Why You Should Use CBI to Sell Your Business

  • By Bob Hughes
  • 28 Jul, 2015
CBI is a Certified Business Intermediary – Astra is a IBBA member with a CBI designate.

Do thoughts of selling your business ever cross your mind? As a business owner you certainly know that the day will come when you will walk away from your company’s operations. Selling your business will likely be one of the biggest decisions of your business life.

No doubt you have a good idea of what your business is worth. But there are many factors to consider when putting your company on the market. Is now the best time to sell? Should I look for a cash deal or should I consider certain terms? What about confidentiality?
Working with a professional business intermediary will provide the expertise to help you make those decisions. Consider teaming with a Certified Business Intermediary (CBI), a professional who fully understands what it takes to successfully sell a business. A CBI can bring significant value to the complex process and help you complete a sale that will include the best possible value and some peace of mind.

A Certified Business Intermediary, or CBI, is the designation awarded by the International Business Brokers Association (IBBA) to members that have met certain educational requirements and ethical standards. IBBA, with 1,500 members worldwide, is the largest international, non-profit association operating exclusively for the benefit of
people and firms engaged in the various aspects of business brokerage and mergers and acquisitions.

A CBI is an experienced, proven professional whose claim of competence is supported and documented. With the skills necessary to handle the marketing, negotiations and complex details involved, a CBI can successfully complete the purchase or sale of your business.
To earn the CBI designation, an IBBA intermediary must meet the following requirements:
  • Education - A CBI must complete a minimum of 68 class hours of business brokerage courses offered through IBBA and must demonstrate an ongoing commitment to professional development through continuing education and recertification.
  • Experience – A CBI must demonstrate competence in the application of knowledge gained through practical experience with a combined minimum of three years’ experience and education in business brokerage.
  • Knowledge – A CBI has to demonstrate a high degree of knowledge garnered through the completion of required courses and the passing of the comprehensive CBI examination.
  • Ethics – A CBI must thoroughly understand the IBBA’s Code of Ethics and apply the code to his or her business practices.
A higher level of education and training means that a CBI will have more access to people and information than other business brokers. A CBI has professional affiliations with hundreds of other intermediaries in addition to the most current industry information regarding taxes, government and legislation.

A CBI’s experience and knowledge of current marketplace conditions is critically important for anyone looking to sell a business. If you are considering the sale of your business, you need every advantage you can garner, primarily preparation, experience and knowledge.
By Jonathan Funk 23 Aug, 2017
On July 18th 2017, The Federal Government announced major tax changes on business owners - triple taxation.
Previously you would have received much more on the sale of the share or assets of your company.
The new legislation taxes could be as high as 75%.

Astra has a proven program that will mitigate this new onerous tax legislation. We would like to have the opportunity to show you how we can do that. To avoid “triple taxation” you must plan your exit strategy through a proven program. Our SuperMax and MiniMax programs will abate these new punishing tax changes. Our financial consultant will review your situation and demonstrate how Astra’s Super or Mini Max programs will work for you to save you many, many thousands. Please contact us at info@abc-astra.com or bhughes@abc-astra.com.


SUMMARY

This note is a summary and clarification of the 27 page announcement by the Minister of Finance on July 18 which has major implications for private business owners in Canada. Please take the time to review this note and give yourself time for reflection. We suggest you read this more than once.

The tax consequences of the NEW Rules could cost you millions of dollars without putting smart tax planning in place.

Scenario A - Under the old rules, you could sell your company’s shares and after it paid the capital gains taxes due, the net cash proceeds could be put into your hands personally with no additional tax to pay on the transaction. Not any more.

The proposed new rules should not impact your company 's ability to pay capital dividends (net after tax proceeds from the sale) to you as a shareholder unless the buyer and the seller are not dealing at arm's length (for example, between family members). With a non arm’s length transaction, the net proceeds are taxed again in your hands as an ineligible dividend at an effective tax rate of between 42 to 57% depending on your province of residence.

Scenario B - Under the old rules, you could sell your company’s assets and after it paid the capital gains taxes due (if any), the net cash proceeds could sent to your Holdco as an after tax intercorporate dividend with no additional tax to pay on the transaction. This would have allowed yo to redeploy cash for other investments. Not any more.        

