While many entrepreneurs relish the challenge of working long hours and triumphing over new market challenges, the truth is that all that effort can be undone by unfavorable, unforeseen circumstances. Whether it’s poor health, a recession or mounting debt obligations, there are a number of factors that can threaten your business’s ability to operate as a going concern. If you don’t have a good exit strategy in place, then you might end up walking away from years of hard work with nothing to show for it.
For most business owners, the ideal path to realizing their investment is through a sale on the open market. But if you think that a recognizable brand name is enough to ensure a quick sale then think again. Any investor worth their salt will assess your operations in minute detail before agreeing to a purchase. If you want to be able to stand up to this sort of scrutiny then you need solid financial reporting processes in place.
In order to determine an accurate valuation for sale purposes, you need to have a firm understanding of the assets and liabilities of your business. This includes everything from machinery and vehicles to brand trademarks and other intellectual property, while your liabilities will cover bank overdrafts and long-term leases.
While tallying up this list of items might sound simple in theory, in practice the task of assigning accurate values can be quite complex especially when different methods of depreciation are applied. This task is made even more difficult for sole proprietorships because assets are often used for both personal and professional purposes by the business owner. A final issue to consider when it comes to valuation is goodwill. Although you might believe that the reputation and contacts you’ve developed over the years entitle you to a certain sum, you must be able to show this value in light of your current operating performance.
With the preparation of financial statements, you can work to assist in answering many of these concerns. Goodwill is calculated on normalized earnings which may or may not be identical to the net income reported in the financial statements. A notice-to-reader prepared financial statements do not provide assurance to the potential purchaser that the income is reported properly. Three years of financial statements which have either a review engagement or audit report will provide much more comfort to the potential purchaser than a notice to reader financial statement.
Prove Your Professionalism
As a business owner, it’s easy to forego the regular preparation of financial statements in favor of less formal bookkeeping procedures. But while sloppy invoicing and inconsistently updated payables/receivables ledgers might seem adequate from a management perspective, for a prospective buyer, these issues serve as a clear deterrent.
Before taking over your business, a new investor will likely ask to check your revenues, expenses, and overheads over the last several fiscal years. This is just a part and parcel of basic due diligence. So if all you have to show are miscategorized entries, non-reconciled bank statements, and inaccurate ledgers then this will reflect your lack of control over your business.
Ideally, you should be able to produce consistent, clear and accurate financial statement for at least the past three years.
There are also a number of tax considerations that go along with a business sale. First, your business structure will define how your profit is taxed. The sale of assets may result in recaptured depreciation which is taxed at a higher rate than capital gains. The sale of shares of a company will be subject to capital gains tax. The sale of shares of a Canadian Control Private Corporation (“CCPC”) may be eligible for capital gains exemption. This exemption is currently indexed to inflation and the current exemption limit is $842,252 for 2018. Again, if you want to minimize taxes and achieve the best outcomes in these scenarios then you should seek professional help prior to listing your company for sale. The accountant can review the financial reporting that you have in place.
As a full-service accounting firm operating across Canada, Gary R Landa, CA Professional Corporation can guide you through the business sale process. From preparing notice-to-reader financial statements, review engagements or even audits to organizing your books and accounting systems in preparation of a purchase or sale of your business, we offer a range of services to business owners at all scales.