If the shareholder of an owner-managed business decides to retire without ownership passing to family members, a number of factors should be considered.
How will the business carry on? In some cases it can be sold to an employee or management team in whom the owner has confidence. Often, however, the prospective buyer will not have funds available to make the purchase.
In this case, the owner can set up a plan in which the current value of the business will be frozen at its fair market value and the prospective owners purchase the company for that frozen value over time.
This is often a successful succession strategy, and will depend upon determining a fair, objective value for the business.
The services of a Chartered Business Valuator can provide the foundation for a plan that ensures fairness for all concerned. Lipton LLP has announced the launch of Lipton Polisuk Inc. — Valuation & Litigation Support. Led by Steven Polisuk, Lipton Polisuk offers a suite of advisory services including business valuation, litigation support and forensic accounting.
Using a valuator, a fair purchase price can be determined, allowing the old and new owners of the business to obtain their financial goals.
Now, the company can begin to issue new common shares, which the new owners can obtain at a normal price to capture future profits. A portion of those profits can then be used to pay the original owners over time for the purchase of the company.
As always, stay organized, detailed cash flows will be necessary to make sure that enough money will be earned to fund the purchase.
Jeff Nightingale is the Senior Tax Partner at Lipton LLP, Chartered Accountants. Jeff has written a number of publications and speaks to a variety of professional and business groups, including the Canadian Tax Foundation, the Institute of Chartered Accountants of Ontario and The Law Society of Upper Canada. He has also completed the CICA In-Depth Tax Course as well as other advanced taxation courses and is a member of the Canadian Tax Foundation and the Society of Trust and Estate Practitioners.