The proposed new NEW Rules will disallow the inter-corporate dividend as a tax free transfer to your holdco and instead tax it as an ineligible dividend at highest possible tax rates.

Scenario C - Old rules: Shareholder dies, creating a deemed disposition of shares. No tax paid liquidity is in hands of estate to pay tax. Estate uses a capital loss manoeuvre in combination with “stop-loss” rules and acceptance of a promissory note from a corporation to mitigate the amount of actual tax due as a result of deemed disposition of shares when the shareholder dies.

The proposed new NEW Rules will disallow the estate from transferring shares with a high cost base to a parent company in exchange for a tax-free promissory note.    

NEW Rules : Shareholder dies, creating a deemed disposition (CRA considers shares and other personal property to be disposed/sold) of shares. No tax paid liquidity (ready cash (on hand) is in hands of estate to pay tax. Estate raises cash to pay this tax by selling corporate assets with attending cap gains tax "A". Net proceeds are paid off of the balance sheet to pay the cap gains tax on the deemed disposition caused by shareholder's death. This is Tax "B". However since it all came off the balance sheet, CRA wants additional tax as they regard this as a non-eligible dividend or Tax "C". This is "triple taxation". A+B+C=CRA The total tax bill could be as much as 75%!!!

Scenario D- Old and New rules are the same: Shareholder dies, creating a deemed disposition of shares. No tax paid liquidity is in hands of estate to pay tax. However life insurance proceeds come into and out of the corporation tax free by way of capital dividend account (CDA. Sec. 89) to pay required taxes. Estate now transfers shares to whomever it is directed by the Will of the deceased shareholder. No corp assets were sold, no taxable cash came off the balance sheet's current assets yet the cap gains tax were paid. The new shareholder's capital is still on the balance sheet but it is now tax paid or paid up capital (PUC). Dividend income paid at say 8-10% of the tax paid PUC are within CRA's "safe income" rules but taxed at the attending marginal rate.

Here are the main reasons tax practitioner’s advocate the use of life insurance in corporate-estate situations: A) it’s a lot cheaper than paying ANY amount of tax and B) it is already pre-approved by CRA and does not cause any tax burdens.

In summary: either from action or inaction when large blocks of capital are moved into the hands of a shareholder or an estate, the transactions are on CRA’s maximum tax radar. On the other hand if dividend income on capital is employed as a source of income, the tax rates are far less than taxes on salary or high amounts of capital treted as ineligible dividends.

In Brief, CRA does not want you to take capital off a balance sheet, but keep it employed ON the balance sheet, and CRA is satisfied.

Therefore smart planning will open doors for tax efficient succession planning for your family and provides options to negate asset sales triggering double or even triple taxation.
And, smart planning utilizes the Income Tax Act’s rules to get your hard earned capital into shareholders hands while you're alive either tax free or with a lot less tax paid during your lifetime and after death.

Bottom Line: Smart Planning will get you:
  • a strong balance sheet 
  • a company that will not be hurt or destroyed because of tax
  • happy shareholders 
  • a happy estate
  • satisfied CRA
  • Everybody wins!

Smart planning starts with us. Contact us now.

TIME IS NOT YOUR FRIEND – WE HAVE WAYS TO HELP
By Robert Hughes, Astra Business Corporation President 22 Jan, 2016

Astra, with their associates, have developed exit strategies using major banks and insurance companies to transfer ownership of your company in a manner similar to a department store ‘lay-a-way’ plan. There are two programs to choose from - MiniMax and SuperMax.

These programs offer a customized succession plans, which enable business owners to hand the reins of their business to a new generation or investor, while securing a TAX FREE retirement income stream, reducing risk, eliminating volatility and creating an estate legacy.

This is a strategy that has a stated time frame to transition the operation, and eventually, the ownership of the business. This succession plan maximizes the net cash flows for the remaining lives of the owner and spouse and if possible, creates a legacy for the surviving family members or investors.

