A Comprehensive Guide to Selling Your Business
DISCLAIMER
This information is intended for business owners in Canada and serves as general guidance only. Always consult with a qualified advisor before making any legal decision.
Introduction
Hey there, I'm Steve Parr, an experienced business lawyer from the beautiful city of Vancouver, BC. Today, I'm eager to explore the fascinating and often complex topic of selling a business. If you are an entrepreneur contemplating hanging up that 'for sale' sign on your business, this blog post is specifically tailored to assist you.
The Great Question: Why Sell My Business?
There could be several reasons behind your decision to sell – perhaps, the beckoning call of retirement, passing the torch to the new generation, or the thrill of diving into a completely different business venture. Whatever your reasons may be, it is essential to understand that selling your business isn't like selling a used car. There are key elements that you need to ponder, which can take a considerable amount of time, often two or three years, to get into place.
Asset Sale vs Share Sale: Choosing the Right Path
It's often more tax-advantageous to buy assets and sell shares, a sentiment encapsulated in the old adage 'buy assets, sell shares.' The reason for this centers on tax considerations associated with the goodwill of a company. In Canada, there's the lifetime capital gains exemption, which allows you to count up to 850,000 of the capital gain from your company sale as exempt from tax. It's worth noting that the transaction in an asset sale tends to be quicker as it involves less due diligence compared to a share sale.
Guidelines for Selling a Bakery in Vancouver
Here's a quick real-life example to illustrate this point: let's consider John, who owns a successful bakery in Vancouver. He's decided to retire and wants to sell his business. John has two options: he could either sell the bakery's assets, such as the ovens, baking tools, and the brand name, or he could sell his shares in the company.
If John chooses to sell the assets, the buyer would likely depreciate them over time, reducing the buyer's taxable income.
But if John sells his shares, he could take advantage of Canada's lifetime capital gains exemption and exempt up to $850,000 from his taxable income. The choice can impact not only John's taxes but also the speed of the transaction - an asset sale typically involves less due diligence, speeding up the process.
Asset sales also favour the buyer as they can “pick and choose” what they want, and avoid acquiring hidden liabilities attached to the Company shares.
Eligibility for Lifetime Capital Gains Exemption
Moving to our second point, you need to determine if the shares in your company are eligible for the lifetime capital gains exemption. The eligibility criteria are straightforward - your shares need to be in a Canadian-controlled private company, 90% of your company's assets should be actively used in your business operations, and the shares need to have been held by you or a relative for at least the preceding 24 months. Chat with us to confirm eligibility!
Example of eligibility
Let's consider "MapleLeaf Tech," a tech startup you founded three years ago. This Vancouver-based, privately owned company has developed an innovative weather forecasting app that has been gaining popularity. The business uses over 90% of its assets - such as software, servers, and office equipment - to keep operations running smoothly. You've held 100% of the shares since its inception.
Suppose you're contemplating selling your business and want to take advantage of the lifetime capital gains exemption in Canada. Given the circumstances, your MapleLeaf Tech shares check all the necessary boxes:
Canadian-Controlled: MapleLeaf Tech is a private company under Canadian control because it's based in Canada and entirely owned by you, a Canadian resident.
Actively Used Assets: The company's assets, from the software to the servers, are all being used actively in your business, exceeding the 90% requirement.
Duration of Ownership: You've owned your shares for more than the 24-month requirement.
So, in this scenario, if you decided to sell your shares in MapleLeaf Tech, they would be eligible for the lifetime capital gains exemption, providing you with a potential tax benefit.
Individuals vs Holding Companies
Let’s imagine Samantha owns a chain of popular yoga studios in Vancouver. She set up a structure with a holding company owning the operating company and herself controlling the holding company. This structure helped Samantha safeguard her personal assets from any liabilities associated with her business. But when it came to selling her business, she faced some tax complications. The issue? The lifetime capital gains exemption is not available to her holding company; it is only available to individual taxpayers.
The Role of Family Trust in Business Sales
There are complex workarounds that permit a HoldCo / OpCo structure to utilize LCGE. However, a viable and sometimes superior alternative to the holding company model is using a family trust. A family trust can own the operating company shares, protect from liability, and manage company distributions. It can also provide limited opportunities for income splitting, helping reduce the family's overall tax bill.
Furthermore, a family trust can facilitate the multiplication of lifetime capital gains exemptions. If you have beneficiaries who qualify for this exemption, each one could use their exemption, potentially multiplying the overall exemption beyond the standard $850,000 limit.
Remember Samantha? An alternative that Samantha could have considered is to use a family trust. A family trust can own shares in her operating company, serve as a safeguard against liabilities, and manage the flow of distributions out of the company. It can also provide limited opportunities for income splitting - a strategy that could help reduce the family's overall tax bill.
Selling a business is complex
Navigating the maze of selling a business is complex and often overwhelming. It's vital to be proactive and contemplate these factors well in advance. Knowledge, as they say, is power. So, familiarize yourself with the process, and surround yourself with a strong team of advisors who can help guide you through this journey.
Feel free to reach out if you need further legal guidance if you are thinking of selling your business. I hope this discussion enlightens and helps you make more informed decisions as you move forward with your business ventures. Wishing you the best of luck and a great day!
