Transferring Ownership Of Your Business: What You Need To Know
Originally published on Jan 31, 2017
Changes in your business structure can be disruptive when you don’t know the right steps to take. All businesses face changes related to ownership and management.
Being prepared for these and other shifts can protect your interests and ensure a smooth transition for the entire organization.
Business owners should have the plans in place to navigate changes in ownership. Knowing how to transfer ownership of your business prevents unwanted issues while maximizing the benefits of the transition.
What’s Your Business Worth?
Companies must determine the market value of their business in advance to ensure that a fair market price is offered and received.
The market value of any business can be determined by considering all of the existing assets held by the organization along with the potential for future growth.
The current level of revenue and profit must also be considered. In many cases, a company’s reputation within its industry can also influence its overall reputation.
Determine the Value
There are many companies who specialize in determining the value of a business when you are considering selling your business. Many accounting firms also provide this service and it is recommended before you begin a business succession plan, you first determine the value of the business and the implications to you as the seller.
How is the Value of the Business Determined?
When it comes to selling a business, determining its value is a crucial step that involves a combination of financial analysis, market comparisons, and understanding the unique elements that contribute to the business’s worth. Here’s how the value of a business is typically assessed:
Financial Performance
The financial health of a business is often the starting point for valuation. Key financial documents such as income statements, balance sheets, and cash flow statements over several years are analyzed to understand the profitability and financial stability of the business. Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a commonly used metric to evaluate a company’s operating performance. Another approach is to use the net profit or the adjusted net profit, which provides a clearer picture of the business’s actual cash-generating ability by removing any one-time expenses or personal expenditures that may not recur under new ownership.
Market Comparisons
Another method to determine the value of a business is by comparing it with similar businesses in the industry that have been sold recently. This approach, known as the market approach, looks at the sale prices of comparable businesses to estimate a fair market value. Factors considered in this comparison include the size of the business, its market share, the health of the industry, and geographic location. This method helps in understanding what potential buyers are willing to pay for similar businesses.
Asset Valuation
The asset-based approach looks at the company’s total net assets. This method is particularly relevant for businesses that are asset-intensive. The valuation involves calculating the current value of all tangible and intangible assets, subtracting any liabilities. This approach can provide a base value or “floor” value for the business, ensuring that the assets alone justify the price.
Future Earnings Potential
For many buyers, the future earning potential of a business is a significant factor in its valuation. This approach, often referred to as the discounted cash flow (DCF) method, involves forecasting the future cash flows of the business and discounting them back to their present value using an appropriate discount rate. This method can be very subjective as it relies heavily on assumptions about future growth rates, market conditions, and the stability of cash flows.
Goodwill and Intangibles
Lastly, elements such as brand reputation, customer loyalty, market position, patents, and copyrights can also contribute significantly to a business’s value. These intangible assets, often grouped under ‘goodwill’, can be challenging to quantify but may be crucial in differentiating the business from its competitors and justifying a higher sale price.
Key steps for transferring ownership:
Transferring a Sole Proprietorship
In order to transfer ownership for Sole Proprietorships (Business Name Registration formerly Master Business Licence, business owners must cancel the current Sole Proprietorship. An existing Sole Proprietorship cannot be transferred to another individual. Once the cancellation is completed, the original owner will also want to close all Canada Revenue Agency (CRA) accounts and bank accounts. The new owner will be required to set up a new business either as a Business Name Registration historically a Master Business Licence as a new Sole Proprietorship, General Partnership (if more than one person) or an incorporated company. The ownership transfer of the assets of the registered business will be considered a personal tax income and the tax implications to the seller could be significant.
Transferring a Incorporated Company
A corporation provides much more flexibility when selling the business. The corporation can be sole in two different ways, a share transfer or an asset transfer.
The share sale of the corporation means that the shares of the corporation are being sold and therefore the corporation itself is sold. This has advantages in that the operation of the business continues as it has historically with new individual directors and shareholders and typically is more tax friendly to the seller. The disadvantages to this type of sale has implications to the new buyer where the liabilities associated with teh corporation continue from the departing directors to the new directors. Typically, purchasers are more likely to wish for an asset sale to avoid pitfalls of the unknown with the history of the corporation.
An asset sale means that the assets of the corporation are purchased and removed from the original corporation including items such as equipment, inventory, real estate, customer lists and intellectual property. In an asset purchase, the buys obtains wanted items from the shell of the corporation and leaves any liability the purchased corporation may have behind.
You should perform an inventory of your business in order to execute a transfer of ownership. This provides you with all of the information related to your existing interests so that you can transfer them appropriately.
Sale of a business must be done through the use of a sales contract. The level of complexity for this agreement will vary based on the size and nature of your business.
Transfers of titles and deeds must be considered when transferring ownerships. Titles related to company vehicles will need to be obtained and processed during this transition.
The decision as to whether to do a share agreement or asset agreement depends largely on the circumstances of the transaction including the business conditions, both the legal and tax implications to both the buy and seller and the business conditions.
New Ownership
Transferring ownership may also require documentation according to provincial or federal regulations. Any changes must be reported in annual reports. In some cases, businesses will need to file notices of change or file Articles of Amendment to reflect a corporate name change when applicable in order to reflect changes in ownership.
Shareholder agreements should be updated when stock shares are transferred over to a new business owner.
There are many factors to consider when transferring ownership of your business. We help business owners like you move through the process easily in order to avoid any unwanted issues.
Knowing how to transfer ownership ensures that all legal obligations are met and that you maximize your return on investment.
Contact Us Today to learn more about transferring ownership of your business.
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Ontario Business Central Inc. is not a law firm and cannot provide a legal opinion or advice. This information is to assist you in understanding the requirements of registration within the chosen jurisdiction. It is always recommended, when you have legal or accounting questions that you speak to a qualified professional.
