Selling Your Business - Part 1

As Miles gently put down the phone and walked into the living room where his wife was sitting, he was as anxious as he was elated. Miles had just spoken to his friend and fellow business partner, Jeff. They had just received an offer to buy their company for $10,000,000.

Miles and Jeff had been negotiating the deal for months, but had nagging doubts that it would ever come together.

And here it was.

A Long Time Ago

When Miles was young his home was full of love and attention from his parents. The only thing that could cause his parents to argue and fight would be money, or rather a lack of it. To avoid causing his parents to argue, Miles quickly learned not to ask for money to play organized hockey, attend school trips, or anything else that might lead to argument between his parents.

Miles also got used to his parents not being able to come to any school events. At any time, one, the other, or both had to work extra jobs. Time off was hard to find. Seeing other kids with their parents upset Miles, and it became another reason for him to hate school.

Eventually, his parents divorced, and Miles went to live with his dad. He rarely saw his mom, as she moved to a different city. To make matters worse, money was even tighter now. Like most people, Miles often fantasized about financial freedom - what it would be like to not have to worry about money.

He just never thought it would actually happen to him.

Although Miles tried his best at school, he was an average student. Before he graduated, Miles met with the career counsellor to explore his employment options. Unfortunately, he was discouraged from attending any post-secondary school due to his dyslexia and limited financial means. Miles responded with “if no great career options were available to me, maybe I’ll just become a career counsellor”.

The counsellor asked him to leave and not come back.

Miles quickly regretted saying that to the career counsellor, but he was tired of people feeling sorry for him, not expecting much of him.

After he was done school, Miles bounced around a variety of jobs. He just couldn’t find anything that he was truly passionate about. When Miles started working at ZPR Welding, he thought it might be another dead end job - until he met Jim, the owner.

Jim took a liking to Miles and showed him everything he knew about the welding business. It was easy to see why Jim liked Miles so much; Miles was Jim’s most reliable and hardest working employee. When it came time for Jim to retire, he was more than willing to help Miles finance the purchase of the business.

Back to the Present

Miles thought… “$10,000,000…someone is willing to give me $10,000,000.”

Miles believed that $10,000,000 was a fair price for their business. Both he and Jeff agreed that they would take the deal.

But as happy as he was to accept the deal, Miles had some concerns.

While Miles grew up learning to accept not having some of the luxuries his friends were accustomed to, Miles’ spending habits grew alongside his business. Whenever Miles bought something that was extravagant, he justified it. He would whisper to himself “I grew up with nothing, I deserve some luxury, my parents want me to enjoy success”.

In the sale agreement, Miles had agreed to continue working for five more years. After that, he planned to retire completely. He wondered if the money would actually be enough to support the lifestyle to which his family had become accustomed.

After splitting the $10,000,000 with his partner, utilizing the Lifetime Capital Gains Exemption and paying taxes owed, as well as paying off some debt, Miles would have about $2,000,000 left.

The Small Business Capital Gains Exemption

The small business capital gains exemption is a useful tax planning tool for business owners when they go to sell their business.

As of 2019, when individuals sell their business, they are granted an $866,912 capital gains exemption. In other words, if they sell their business for $1,000,000 and the cost to start their business was $100,000, they would have a capital gain of $900,000; however, with the exemption, they would only be taxed on $33,088 ($900,000 - $866,912). If a couple owns the business, they would qualify for $1,733,824 ($866,912 x 2). Determining if you qualify for the Lifetime Capital Gains Exemption is a complicated process and should be discussed with your accountant and/or lawyer, but generally there are four criteria:

• Your company must be a small business corporation (SBC) at the time of sale.
• It must be a share sale of your business (sole proprietorships and partnerships do not qualify).
• More than 50% of the business assets must have been used in an active business in Canada for 24 months prior to the sale.
• The shares must not have been owned by anyone other than you or someone related to you in the 24 month period before the sale.

In this example, it’s unlikely that Jeff (Miles’ business partner) would’ve agreed to Miles’ wife being part owner of the business. Although it’s helpful for both spouses to be co-owners of a business when the business is sold, it can also lead to complications if there is a breakdown in the marriage.

Miles was only 55 and he wasn’t sure if $2,000,000 would be enough to support his family’s lifestyle. Even though the business made well over $400,000 a year, Miles and Cheryl always had a balance on their lines of credit and credit cards. Once the business was gone, there would be less money coming in.

There was also the issue of their son Brett, who was diagnosed with cerebral palsy at an early age and required intensive care. Miles and Cheryl wanted to ensure that Brett would be financially secure and well taken care of after his parents were gone.

Miles had many questions:

• how could they minimize taxes;
• how should this money get invested;
• what can they do to protect their son; but mainly…
• who could they trust?

Miles had never come across a more important decision in his life. It was crucial that Miles make the right decision – the future of his family depended on it. Miles knew he didn’t have all the answers, but he didn’t know who he could talk to for advice.

What would his next step be?

What would you do if you were Miles?

Up Next

We’ll discuss what steps Miles took to set himself up for success – and who he relied on for sound advice.

Thanks for reading,

Brent

Brent Misener is a Financial Advisor with Raymond James Ltd. The views of the author do not necessarily reflect those of Raymond James. Statistics and factual data and other information are from source Raymond James Ltd. (RJL) believes to be reliable but their accuracy cannot be guaranteed. Information is furnished on the basis and understanding that RJL is to be under no liability whatsoever in respect thereof. It is provided as a general source of information and should not be construed as an offer or solicitation for the sale or purchase of any product and should not be considered tax advice. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. Securities-related products and services are offered through Raymond James Ltd., Member - Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a Member - Canadian Investor Protection Fund.