Selling your business: A guide to maximizing your profit
Selling your business: A guide to maximizing your profit
Selling your business is one of the biggest decisions of your life. You’ve worked hard to build your tech company from a startup to a successful business — and you want to ensure the sale supports a successful future for your company while maximizing your profit.
Before you begin the process, it is important to review:
- Key terms to understand when selling your business
- What questions to ask yourself before selling your business
- How a business sale works
- Tax implications of selling a business in Canada
You don’t have to face the sales process alone. Support from a team of advisors can help you make the right decisions and achieve your goals.
You’ve worked hard to build your technology company from a startup to a successful business — and it’s important to ensure you get the most from what you’ve worked so hard to build. Selling your company is a serious decision. How can you ensure the sale will achieve your goals for both yourself and your company?
This type of uncertainty is a normal part of selling your business. Asking yourself the right questions and understanding what happens at every stage of the sale process can help ensure you choose the right buyer for your company and maximize your profit. Let’s discuss the key terms to understand when selling your business, the questions you should ask yourself before starting the process, and how a business sale works. Understanding the process can help you navigate the sale from a position of confidence and ensure you achieve your goals.
Key terms to understand when selling your business
Selling your business is a complex process — and it is important to understand each of these key terms and how they might impact your sale.
Due diligence
The comprehensive appraisal and investigation of a business or asset by a prospective buyer to assess its value and uncover any potential risks or liabilities before finalizing a transaction.
Valuations
The process of determining the current worth of an asset, business, or company, typically using various financial metrics and market conditions to arrive at an accurate estimate.
Deal memo
A deal memo sets the stage for how a business deal could come together, including:
- Investment amount (venture capital): If the deal involves the sale of a partial equity interest in the business, a ballpark figure for the amount might be included. This provides a starting point for negotiations.
- Valuation (startups): For startup investments, the memo might mention the expected valuation range of the company.
- Market size (general): For any deal, the memo could discuss the size of the target market the agreement impacts. This helps assess potential returns.
- Growth projections (startups): In startup investments, the memo might mention high-level growth projections to showcase the company's potential.
- Financial performance (mergers and acquisitions): In mergers and acquisitions, the memo might reference past financial performance of the involved companies.
Term sheets
A non-binding document outlining the preliminary terms and conditions of a business sale agreement, serving as a basis for drafting a formal or binding contract. This is more formal than a deal memo.
Audited financials
This refers to financial statements that have been examined and verified by an independent certified public accountant or auditing firm. These statements provide a clearer picture of the financial health of a business — and if you don’t have these, you could be leaving money on the table. Some of the benefits include:
- Increased credibility and transparency: An independent audit provides a stamp of approval on your financial statements. It assures potential buyers that the financials are accurate and fairly represent the company's health. This builds trust and makes the deal more transparent.
- Smoother due diligence: Buyers will conduct thorough due diligence on your company's finances before finalizing the acquisition. Having audited financials streamlines this process. The readily available, verified information saves time and reduces friction during negotiations.
- Potentially higher valuation: Audited financials can potentially lead to a higher valuation for your business. Buyers are more confident in the accuracy of your financials, reducing risk and justifying a potentially higher purchase price.
- Reduced risk of post-sale disputes: Audited financials can help minimize the chance of disagreements after the sale. With verified financials, there's less room for the buyer to challenge the financial health of the company you presented.
- Demonstrates strong internal controls: The audit process also assesses the design and implementation of key internal controls utilized in management’s reporting systems. A clean audit report shows the buyer you have a well-managed financial system, reducing their concerns about potential fraud or errors.
What questions to ask before selling your business
Selling your business is a serious decision — and asking yourself these questions before you get started can help guide you to reach your goals.
Do I know what my business is worth?
You need to understand the market to get full value for what you’ve built. A business valuation is a mix of art and science — and using an industry comparable is a helpful but imperfect way to get a dollar value.
How can I improve my business value?
You could enhance the value of your business by making some changes to your operations to increase efficiency.
What do I want from the sale of the business?
Your goals should drive your decision to sell. If you want to retire, then you need to ensure you’re getting enough from the sale to fund your retirement. The dollar value becomes less important
What are the tax implications of different approaches?
Different approaches have different tax implications. If you plan to sell the shares of your company, certain tax criteria must be satisfied up to two years in advance of the transaction to maximize the tax benefits of the sale. Therefore, it is important to discuss these implications with a tax advisor to understand which approach best meets your goals for the sale.
How a business sale works
The business sale process typically involves these six stages:
Preparation
- Valuation: Determine the value of the business. This involves assessing financial statements, assets, liabilities, market position, and future earning potential.
- Documentation: Prepare comprehensive documentation, including financial records, operational procedures, and legal paperwork.
- Improvement: Make any necessary improvements to increase the attractiveness of the business to potential buyers.
Marketing the business
- Confidentiality: Maintain confidentiality to prevent employees, customers, and competitors from learning about the sale prematurely.
- Buyer screening: Screen potential buyers to ensure they have the financial capability and serious interest in purchasing.
Negotiation
- Initial meetings: Meet with interested buyers to discuss the business, its value, and terms of the sale.
- Offers: Receive and review offers. Consider not only the price but also the terms and conditions, such as payment structure and any contingencies.
- Due diligence: Allow the buyer to conduct due diligence, where they verify the business’ financials, operations, and legal standing.
Finalizing the deal
- Negotiation of terms: Finalize the terms of the sale, including the purchase price, payment terms, and any warranties or representations. Each of these details will be included on the term sheet.
- Purchase agreement: Draft a purchase agreement outlining all terms and conditions of the sale.
- Approval: Obtain any necessary approvals from shareholders, regulatory bodies, or other stakeholders.
Closing
- Transfer of ownership: Complete the transfer of ownership, which may involve transferring licenses, permits, and contracts.
- Payment: Arrange for the transfer of funds. This can be a lump sum payment, installment payments, or seller financing.
- Post-sale transition: Provide for a transition period where the seller may stay on to assist the new owner with the transition.
Post-sale considerations
- Taxes: Address any tax obligations arising from the sale. This may include capital gains tax and other liabilities.
- Legal compliance: Ensure all legal requirements are met, including notifying relevant authorities and updating business registrations.
Technology, Media, and Telecommunications
Tax implications of selling a business in Canada
Calculating the exact amount of taxes or the percentage of tax you’ll pay on a business sale is not as easy as you might think. The final tax amount could depend on how the deal is structured, the Lifetime Capital Gains Exemption, GST/HST obligations, and other unique factors.
An MNP advisor can help you get a clearer understanding of how tax could impact your sale.
Take the next steps
Selling your business is one of the biggest decisions of your life. You don’t have to face it alone — support from a team of advisors can ensure you make the best decisions and achieve your goals.
Our team can support you at every stage of the process, from developing audited financial statements and helping with valuation, to post-acquisition tax planning and beyond. To learn more, contact MNP’s Reece Hiland at 647.943.4048 or [email protected].
Reece Hiland CPA, CA
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