Whereas you are looking to obtain a sale price of up to 4 to 5 times multiple, buyers have been reluctant to provide you with an acceptable purchase price with terms satisfactory to you. These alternate programs will provide you with an acceptable exit strategy with a financial benefit of  many times over what you had originally wanted  and while you are young enough to enjoy your retirement income.

I trust this is of interest. If so please advise and we will introduce you to our associate and start the process with a conference call where an in-depth detailed discussion will reveal how this program works.

Looking forward to working with you.

Click here for more information.

By Paul Woodhouse, MNP 15 Dec, 2015

A non-compete agreement is a covenant to the purchase and sale agreement that restricts the seller of a business from competing with that business in the future. Such covenants usually last for a specified period of time and may apply to a specific geographic area (generally the area currently being served by the subject company).

Non-compete agreements provide buyers with a measure of comfort in that the expected stream of earnings from the business being acquired will not be disrupted by competition from the former owner. The seller benefits because the buyer has confidence that the anticipated earnings will materialize and therefore the seller can maximize the purchase price.

In some cases, they receive an annual payment for a specified number of years. In others, the amount the seller receives is included as part of the total purchase price. In either case, the seller is granting a promise to the buyer that may have considerable value in terms of preserving the future earnings potential of the acquired business. Thus, a non-compete agreement represents an important (though intangible) asset for the buyer, quite apart from the operating assets.

Why put a value on non-compete agreements?

If the consideration paid to the seller for entering into a non-compete agreement is included as part of the total purchase price paid for the acquisition, there are three good reasons to assign a separate value to it.

Accounting Standards and Reporting Requirements
If the purchaser is a corporation, generally accepted accounting principles (GAAP) require the parent company’s financial statements to be consolidated with those of its subsidiary. Depending on the jurisdiction, these accounting rules have specific standards that require a purchaser to allocate the total purchase price paid in a business combination to the fair market value of all the tangible and identifiable intangible assets acquired (which would include the non-compete agreement). This provides stakeholders with more information on the true nature and cost of the acquisition.

Compliance with Income Tax Rules
Proposed changes to the Income Tax Act mean that any amount the seller receives for granting a restrictive covenant will be treated as ordinary income for income tax purposes. The buyer will generally treat the expense as the seller treats the income; in this case, it would be a deductible business expense. There are some exceptions to this general income inclusion rule. One exception is where the grantor and grantee jointly elect, in prescribed form with their tax return for the year, that the amount is an eligible capital expenditure to the buyer and an eligible capital amount to the grantor. Therefore, it is necessary for the parties to determine the value of the non-compete to ensure there are no unintended tax consequences.

Possible Future Damage Claim
In the event the seller breaches the covenant not to compete, the purchaser may have a claim for economic damages. The fact that a valuation was prepared at the time of the transaction demonstrates that the parties contemplated that real damages would arise if the seller was allowed to compete. This helps support the purchaser’s legal claim against the seller.

How should a non-compete agreement be valued?

There are two generally accepted approaches used to determine the value of a non-compete agreement:

Differential Valuation Approach
The differential approach involves valuing the business under two different scenarios. The first valuation assumes the non-compete agreement is in place and the second valuation assumes that it is not. The difference in the value of the business under each approach is attributed to the non-compete agreement. Because the differential approach involves a rigorous business valuation analysis under two scenarios, it allows for more flexibility in determining the net impact on future cash flows arising from potential competition from the seller. The downside is that this approach is more complex and time consuming.

Direct Valuation of Economic Damages Approach
The direct approach involves determining the present value of the potential future economic damages that would occur as a direct result of not implementing a non-compete agreement. The direct approach is somewhat simpler since it involves estimating the direct damages from competition, usually in the form of a percentage of income lost. This method is more widely used because of the need for only one estimate of future operating results, which makes the analysis less time consuming. Both methods, if properly applied, should arrive at a similar conclusion of value.

 

A Framework for Using the Direct Damages Approach

When using the direct damages approach, the first step involves a risk analysis to determine the maximum potential damages that could arise if the seller competes with the acquired business.

The second step is to determine the “expected value” of the losses based on a probability assessment that considers the likelihood that the seller would compete with the acquired business.

