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TaxMatters@EY - November 2012 - Selling your business? What you need to know before letting go - EY - Canada

TaxMatters@EY - November 2012

Selling your business? What you need to know before letting go

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First published in the National Post’s 30-Second Mentor
Derrick Phelps and Andrew Schaefer, Toronto

The decision to sell your company can be an emotional one. After all, you’ve spent years — likely the majority of your life — building a successful business. So it can be difficult to step away and let someone else take over.

But at some point, you need to start thinking of succession. And there are many things you should be aware of before going ahead. If you’re considering selling your business — today or in the future — then you’ll need to start planning now.

Let’s look at some of the points to consider before you embark on this journey.

Determining what it’s worth

Although many factors determine the value of your company, at the end of the day, your business is worth what another party is willing to pay for it.

Factors typically considered include current rates of return in the marketplace, growth rates, industry outlook, your organization’s management structure, your business’s financial and operational strength, and competitive advantages of your products or services.

Marketing your company to buyers

Every business has a story. Telling that story in a compelling way will act as a valuable sales tool and help you successfully sell your company. By strategically marketing your company’s opportunities and strengths, you’ll attract more interest and earn a higher value from the sale.

To do this, focus on your company’s history and reputation, highlighting your technological know-how, possession of key intellectual property and ability to realize potential synergies. Vocalizing strong customer and vendor relations and key product or service advantages won’t hurt either, but a strong future outlook will be the key to producing higher-than-average returns.

Do your due diligence

A potential buyer will want to perform an extensive investigation into your company before any transaction occurs. You need to be prepared before contemplating a sale.

In particular, you should ensure that all your financial and legal information is organized, analyze trends your company has seen in the past five years, and determine what information can be shared to help the buyer make an informed decision. A buyer may also want to review operations to help develop plans and identify operational issues.

Figuring out the appropriate type of sale

There are many options available to you when selling your company. Among the common types of transactions are asset sales and share sales.

Although it’s a more complex transaction, an asset sale offers more flexibility to the vendor and purchaser than a share sale. However, a share sale can give the seller a lower tax rate on the transaction and the option of transferring all liabilities to the buyer. But if you’re going with an asset sale, be aware of possible double taxation at the corporate and shareholder levels, and a higher asking price.If neither of these options appeals to you, then there is another transaction option available: a hybrid sale. Hybrid sales offer more comfort through security for the buyer and continuity for the seller.

Even if a sale is not in your short- or medium-term plans, structuring from the outset to facilitate a future business sale can make the end game a lot easier and less costly. When you’ve entered the marketing process, it’s too late for many strategies.

Considering potential buyers

Organizations acquire businesses for several different reasons.

A strategic buyer is looking for a business to establish or realize synergies, while a financial buyer may or may not have investments in your industry. The strategic buyer is looking to grow and capitalize by integrating other businesses, while the financial buyer acquires a company because the business (or industry) is attractive and profitable. Other purchasers include diversified groups and private individuals.

Regardless of your choice, there will be benefits and downsides with any type of buyer, so you need to decide what you want out of the sale before you make an informed choice.

Reviewing the process

Selling a business is a lot of work. To begin, you must first select a process, either a targeted or a broad auction. You then begin building a list of potential buyers to approach during the sales process.

Then your focus turns to marketing to draw in and approach interested buyers. When a potential buyer submits a letter of intent, it’s then time to perform due diligence and solicit offers before closing the sale.

Working with an advisor

It’s difficult to market your business if you don’t have a clear plan. That’s where an advisor can step in, to help you weigh the many options available and find one that is ideal for you.

Bringing valuable benefits and insights to the table, your EY advisor can guide you through the selling process and help you determine the right approach to effectively market your business and identify potential buyers. Efficient and experienced advisors can also help you facilitate diligence, negotiate offers, assist with closing and aid with legalities.

What’s next?

Whether you’re selling your business tomorrow or sometime down the road, it’s essential to start planning today. You have multiple factors to consider, so it’s important to weigh the pros and cons of each option before you go in to negotiate a profitable sale.

For more information and guidance on planning for the future of your business, contact your EY advisor.

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