Earlier in my banking career I might have dismissed them as unqualified.
Two young guys in their late 20's were trying to buy out a more seasoned businessman from his well-established operation. The outgoing shareholder was tired of the long hours and ready to cash in.
The two new guys, a couple of his senior employees, had really nothing in terms of assets. I gave them each a visa card, which they quickly charged up to the limit to generate the cash for the very modest down payment. (That part is more than a bit sketchy in the bank world, but honestly the whole thing was very non-traditional).
I mean, really, they had almost nothing, other than a good operating knowledge of the company and a lot of savvy. They needed to borrow about $500,000 from us to help buy out the other guy, plus a seasonal operating loan of another $250,000.
I couldn't just dismiss them out of hand because: No. 1 – the company they were buying had absolutely stunning cash flow; and No. 2 – the outgoing shareholder was willing to guarantee a small part of the debt, and stay on for a year as an interested/paid consultant.
As you might imagine, I had to kind of hold my tongue right way in order to see a deal there, and I must've prayed really hard as I sent along the application to the higher-ups for approval. To their credit, the RBC credit guys saw what I saw, and approved it, commenting on the ongoing strength of the operation, a true cash-generating machine.
I am very proud of this loan.
They paid it off rapidly, (one of our lending conditions) and have grown into a substantial employer now.
A potential business sale
As they say: "Any business is for sale at the right price." But in order to qualify for the tax breaks we have been discussing, your corporation must have more than 50 per cent of its assets used in an active business carried on primarily in Canada during the 24 months immediately before the sale of the shares.
As we pointed out last week, this can allow for substantial, once-in-a-lifetime tax breaks for outgoing shareholders.
Since you never know when an interested party may offer to buy your company, it is prudent maintain your operating company in a constant state of purity. There is no religious connotation to the term "purity" here, unless you are a congregant in the Church of the Most Holy order of Taxium Minitorious.
In any event, just in case you get a tempting offer out of the blue on your business, keep your company from being dominated by passive investments.
Consider transferring enough non-active assets to a separate company. You don't need to necessarily move all of these assets over, but enough to qualify for the tax break, and for the minimum of two years before the sale.
Passive assets to consider transferring include real estate, investment portfolios, life insurance policies, etc.
Buyer's tax considerations:
Some would-be buyers may prefer to acquire your assets rather than shares for their own tax reasons. This gives them tax-deductible write-down opportunities on the physical stuff they buy from you, but makes the sale less attractive to you, due to the likelihood (if you are selling at a gain) that you will face a tax bill when selling depreciated assets at a profit.
These sorts of competing buyer/seller tax issues are often settled in the offer price one way or another.
In addition, a small army of qualified accountants with their smoking calculators are ingredients not to be ignored.
Put another way, this is not a job for the backyard bookkeeper. With all due respect, hire a bonafide professional and get this done right.
This is your life's work. You are in the driver's seat. You have made your idea work, and turned it in to jobs and positive cash flow, so don't give in to the requests of the buyer too readily.
Factors that influence the value of your company:
Consistent, recurring, growing cash flow;
Certainty of cash flow;
Favourable industry dynamics;
Management team;
Growing and diversified customer base;
Sustainable competitive advantage;
Price sensitive commodity product/proprietary offering;
Barriers to entry;
Public/private/scale;
Credit Conditions (interest rates and appetite to lend).
The numbers:
Timing is important for both buyers and sellers.
Buyers should beware of sellers who, after several years of mediocre performance, have a string of good years and then want to sell based on these perhaps temporary increases in cash flow.
Sellers will want to avoid a deal just after a temporary dip in an otherwise stable series of chubby cash flow periods.
The strategies discussed in this article are complex and there are numerous traps and pitfalls, both from a tax and legal perspective.
Consequently, we advise you to get both legal and tax professionals involved to ensure you accomplish your goals and avoid unnecessary headaches.
Mark Ryan is an advisor in Prince George with RBC Wealth Management, Dominion Securities (member CIPF) and can be reach at [email protected], or 250-960-4927.
