March 1998 volume 2, issue 1 

Unhappily, they go bankrupt or are gradually wound-up; or happily, some are successfully sold.

How do you go about successfully selling a "family-owned business"? Why would you want to sell a successful business in the first place? There are many reasons and all are valid.

Some commonly encountered reasons for selling include:

• Ability to retire
• Having no logical successor in the business
• Wanting to provide liquidity in your estate
• Poor health combined with lack of an exit strategy

All of these reasons require you to convert some or all of your risk-inherent investment into a relatively risk-free investment.

A seller often finds the thought of selling confusing, but the common goal of most sellers is obtaining the maximum proceeds from the sale and paying the minimum amount of income taxes. Your accountant can be a valuable asset in achieving this goal and should probably be the first person you contact when considering selling your business. Be sure you have genuine commitment to selling your business before you take any steps toward preparing for a sale. A sale consummated is irreversible. Your accountant can help you assess whether there are alternatives to the sale procedure before exposing the business to the market.

Once you are satisfied no alternative to selling exists, the process must be properly planned and executed.

In the planning phase, your accountant provides the most assistance to you by:

• Preparing a valuation of your business
• Giving consideration to the break-up value and the earnings approach, determining the difference between the value of tangible, identifiable assets and the total value of your business, better known as "goodwill".

This should help you assess whether your expectations are realistic.

Based on the valuation, your accountant can:

• Determine how much of the proceeds you will keep from the Canada Customs and Revenue Agency if you realize your selling price
• Determine if you will be able to maintain your desired lifestyle from the investment of the net sale proceeds
• Review your company's balance sheet to determine if your company must be restructured and the tax cost of doing so. Restructuring is required for extracting redundant assets, retiring shareholder loans and removing personal assets such as cars and properties
• Determine the status of the company's capital dividend account and ensure the balance is paid out as a capital dividend on a tax-free basis prior to sale
• Review the company's assets to ensure the company is eligible for the lifetime exemption from capital gains of $500,000, taking whatever steps are required to cleanse the company should it be necessary. Little could be worse then discovering your sale is subject to full capital gains with no relief for your lifetime capital gains exemption.

Your accountant can also help you prepare the necessary information to be provided to the prospective buyer in order for him/her to make an informed decision. This information package for prospective buyers should include company history, description of current operation, nature of products or services, growth opportunities, market analysis, competition, customer profile, management organization, employee base, union details, and a summary of financial information past and futures with key assumptions relating therein.

The internal information in your business is a valuable commodity and your accountant can assist in drafting a required confidentiality agreement to protect this information.

Help is also available to determine and rank logical buyers for the company, such as:

• Suppliers wanting to vertically integrate their business
• Competitors wishing you reduce market place competition
• Any management employees wanting to explore their entrepreneurial talents.

Knowing the potential benefits and the value thereof to a prospective purchaser is critical in the negotiation process.

Sale of shares for cash may not be an option to you in the sale negotiations. Before entering the negotiations, you should be aware of the various tax and legal implications of an asset-sale versus a share-sale and what types of consideration other than cash you may be offered. Being aware of alternatives before nay negotiations is extremely important. These alternatives may include vendor-take-back, installment sale, earn-out arrangements, retiring allowances, management contract, consulting contract, serial sale capital stock exchange, and retirement compensation arrangements.

While negotiating, your accountant is the facilitator in the negotiating team and should make you aware of four matters along the way:

• Misinformation discussed in the negotiating process
• Effect that any negotiated alternative to the "cash for shares" may have on the amount and timing of the receipt of after-tax proceeds
• Suggestion of appropriate alternatives to the discussion as they arise
• Impediments to the representations and warranties given in the negotiations, including non-competition agreements and tax consequences of any proceeds.

All parties are responsible for ensuring the actual agreement of purchase and sale reflects the positive aspects negotiated. Being prepared will substantially relieve the stress of sale and maximize your net sale proceeds.

There is no substitute for sound financial advice during every stage of selling your family business. The issues and options can seem complicated, but a trustworthy accountant can help steer you past the pitfalls and contribute to a sale that is both personally and financially rewarding.

Wayne Phillips, CA, shares his knowledge and ideas with clients to help them succeed. Wayne enjoys the many challenges of helping clients achieve success through the cycle of change and firmly believes a problem is "only a solution waiting to happen".