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Another new year, another year closer to the next phase of your life. With the holidays behind us and a fresh calendar year ahead, now is the ideal time to ask yourself: Are you ready for your business exit?
If you’re not, you’re not alone. While many of our clients have ideas for how they hope to exit their business, few of them have a defined exit strategy — and even fewer have started to put that plan into action.
As a guideline, MNP tells clients that they need to plan their exit five years in advance to maximize the business’s value and minimize taxes. Having your business ready for sale does not mean you have to sell it. But if the opportunity presents itself, you should be ready to take it.
If 2020 has brought you into that five-year window, now is the time to explore your options, identify your preferred exit and establish a plan to make that exit a reality. To help you, here are three common ways to exit a business — and the key issues associated with each.
Put your business up for sale
When asked to describe their ideal business exit, many business owners envision a quick, easy and lucrative sale to an arm’s length buyer — but this type of exit isn’t as easy as it sounds.
For this option to reap the greatest rewards, you have to make sure market conditions are favourable at the time of sale and your business is set up to sell for highest value.
“The number one issue I see with selling a business is that clients come to us too late to maximize the business’s value,” explains James Kungel, MNP Tax Specialist.
Your company’s value hinges on a number of factors, including your business set-up, debt levels and tax structure. For instance, if your business’s success is solely dependent on the Founder’s presence in the company — say, the personal business relationships — it will be worth less on the open market. Similarly, without the proper tax structure in place, you could end up losing some of the value of your business.
That’s why you need to leave yourself enough time to get your business into the best shape possible before offering it for sale.
Transferring the business to a family member
Transferring your business to the next generation is another tempting exit strategy but, for it to work, you need to make sure the next generation is on board. If you pass the business into the wrong (unprepared or unenthusiastic) hands, the company you’ve worked so hard to grow could quickly decrease in value.
Assuming you did take the time to consult with your children and set them up for success, the next challenge becomes tax planning. Due to the fact that selling to a child is considered a non-arm’s length transaction from an income tax perspective, it has unique tax consequences that should be addressed well in advance of your retirement.
Selling the business to employees
Many employees would love the opportunity to take over the company for which they work; however most don’t have the capital to purchase the business outright. Fortunately, partial-or full-owner financing is a popular and viable option.
While this type of sale is a great way for you to ensure the business remains in familiar hands, it doesn’t always come with a clean break. You may be required to retain a hand in the corporation — or gradually phase out your exit — to ensure you receive the full value of your business.
Start planning your exit now
A business exit happens in one of two ways: voluntarily or involuntarily. In both cases, you owe it to yourself to determine the most appropriate exit long before an actual sales transaction takes place.
To learn more about how MNP can help you realize your ideal exit, contact an MNP Business Advisor.
Related Topics:Small Business; Entrepreneurs; Estate Planning; Family
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