Selling Your Business: Can You Afford to Retire?

If someone offered you $5 million for your business, would you know whether you could afford to accept it? You might have a good sense of whether the price was fair without knowing whether the proceeds would be enough to retire.

For an owner who has spent years building a company, it is understandable that the sale price gets much of the attention. But selling also means giving up the income the business provides. The proceeds may need to support your spending for the next 30 to 40 years.

Before you put your business up for sale, it is worth working backwards from the life you want afterward. Knowing how much you need can help you assess an offer and decide whether selling makes sense in the first place.

How Much Will You Keep After Selling Your Business?

The sale price and the net sale proceeds after costs can be very different. Taxes and professional fees will reduce what you keep. Depending on how the price is quoted and the deal is structured, debt repayment or adjustments at closing may reduce it further.

The payment terms matter as well. A buyer might pay part of the price over several years, or make a portion conditional on the business meeting future targets. That money carries more uncertainty than cash received at closing, particularly if you no longer control the decisions that affect the results.

There is also a difference between money you receive personally and money that remains in a corporation. Corporate sale proceeds may be available to invest within the corporation. Your retirement plan needs to account for tax on the investment income as well as any personal tax payable when money is withdrawn. A corporate investment account with a $3 million balance is not equivalent to $3 million of personal cash on which all tax has been paid.

Before relying on a proposed price, ask your accountant for an estimate of the proceeds available after the transaction and the tax still payable when you take withdrawals. If part of the price is conditional, your retirement plan should show what happens if that money never arrives.

Start Tax Planning Before There Is an Offer

For an incorporated business, selling your shares can produce a different tax result from having the corporation sell its assets such as its client list or goodwill. The buyer may also prefer a structure that is less favourable to you. Comparing the after-tax outcomes can help you understand how much a difference in price is actually worth.

The Lifetime Capital Gains Exemption (LCGE) may reduce tax on a qualifying sale of small business corporation shares, but eligibility is not automatic. The rules include ownership and asset tests, some of which look back over the preceding 24 months. A corporation holding substantial investments or excess cash may require planning well before a sale.

This does not mean every business owner needs a corporate reorganization. Whether a holding company or family trust would help depends on the ownership structure and the family’s circumstances. As a business owner, you should avoid assuming that an exemption will be available simply because you have owned and operated your business for many years. You need to qualify, and the transaction needs to involve a sale of qualifying shares.

If a sale is possible in the next few years, review the ownership structure and potential tax treatment now. Once negotiations are underway, there may be less time to make changes, and some opportunities may no longer be available. An unexpected offer can leave you with less time to prepare than you anticipated.

How Much Do You Need to Retire?

Your current salary or dividends are not necessarily a reliable measure of what you will need after selling. You may be saving a substantial portion of that income, in which case replacing all of it could be unnecessary. On the other hand, costs currently covered by the business may become personal expenses after the sale.

Start with what your household spends and consider how that might change. A mortgage that will soon be paid off could reduce your needs. More travel in retirement could increase them.

Suppose a sale leaves you with $3 million personally after all transaction costs and taxes. A household that needs $100,000 a year from those proceeds faces a different calculation from one that needs $200,000. Neither amount can be assessed properly without considering the owners' ages and how withdrawals will change over time.

Your other assets matter too. Registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs) may already fund part of your retirement, while Canada Pension Plan (CPP) and Old Age Security (OAS) could reduce the amount you need to withdraw later. Home equity should only be included in a retirement plan if you have a realistic strategy to access it.

A post-sale retirement projection needs to account for tax on future income and the effect of inflation on spending. It should also consider a long retirement, including the financial impact of one spouse outliving the other, if you are planning as a couple.

How Much Are You Relying on Future Work?

Selling does not have to mean stopping work. You may continue working for the buyer or take on other work. That income can reduce the pressure on your investments.

There is a difference, though, between choosing to work and needing to work for the numbers to add up. If retirement depends on another five years of employment or self-employment income, you should understand what happens if the contract ends early or you decide you have had enough.

The terms of the sale may also affect how much freedom you gain. An agreement that requires you to remain involved for several years may be financially attractive, but it may not deliver the change you were hoping for. You may also find it difficult to work for someone else after years of making your own decisions.

Would the Plan Still Work With a Lower Sale Price?

An estimated business value is useful, but it is not a guaranteed offer. Testing a lower price can show how much room you have to negotiate and whether your retirement depends too heavily on a particular result.

A delayed sale deserves consideration as well. You may be willing to work longer, but your health or the market for your business could change. Separately, the retirement projection should test weaker investment returns, particularly in the early years when you are beginning to make withdrawals.

The purpose is to identify what would require you to change your plans. You might discover that a lower offer is still enough, allowing you to leave sooner. Alternatively, you may find that you need to save more outside the business before putting it on the market.

Assess the Offer in the Context of Your Retirement

A valuation helps you assess whether a buyer's price is reasonable. A retirement plan helps you assess whether the resulting proceeds are enough for you. Both are useful, and they answer different questions.

Your accountant and financial planner should work from the same assumptions about the sale. Your lawyer can help assess the payment terms and your obligations after closing, with a valuation specialist involved where appropriate.

At Objective Financial Partners, our financial planning for business owners can help you assess whether a potential sale will support your retirement. We can coordinate with your accountant or our colleagues at Objective Tax & Accounting to incorporate the tax implications into your plan.

If you are considering selling your business, book an introductory call to discuss your planning needs. Knowing how much you need to keep after tax gives you a more useful starting point for negotiations than the sale price alone.