Business valuation haggles, tax complexities, family disagreements, funding challenges, and legal wrangling are the inevitable right of passage when retiring from your business. Because each directly impact your 5 key exit goals:
1. Realize or exceed your asking price.
2. Less tax obligations in retirement.
3. Equip your successor to succeed.
4. Expedite the sale or transfer of your business.
5. Secure your family wealth.
So, make them achievable by tailoring and implementing your exit strategy to include some or all of the following strategies:
1. Business exit value
Your business is usually the largest piece of your family wealth. So, it’s especially important to maximize the return on this investment. Explore the strengths and weaknesses of your business and put plans in place to make improvements. This will likely increase your profits, a key metric used to value your business. And the resulting improved efficiencies and customer engagement presents a better value proposition for prospective buyers.
Do an independent valuation to determine the extent of the gap compared to your valuation and the likelihood of you achieving your desired price. Gear your improvement plans to achieve or exceed your valuation or the independent value, whichever is higher. And consider the timing of your sale. Selling or transferring your business in an economic downturn will lower its value, irrespective of your success at improving its bottom line.
2. Tax planning
Not planning will likely lead to costly and unexpected tax issues. Exacerbated by you not qualifying for available exemptions. So, decide early in your exit considerations whether to sell externally, or transfer your business to family. And whether to sell the business as a corporation, sole proprietorship, or partnership. Or whether to sell off individual assets. Selling your corporation gives you access to up to $883,384 Lifetime Capital Gains Exemption (LCGE) [applicable in Canada only] should your company meet the qualifications of a Qualified Small Business Corporation (QSBC).
And transferring to family gives you the option of an Estate Freeze, that caps your tax liability at the “frozen” value of your shares in the business, while transferring the growth in value to future generations. You will realize the benefits of this option by implementing mechanisms to ensure your “frozen” (preference) shares continue to meet your needs during retirement. In a deemed disposition of your shares, say on your passing, your estate may utilize your available LCGE, providing your company meets the QSBC threshold at the time of disposition. Another benefit is your ability to plan upfront the most efficient means for your family to payout your estate tax liabilities on your passing.
Selling off the assets individually or an unincorporated company foregoes any of these tax planning benefits.
3. Successor readiness
Your successor will be one of a family member, management (Management by Buy Out) or an external buyer. Position them to have the best opportunity to succeed when you ultimately step away. Your assessment of the strengths and weaknesses of the business and steps-in-progress to improve them will prove invaluable to your successor. Opting to stay on in a consultative role for an agreed period after the sale will be very welcomed. And ensure the retention of critical staff and customers when your successor takes over from you.
Your willingness to help your successor “hit the ground running” and replicate the quality service expected by customers, will undoubtedly make for a better sale and funding negotiation.
4. Expedited sale of the business
The lead time to close the sale of your business once a serious buyer surfaces will depend on the outcome and duration of the due diligence by both the buyer and their bank. The longer the due diligence, the less likelihood of you obtaining your asking price and ultimately closing the sale. It is in your best interest to limit the time spent in this loop.
So, ascertain and provide in a timely manner, the information your prospective buyer and their bank requires to satisfy themselves that your business can deliver the value proposition you project into the future.
5. Asset protection after the sale
This is the final and arguably most important step to realizing your successful business exit while transferring wealth to your next generation. The sale of your company means the immediate removal of the veil of protection you previously enjoyed over your personal assets. The buyer may opt to go after your assets, including your home and the purchase price received, to remedy any misrepresentations they deem you made during the sale process. And this could derail your plans to ride off happily into the sunset. You can pursue various asset protection strategies, in line with your circumstances. There are provisions you can include in your sale agreement with the buyer, with varying impact on the negotiations and price:
- Non-recourse contracts, which frees you of any liability at the cost of accepting a lesser asking price than you desire.
- Liability caps, which limits the buyer recourse to an agreed limit, available in escrow, should there be undiscovered liabilities.
- Indemnity baskets, which limits the buyer recourse to an aggregate of undiscovered liabilities exceeding an agreed threshold.
You may opt to transfer your assets to an offshore asset protection trusts, in Barbados for example.
Representation and Warranty insurance is another option, albeit relatively new and still expensive. As with all insurance policies though, the devil may be in the adjudication. So buyer beware.
Realizing your business exit goal is your just reward for the 20 to 30 years you invested in your business. Your business exit strategy, comprising some or all of the above suggestions is achievable in 3 to 5 years. So, implementing a plan today is imperative, especially if you are closing in on the retirement window you wish for yourself.
Effectuation Optimum develops these and other strategies for business owners to help them realize their goal of exiting their business on their terms while passing on their wealth to the next generation. Business owners who opt to partner with a professional will position themselves to systematically overcome the various obstacles exiting one’s business may present.