Part III - The Seller’s Guide to Preparing for Buyer’s Scrutiny
Selling a business represents a pivotal decision for any owner, comparable to a comprehensive inspection of a vehicle prior to purchase. Buyers will conduct an exhaustive review—known as due diligence—to assess risks, opportunities, and overall value. Proactive preparation can facilitate a more efficient transaction, mitigate unforeseen issues, and enhance the attractiveness and valuation of your enterprise.
At Venter Accounting & Tax, we assist business owners in navigating these processes to optimize tax outcomes and ensure a seamless exit. This guide outlines key preparatory steps, an overview of due diligence, essential types of review, and critical considerations such as change of control and sales tax implications. For personalized guidance, please contact us at dave@venter.ca.
Essential Preparatory Steps: A 18- to 24-Month Timeline
Commencing preparation 18 to 24 months in advance allows sufficient time to address deficiencies and elevate your business’s profile. The following steps, informed by established merger and acquisition practices, are recommended:
Update the Corporate Minute Book: Maintain current and accurate records of meetings, decisions, and resolutions to demonstrate sound corporate governance and avert potential concerns during legal examinations.
Compile Shareholder and Tax Records: Assemble information on ownership structures, personal guarantees, and historical tax returns to identify and resolve any personal or corporate interdependencies.
Review and Revise Shareholder Agreements: Amend provisions related to buy-sell arrangements, voting rights, or transfer restrictions to eliminate outdated elements that could precipitate disputes or delays.
Conduct Asset Purification or Reorganization: Dispose of non-essential or non-qualifying assets to enhance eligibility for tax advantages, such as the lifetime capital gains exemption (LCGE), thereby improving the business’s appeal.
Separate Personal Assets: Distinguish personal property (e.g., vehicles or equipment) from corporate holdings to ensure clarity regarding the scope of the sale.
Reconcile Advances to Shareholders or Directors: Verify and settle any outstanding loans to prevent their classification as undisclosed liabilities.
Evaluate Tax Implications of Change of Control: Anticipate consequences such as deemed year-ends or restrictions on loss carryforwards, and consult advisors to implement mitigating strategies.
Engaging legal and tax professionals early in this process is advisable to refine these elements effectively. At Venter Accounting & Tax, we provide specialized support for tax optimization to help preserve and enhance value.
Overview of the Due Diligence Process
Due diligence constitutes the buyer’s methodical examination of the business’s operations, assets, liabilities, contracts, records, and structure. This evaluation, typically performed by the buyer’s advisors following the execution of a letter of intent (LOI), informs a balanced assessment of value and risk.
The LOI delineates the transaction’s parameters, including whether shares or assets are being sold, the proposed price, and principal terms. While non-binding on completion, it establishes a framework for good-faith collaboration, with an expectation of full disclosure.
Documents are generally uploaded to a secure virtual data room for review, with requests varying by industry and often evolving through iterative inquiries. To manage this effectively:
Designate a primary contact to coordinate communications.
Implement secure protocols for information exchange.
Define the review’s scope, timelines, and reporting mechanisms for identified risks.
Disclose potential issues promptly to enable resolutions.
As the seller, organizing materials in advance and responding expeditiously fosters trust and supports a positive outcome. Should tax-related matters emerge, our team at Venter Accounting & Tax is equipped to provide targeted assistance.
Key Types of Due Diligence: Focus Areas and Preparation Strategies
For smaller business transactions, due diligence typically concentrates on core areas: legal, financial, accounting, tax, and human resources. The table below summarizes these primary categories, including their scope and preparatory recommendations. While additional reviews (e.g., commercial, intellectual property, information technology, compliance, and environmental, social, and governance factors) may apply, they are often secondary for such sales.
| Type | Scope of Review | Recommendations | Significance |
|---|---|---|---|
| Legal | Contracts, litigation, regulatory compliance (e.g., leases, employment agreements). | Update documentation and resolve disputes. | Identifies liabilities that could derail the transaction. |
| Financial | Cash flows, debt obligations, profitability projections. | Prepare audited statements and reconcile variances. | Validates financial stability and sustainability. |
| Accounting (incl. Quality of Earnings) | Accuracy of financial records, identification of non-recurring items. | Perform an internal review to eliminate discrepancies. | Ensures reliable earnings, preventing valuation adjustments. |
| Tax | Historical filings, audits, liens, and loss carryforwards. | Settle outstanding matters and document compliance. | Highlights risks and opportunities, such as transferable tax attributes. Our expertise at Venter Accounting & Tax is particularly relevant here. |
| Human Resources | Organizational structure, compensation, benefits, and retention risks. | Update personnel records and emphasize key talent. | Assesses workforce stability, a critical factor for continuity. |
Strategic Planning Following Due Diligence
Upon completion of due diligence, buyers frequently formulate a post-acquisition business plan to drive value creation. This involves:
Identifying market-driven opportunities.
Analyzing competitive dynamics and positioning.
Estimating market size and growth potential.
Prioritizing profitability-enhancing initiatives.
Evaluating risks and sensitivities.
Sellers can contribute by providing insightful data on growth prospects, thereby reinforcing the business’s strategic potential.
Implications of Change of Control
A change of control—typically arising from the transfer of more than 50% of voting shares—activates specific tax provisions, including a deemed year-end. Notable consequences include:
Limitations on non-capital loss carryforwards to profits from similar businesses.
Expiration of net capital and property losses.
Recognition of bad debts and inventory write-downs.
Realization of losses on non-depreciable property where cost exceeds fair market value.
Write-downs of depreciable property to fair market value.
Restrictions on certain tax credits (e.g., research and development).
Potential acceleration of shareholder loan repayments.
To counter these, consider elections under Section 111(4)(e) to apply capital losses against gains. For transactions involving non-resident buyers of Canadian-controlled private corporations, additional deemed year-ends may occur. Review shareholder agreements to avoid unintended triggers. At Venter Accounting & Tax, we assist in structuring these elements to minimize tax exposure and protect exemptions like the LCGE. Contact us at dave@venter.ca for a discussion.
Sales Tax Considerations
Sales tax (e.g., GST/HST in Canada) warrants careful attention to preserve transaction proceeds. Share sales are generally exempt as financial services. For asset sales comprising over 90% of the business’s assets, a joint election under Section 167(1) of the Excise Tax Act can defer GST/HST obligations.
Regarding real property:
Incorporate GST/HST registration numbers in transfer documents.
Confirm numbers pre- and post-transaction.
Amend relevant leases and contracts.
Failure to address these can result in unanticipated cash flow impacts. Our team at Venter Accounting & Tax advises on compliant structuring, please reach out at dave@venter.ca.
Final Considerations
Thorough preparation for buyer scrutiny extends beyond mere compliance; it positions your business as a well-governed, transparent entity, conducive to achieving an optimal sale outcome. In an evolving landscape influenced by technological advancements and sustainability imperatives, foresight is paramount.
Venter Accounting & Tax is dedicated to supporting business owners through these intricacies, with a focus on tax efficiency and transaction success. For advice customized to your circumstances, contact Dave at dave@venter.ca.
