Staging your
business for sale
kpmg.com/enterprise
Think of Deborah MacPherson as a stager for your business – the person who
comes in to make sure it looks as good as possible when prospective buyers
begin to pore over your books. “Selling a business is like your first time selling a
house,” says MacPherson, National KPMG Enterprise Tax Leader and tax partner
with KPMG in Calgary. Just because you’ve lived in it and made it into a home
doesn’t mean you know how to look at it from a buyers’ perspective. “Most
business owners only sell their business once,” she says, “and that means that,
while they’ve been really good at building the business, it doesn’t necessarily
mean they know how to sell it.”
Financial Statements
First and foremost, prospective buyers will want to look at your company’s financial health,
since they’ll likely base their offering price on some multiple of cash flow. So, can they rely
on your numbers? “All financial statements are not created equal,” says MacPherson. For
instance, you could produce your own set of financials but, she says, “the purchaser is going
to be a little wary, because there’s been no outside accountant involvement at all.” You could
enhance that creditability by opting for a Review Engagement: bringing in an independent
accounting firm to gauge whether your numbers appear to be reasonable. If you’re looking at
a potentially large sale price, chances are the buyer will expect you to have a full audit done,
with an accounting firm actually giving an opinion on your financial statements as to whether
they fairly present your business from a financial perspective consistent with generally
accepted accounting principles.
Questions/contact
Deborah MacPherson
National KPMG Enterprise
Tax Leader
KPMG in Canada
T: +1 403 691 8567
E: [email protected]
As for how much this will cost you, it depends on the scope of your business. “But without a
review or an audit, if a purchaser ends up asking more questions and wanting to know more
about your numbers, you may need to get an audit or review done at that point which may end
up costing you more after the fact. If your numbers aren’t credible or you have weak internal
controls, you might not get as much for your business,” says MacPherson.
Internally, you need to make sure that your accounting systems are appropriately matched to
the size and scope of your business. “There’s a lot of maintenance that goes into accounting,”
says MacPherson. If you’re still a relatively small shop, you might be able to get by with basic
accounting software and a part-time bookkeeper. But if your outfit has grown in size and
complexity, you might need to upgrade to a more sophisticated software package and bring
in a professional number-cruncher – an accounting manager, controller, or a chief financial
officer – to oversee not just accounts payable and receivable, but also inventory, work in
process, capital assets and reserves, and so on.
© 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Tax planning
If you’re going to sell your business, you’re going to pay tax. “So you want to try to minimize
the tax liability and maximize what goes into your jeans,” says MacPherson. But, she warns,
many tax-planning initiatives require a considerable amount of lead time – which means you
always need to be looking forward to a possible sale. “When we do tax planning and set up
how a corporate group should be structured, we look ahead to an exit,” she says. “You don’t
want to lock yourself in to an inflexible structure.”
For instance, when you sell shares in a qualifying business, you can get US$800,000 in
tax-free capital gains – but you generally must hold those shares for two years to qualify.
Similarly, stock options are a great way to remunerate employees or to bring family into
your business, says MacPherson, “but if you’re offering shares at below market, the new
shareholder will have to hold the shares for two years.”
Do you have an operating company that owns assets like real estate or investments
purchased with excess cash flow? If so, you might want to rethink that structure and
separate those assets from your business assets by transferring them to another
company. “If someone were to sue the business, they can only go after your business’
assets – and if you have real estate or other non-business assets within an operating
company, they can be exposed to creditors and may jeopardize your eligibility for
the capital gains exemption” Transferring these assets out is called “purifying” your
business says MacPherson. “If you try to do these types of transfers too close to
the sale, you may find that you can be limited in what you’re able to do on a taxeffective basis.”
If your company has expanded into the United States, and that wildly
successful new subsidiary is owned by the Canadian company, you could
risk your capital gains exemption, since it only applies to shares of Canadian
operations. MacPherson suggests you look at creating a separate company
for the US subsidiary that is owned by a holding company as opposed to
the Canadian operating company. “How you organize your corporate group
matters when it comes to this exemption, sale of your business and the
repatriation of profits,” says MacPherson.
Another major tax-related consideration is how you want to sell your
company: assets or shares or some combination of the two. “If you have
a family trust which you can use to multiply access to the capital gains
exemptions of your family members, then you probably want to sell shares,”
says MacPherson, “but a review of your specific facts will be needed”.
When we do tax planning and set up how
a corporate group should be structured, we look
ahead to an exit.
© 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
“The purchasers will almost always want to buy assets because they get an increase in cost
basis.” What’s that mean? “Say you have a manufacturing facility as a business asset and
the un-depreciated capital cost is US$5 million, but it’s really worth US$10 million today,”
she says. “With an asset purchase, the purchaser can buy that asset for US$10 million and
can write off the US$10 million in tax deprecation over time. If the purchaser buys shares,
it inherits the US$5 million cost base and can only continue to write off the asset from that
point. That US$5 million bump is results in tax savings for the purchaser over the long-run that
can be huge for them.” Bridging that gap between what you’ll want as seller and what the
purchaser will prefer is part of the sale negotiations.
It all comes down to timing. ”When you start to negotiate a transaction, too often tax is the
last piece,” says MacPherson. “If you’re about to sell, you can’t get two years back. But if
you do pre-sale planning, you know which way you want to sell and you’re talking that way
throughout your negotiations.”
As with selling your house, you want to do a
major clean-up before throwing open the doors to
potential buyers, making sure all your documents,
leases and contracts are in order – and that they
exist in the first place.
© 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Valuations, marketing and agreements
What is the right price for your business? You should consider getting a
professional valuation done of your business to see a range of possible sale
prices and understand what will drive value for a purchaser. Also speaking
to a corporate finance professional early can kick start the process
by identifying possible purchasers and how to approach marketing
your business. Working with a corporate finance professional who is
knowledgeable with a sale process is essential to translate your business
value to cash. As with selling your house, you want to do a major cleanup before throwing open the doors to potential buyers, making sure
all your documents, leases and contracts are in order – and that they
exist in the first place. Sometimes, smaller companies make verbal
deals with customers, without having them sign contracts, says
MacPherson. “But that makes it tough for purchasers because how
can they be sure those contracts are going to continue?” If your
operating company pays rent to a holding company, do you have
the appropriate amount of rent and lease agreement in place?
Some of this pre-sale tidying may not sound terribly exciting,
but the last thing you want is for a few dust bunnies under the
couch to kill the entire sale.
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Publication name: Staging your business article
Publication number: 132466-G
Publication date: July 2015