The third step involves determining the present value of the economic damages avoided over the term of the non-compete agreement.

 

Step 1: Estimate annual economic losses, assuming competition from the seller.

This step involves the following stages:

1.  Estimate future earnings or cash flow, assuming a non-compete agreement is in place. This will generally incorporate the same set of assumptions that a hypothetical market participant would use in estimating future operating results for the purpose of pricing the acquisition.

2.  Quantify the potential damages (in the form of reduced earnings or cash flow) if the vendor(s) were free to compete with the business post sale. This generally involves a two-step process:

1.  Perform a risk assessment that considers the key factors that could negatively influence the business projections determined in Stage 1. Depending on the nature of the business, the following questions should be asked:

Does the former owner have significant personal contact with customers?

If so, are these customers loyal to the former owner? How many customers could the former owner take to a new business and what is the profit related to these accounts?

Are the other employees loyal to this person and do those employees have strong relationships with customers?

Does the former owner have access to trade secrets that are critical to the company’s success?

Depending on the circumstances, financial damages may take the form of one or more of the following:

Lost sales to existing customers recruited by the former owner

Lost sales to new customers through the use of trade secrets taken by the former owner to provide a similar product or service

Lower gross profit margins due to reducing selling prices to compete with the former owner

Higher marketing expenses incurred in an attempt to mitigate damages (i.e., recoup the lost sales)

2.  Based on the above risk analysis, estimate the percentage of projected earnings or cash flow that would be lost due to seller competition. We have seen estimates ranging from 10% to 50%, depending on the nature of the business and the industry in which it operates.

3.  Apply this percentage to the annual projected cash flow determined in Stage 1. This represents your estimate of how much of the future earnings the former owner could take from the company if he or she decided to compete after the sale.

 

Step 2: Adjust the losses determined in Step 1 based on the probability that the seller would compete in the absence of a non-compete agreement.

This step involves performing a probability assessment to determine the likelihood that the former owner would compete in the absence of agreeing not to. It is likely to be the most difficult and subjective part of the analysis. Some of the factors that affect the probability of the former owner competing include:

The age of the former owner . Is the individual near retirement age or is she too young to retire and physically able to compete?

The former owner’s employment status. Has he entered into a management contract to stay on with the existing business? If so, this reduces the likelihood of competing with the purchased business, particularly if a significant part of the purchase price is held back and paid out over time, or is contingent upon business performance. Does the individual have other skills in a different industry in which he could find work that is unrelated to the purchased company’s industry?

The former owner’s financial resources. Is the individual wealthy or does she need to work?

Competitive entry barriers. Are there significant barriers to entry in this industry? If the business is capital intensive, does the individual have access to sufficient capital resources? If not, is it likely that the individual would be hired by a competitor?

The former owner’s track record. Has the seller sold a business in the past and subsequently started up a similar competing business?

The strength of legal agreements. Is the protection term and market area defined in the non-compete agreement reasonable and enforceable in a court of law? Are there other pre-existing legal obligations in place to help prevent the seller from competing?

Based on the above factors, estimate the probability that the former owner would compete with the purchased business if there were no restrictive covenants. The estimated probability factor is then applied to the losses calculated in Step 1(c) to determine the “expected value” of the losses.

 

Step 3: Determine the present value of the expected annual losses.

  This step involves determining an appropriate discount rate with which to calculate the present value of the expected losses. Consider using, as a starting point, the weighted average cost of the capital (WACC) used to finance the acquisition. Generally speaking, the cash flows associated with intangible assets have greater risk than those associated with tangible assets. This additional risk would generally support a higher rate of return to compensate the investor. However, since much of the risk in the cash flows was already removed through the probability adjustment (in Step 2), a significant risk premium (applied to the WACC) would likely not be appropriate.

Once a discount rate is determined, apply the appropriate present value factors to the expected losses (determined in Step 2) to quantify the value of the non-compete agreement. For accounting purposes, the value of this intangible asset would be amortized over the term of the agreement.

A simplified example of the valuation analysis described above is provided in the following table:

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