business and all of its assets.
- Selling shares is a fairly simple transaction, especially when compared to an asset sale.
- Eligible shares might qualify for a lifetime capital gains exemption. This means you do not pay any tax on capital gains up to that amount. That number is indexed to inflation and increases every year (if you sell shares of a qualifying Canadian business in 2019, the lifetime capital gains exemption is $866,912). There are certain conditions that need to be met to qualify for it.
- All of the liabilities and debts are sold with the business.
If you are a sole proprietor or in a partnership, you may wish to restructure your business as a corporation. Speak to a tax professional to find out if changing your business structure before a sale would benefit you.
This is the only option available to you if you are a sole proprietor or in a partnership.
- An asset sale involves selling off all of the assets your small business owns. This includes tangible goods (land, equipment, buildings, cash, investments and inventory) or intangible goods (client lists, goodwill, patents, copyrights, trademarks).
- With an asset sale, you can negotiate the selling price and choose what to sell. You may wish to keep your business name or another asset. In a share sale, everything passes to the new owner.
- With an asset sale, you are not eligible to take advantage of the lifetime capital gains exemption, and taxable income in an asset sale can include capital gains on other capital properties and capital gains on goodwill. Only assets are sold, so you may still be responsible for any liabilities or debts.
It’s important to start succession planning early — before you have found a buyer and even before you know exactly when you’re going to sell. Doing so helps get the business in the best position before the sale, ensuring you maximize the after-tax value of the sale.
Depending on the structure of the sale and how involved you will be, you need to consider transferring ownership, positions of leadership, and who controls the business. You’ll also need to figure out how much you’re going to need for retirement.
Think of succession planning as a process occurring over time during which you plan for the transfer of knowledge, skills, labour, management, control and ownership of the business between the founder and the successor. It involves the creation, preservation and ultimately the transfer of the business assets in order to achieve personal, family and business goals. We recommend you include your lawyer, accountant, financial advisor and a succession planning professional in the process.
FBC works with Canadian small business owners to minimize their income taxes and maximize their assets. Contact us today to find out how we can help your business unleash its full economic potential.