October 1, 2022
SALE/PURCHASE OF A BUSINESS
SELLING ASSETS OR SELLING SHARES?
In a special collaboration with Guylaine Ure – Sunbelt Canada
Whether it’s because retirement is on the horizon or you’re looking to embark on a new adventure, selling your business is a decision that requires careful consideration. Depending on your situation and the history of your business or office, two main options are available: selling assets or selling shares.
Selling shares applies to incorporated businesses with one or more shareholders, each holding subscribed shares derived from the corporation’s share capital. It is somewhat the soul of the business that is being parted with. On the other hand, selling assets is limited to what is often called the “business assets”: real estate, machinery, office equipment, vehicles, customer lists, etc. Both approaches come with their share of advantages and risks.
PART 1 – THE SELLER’S PERSPECTIVE
We will address the buyer’s perspective in the next edition in the context of acquiring a business. Let’s now focus on the seller’s perspective.
Selling Shares
“It’s usually the most interesting option for sellers in many respects,” says Guylaine Ure, a certified business broker at Sunbelt Canada. “This choice allows the business to continue as if nothing happened; only the shareholders change.”
The former shareholders will share the proceeds of the sale in the form of a capital gain. Since the current tax exemption limit on the gain is currently $892,000, sellers of shares in a taxable business often benefit from these proceeds, tax-free. Obviously, when selling shares, you are also selling the history of the business (reputation, order books, bidder privileges, recurring supply or procurement contracts).
A share sale promotes the continuity of the business. Moreover, it can attract investors who may want to be shareholders but not actively involved in the business. Opting for a share sale can also favor means of financing the acquisition of a business, especially if it has a certain notoriety or customer base, a history of good practices, and sound financial management.
Selling Assets
For an incorporated business, selling assets generally signals the end of operations.
Opting for the sale of assets as an approach to selling your business is a simpler exercise, requiring much less preparation, but it results in a generally less interesting net sale product considering the tax impact.
After the transaction, shareholders will essentially only have to manage the resulting asset, i.e., the sale price after the repayment of debts and taxes. They will only have to close their operations, terminate the lease, close their employer and sales tax accounts, etc. After that, they will only manage a bank account. In such a case, shareholders will share the net proceeds in the form of dividends paid in one or more installments over time, taxable again. Both approaches come with their share of advantages and risks.
A share sale requires preparation
Those who have done it will tell you: that to sell your business (even an individual one), you need to plan in advance. Will it be a family takeover, one of your employees, or someone from outside?
“Some entrepreneurs know their operations inside out but have never taken the time to put the details on paper,” warns Ms. Ure. “In the case of a transition to a new buyer, will they have access to your processes, or… do they only exist in your memory? Are your books up to date? If you do your own bookkeeping, know that a financial institution, as part of financing, may require an accountant to produce them. On the other hand, selling assets requires much less preparation and planning. Finally, even individuals operating a sole proprietorship can benefit from this approach provided they incorporate at least two years before selling.
BUSINESS LAW EXPERTS ADVISORY BOX
In accounts receivable recovery, communication plays an essential role. An unpaid account is not necessarily a sign of bad intentions on the part of your client. Several reasons could explain a delay or a lack of payment. To understand the true reason, a call to your client can often help.
The objective you should keep in mind is to resolve the situation as quickly as possible and, whenever possible, to preserve the business relationship you have with your client, but not at the expense of your company’s finances.
In business, as elsewhere, it’s important to remember that… good accounts make good friends!
WARNING: The information contained in this article, while of a legal nature, does not constitute legal advice. It is recommended to consult with a professional for advice that will address your specific situation.