Entrepreneurs and business owners may leave their businesses for various reasons, including significant life changes, pursuing new opportunities, financial uncertainty, or personal reasons. However, selling, closing, or transferring a business to a new owner requires comprehensive planning and precise execution. Selling a business is a complex process that requires careful planning and expert guidance.

This blog post will provide an overview of key considerations when selling a business in Ontario, including the sale structure, valuation, due diligence, and legal and tax implications.

Preparing a Business Succession Plan

Business owners should prepare a comprehensive succession plan, as this can help manage the transfer of ownership to someone else. Entrepreneurs should also consider preparing a succession plan even if they intend to wait to sell or leave the business. A succession plan can outline a business owner’s goals and vision for the change in ownership and address matters such as timeframes for the transfer and training for the new owner(s).

Understanding Your Options

Deciding to sell a business is the first step in a longer process that may include utilizing professional services, valuing a business, negotiating a sale price, and finalizing the sale.

Before embarking on the sale process, business owners should consider the best structure for their transaction, each with their own tax implications, liability considerations, and impacts on the business’s continuity. There are generally two options when selling a business:

• Asset Sale: An asset sale involves selling individual business assets, such as equipment, inventory, and intellectual property. The buyer assumes only the purchased assets and liabilities. This type of sale may result in capital gain or loss on the net proceeds (sale price – purchase price).
• Share Sale: A share sale involves selling the corporation’s shares and transferring ownership of the entire business, including assets and liabilities. Under a share sale, capital gains tax may be paid on the shares sold. However, it is essential to note that if the business was started by the same person selling it, the purchase price will be $0.

For sole proprietorships and partnerships, a business may sell its assets but may not transfer or sell the business registration. In other words, the new owner must set up new accounts once the former have been closed. Accordingly, the person selling the business must settle any unpaid accounts, and the new owner is free to choose what to name the business, how to structure it, and how to register the new business. Corporations, on the other hand, may be sold or transferred to another owner directly. However, this process can be highly complex, so working with an experienced lawyer and/or accountant is important to ensure the process proceeds without issue.

How to Value Your Business

Once the decision to sell a business has been made, it is important to accurately value it to set a realistic selling price. The method chosen depends on several factors, and selecting the one that best fits your needs requires a comprehensive understanding of the business and the industry.

Different valuation methods can be used, as set out below.

Income-Based Valuation

An income-based valuation approach values a company’s ability to generate future income. This may also be referred to as an earnings or cash flow approach. This method is typically used for businesses with intangible assets that produce revenue. The value is determined by calculating a company’s estimated future earning potential. Here, a capitalized cash flow may be used when the income is expected to remain stable, with a discounted cash flow approach to be used when a company’s cash flow is anticipated to fluctuate between years.

Asset-Based Valuation

An asset-based valuation approach is typically used by a business that holds the majority of its value in its assets. It may also be used to value a business that is no longer a going concern. The calculation under this approach involves valuing the company’s assets less any liabilities. An operating business may use a net asset approach, while a liquidation method approach may be better suited to a business that is not a going concern.

Market-Based Valuation

The market-based valuation approach values a business based on its market price – in other words, the price that a reasonable buyer would pay for it in an arms-length transaction. This method utilizes a comparative approach that considers how the market values companies and considers the sale of similar businesses. However, depending on the unique characteristics of the industry in question, adjustments may be made to the value. A public company will compare the values of other publicly traded companies, while a comparable transaction will consider multiples paid in actual transactions of comparable businesses. This method can be thought of as similar to the process used to buy real estate, as a realtor will typically comprise a list of comparable properties to determine the value of a similar property.

Finalizing a Business Sale

It is important to consider whether the sale of the business will result in a realization of capital gains due to the disposition of qualified farm property or qualified small business corporation shares. If so, the business owner may be eligible to claim a capital gains deduction. It is also vital to close the business’ GST/HST account with the Canada Revenue Agency (CRA) before the sale is complete. While the purchaser of a business will generally be required to pay GST/HST on the sale, the parties may mutually elect to avoid sales tax by completing the necessary paperwork.

A contract or other legal documents are typically required to finalize the sale of a business. Having a skilled business lawyer work with you throughout the sale process can ensure that these documents are correctly prepared and can help mitigate misunderstandings and potential legal issues down the road.

Contact the Skilled Business Lawyers at Willis Business Law for Guidance on Business Sales and Acquisitions

At Willis Business Law, our trusted and knowledgeable business lawyers draw upon their extensive experience to help business owners and employers seamlessly navigate a variety of business law matters, including mergers and acquisitions, the creation of business structures, contract negotiations, and debt financing. To speak with one of our team members regarding the sale or purchase of a business, contact us online or by phone at 519-945-5470.