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Most professionals who own their own firms intend to sell their practices one day to fund their retirement or sometimes, a second career. To maximize the value you receive for the practice you’ve built through years of hard work, careful transition timing and planning are needed. Here’s how to get started.
A transition or exit plan is a documented action plan setting out the specific steps and tasks required to successfully exit your practice. For a professional firm this typically includes the following components:
Developing this plan helps you think about your future goals and how to operate your business to achieve them. The success of your transition will be a direct result of the timing and execution of this plan. Since two components – structuring the practice and building its value – may require a number of years to put into place, it’s essential to allow sufficient time to properly address them.
Essentially, there are two options for selling a practice: a sale of assets or shares. While purchasers generally prefer to buy assets because there are tax advantages and fewer liability issues, most professionals prefer to sell shares because this allows you to claim the lifetime capital gains exemption to shelter up to $866,912 (for 2019) of the gain from the sale. This exemption can also be multiplied when family members hold equity shares and participate in the growth of the practice.
In order for a sale to be eligible for the lifetime capital gains exemption, a number of conditions must be met, including the following.
Also, for a period of 24 months prior to a sale, at least 50% of the corporation’s assets must be used principally in an active business or to finance a connected active business. Since it is common practice to leave retained earnings in a corporation in order to defer taxes, nonactive business assets may need to be moved out of the corporation in sufficient time to ensure the capital gains exemption is available.
When assessing a business, the more value that prospective purchasers find, the higher the sale price is likely to be. Focusing on the following strategies can help to reduce liabilities, increase efficiency and enable you to realize higher returns
Typically, you may involve a number of different advisors in planning for the sale of your practice, such as a wealth management advisor, lawyer, insurance broker and practice broker. Be sure that an accountant experienced with professional practices is included as a key part of this team. This individual can help to ensure that your business structure, business value enhancement strategy and retirement, estate and tax planning are all properly aligned to achieve your goals.
By planning now for future transition, you can significantly increase the value of your practice and be well prepared for the most appealing opportunity when it arises.
To learn more, contact Brandon Gilbert, BMath, MAcc, CPA, CA, Partner, at 519.679.8550 or [email protected]
Client Groups:Private Enterprise
Related Topics:Valuations; ExitSMART™; Dentists; Doctors; Lawyers; Small Business; Entrepreneurs; Selling a Business; Retirement
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