How do I develop an exit strategy for my business?

Determine if you should sell your business

Any decision about your exit plan—including its timing—comes down to your unique situation and goals. There are three important questions to ask that can help you assess whether now is the right time to plan an exit.

1. How much is my business worth today?

Understanding the current market value of your business impacts any decision you make regarding your future, and getting a proper estimate is a complicated task. The timing of your next steps may change depending on your expected price and the fact that selling your business can sometimes take 9 to 12 months. Working with a professional can help ensure that you don’t overestimate the value of your business or underestimate its potential for future growth.

2. Is my business in demand?

Consider the demand for businesses in your sector and privately-held businesses overall. The Canadian marketplace has seen significant M&A activity over the last 6 to 9 months that has created opportunities for both buyers and sellers. Market conditions can change quickly, so it’s important to understand how the cyclical nature of the M&A landscape could affect your sale prospects.

3. What are my personal goals?

Our personal or financial goals help determine when to exit and your best options. For example, the decision to move on to the next chapter of your life as soon as possible can require more funds upfront, so it’s important to understand the timelines associated with various exit strategy options.

Consider common exit strategies

1. Transition your business to a family member

Consider transferring ownership or control of your business to a family member if you want it to continue in its present form but would like some relief from the mantle of responsibility. With Bill C-208 now law and in effect, you may be able to transition your family-owned business, with prudent succession planning, to the next generation without the adverse tax consequences that currently apply.

To ensure a smooth transition, it’s important to carefully identify and train your successor to handle both short- and long-term decisions and responsibilities.

Transferring business ownership/control to a family member is often part of a succession plan, though this option may fall short of your needs if you require a more rapid exit or payout.

2. Sell your business to your existing partners or employees

A management buyout or sale to an existing senior team member allows individuals familiar with the culture and processes to acquire the company and take control of ownership. This provides continuity in your business and can mean a smoother transition that requires less time to transfer your day-to-day responsibilities. However, selling to your employees can result in a lower sale price and may take longer to fully realize on the funds from the sale, although ultimately the sale price will be dependent on what is happening in the market.

3. Sell your business on the open market 

If your business is profitable and demand is strong, it could draw potential buyers and sell for optimal price. This option requires grooming the business for sale, including making sure that your financial records and asset inventories are current and your processes are adequately documented.

Understand the tax implications of selling your business

The tax implications of stepping away from your business will depend on how you exit. For example, if you choose to hand down your business to a family member—whether through a sale or a gift—the business is deemed to transfer at fair market value, which means that you’ll be taxed on capital gains based on the business’ value. There are exemptions and strategies—such as an estate freeze—that can help you make the transfer as tax efficient as possible, though it’s crucial to plan these in advance of the transaction.

If you’re opting to sell your business, you’ll want to consider the after-tax return on the proceeds of the transaction. Depending on the nature of sale—whether you’re selling only parts of the enterprise, the entire business or if you’re looking to only sell an equity interest in the business—there may be capital gains exemptions and tax deferrals available to you. If you’re thinking about including contingent or earn-out components to the sale of your business, there may be other tax implications to consider.

There are also tax considerations associated with liquidating your business assets. The proceeds of an asset sale will be used to repay outstanding debts owed to creditors, and the remaining proceeds, depending on the ownership structure of your business, may be distributed to you as taxable dividends.