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If you are selling your business, your goals should dictate your approach to everything from corporate structure to tax planning. There are many ways to structure M&A transactions, each with different tax implications, so the decision of how to sell is just as important as what to sell.
Engage in business planning before negotiations go too far
There are any number of reasons to sell a business, whether personal, strategic or commercial. Understanding what is important to you and how the sale fits into your overarching strategy and objectives is an essential first step in the planning process. Does the business have special meaning to you? For example, is it a family business? Do you consider it to be a strategic asset?
Although basic, these questions will influence the entire transaction, and help you optimize after-tax returns. Those tax implications can then inform your decisions concerning the pricing, conditions, schedule, and structure of the deal. In certain circumstances, the right planning can impact the net return on a sale by 10-15% — a significant margin.
It is also important to understand that business planning should take place before the negotiations become too advanced. Once you’ve signed a letter of intent, it may be too late to make key decisions on the transaction which will maximize tax efficiencies on the overall sale.
Once negotiations are underway, you may be surprised at how quickly they unfold – the process often takes less than two months. This does not leave much time for corporate planning, so there is a balance to strike as a seller. While you don’t want tax planning to drive you’re planning as a vendor and other strategic considerations, it is still a good idea to be proactive, and not be inhibited from taking decisive action for tax reasons later on. We recommend that you start with a clear outline of your corporate objectives and optimize tax results accordingly.
While buying takes months, selling takes years. If you are the seller, you should think about the possibility of M&A at least three years in advance because this will help determine how your business grows. In contrast, buyers are usually responding to market dynamics, although they will also have long-term objectives of their own.
Understand the buyer’s motivations
As a seller, you should have a strong understanding of the value of your business, your role in the market, and what intangible factors may motivate prospective buyers. For example, some buyers are motivated by competitive factors, and will place a premium on their competitive position. These factors are quantifiable and should be well understood before the terms of the transaction are settled.
Although buyers respond to market opportunities, they also engage in long-term planning. A significant part of their strategic plan may include buying businesses to achieve their objectives. So, this is not usually a spontaneous decision, as the buyer will be identifying targets in advance.
The buyer’s strategic motivations will usually include one, or more, of the following:
Another important consideration in a buyer’s decision to proceed with the acquisition is whether they are capable of assimilating the target business. Although the business may seem attractive for strategic reasons, the acquisition is only advisable if the buyer has the capacity to see it through. Otherwise, they risk becoming overwhelmed if their new, sudden growth isn’t structured properly.
While this may seem counter-intuitive if you are the seller you shouldn’t focus on the transaction structure until you fully understand the buyer’s motivations. This is because it’s difficult to negotiate without compromising the value of what you’re trying to sell. So, you have better odds of maximizing your position once you truly understand what the buyer wants.
- The targeted business is in the same sector, perhaps as a key supplier;
- The targeted activities are innovative and show significant promise;
- The acquisition may lead to economies of scale and increased profitability;
- There are competitive advantages to be gained in a geographic area; and
- The acquisition is done sooner than intended due to intense M&A activity in a sector or a geographic area.
What does the transaction look like?
Once you decide to sell your business, you should consider the after-tax return on proceeds. The number of vendors may have an impact on the capital gains exemptions that are available. Further, a tax deferral may be available depending on the nature of the proceeds. The reason for this deferral is to match tax obligations with cash flows and ensure you don’t incur unexpected tax liabilities while holding relatively illiquid assets.
As well, to the extent the sale proceeds include a contingent or earn-out component, which allows the seller to participate in the future growth of the company, such a component can be taxed as a capital gain or regular income. The outcome depends on how it is earned or realized.
Usually, it is more advantageous for a seller to sell an equity interest and for a buyer to buy assets. For each side, this choice comes with certain tax advantages. Although this is the basic dynamic at play in M&A, transactions are becoming increasingly complex in today’s competitive environment. In fact, the question of whether a sale involves equity or assets is sometimes a hard one to answer, and your professional tax advisor may help you in making this choice and in optimizing the result.
The priority for your Grant Thornton tax advisor is to help you reach your long-term financial goals, at every step of the corporate journey. When done in advance, tax planning can both support and guide your decisions in a way that will maximize returns and help you avoid unexpected pitfalls. For more information, contact us.]]>
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Starting a technology company, setting up an R&D center in Canada or transitioning your technology company to new ownership all require dedication and substantive expertise. In addition to the expected business challenges that come with innovation and rapid growth, there are risks and potential pitfalls that await entrepreneurs and business leaders. In our work with tech companies, we decided to put together this list of common issues we see across the sector that apply to both small and large tech companies here in Canada.
The technology sector offers great opportunities for start-ups and foreign investors seeking to leverage the resources, infrastructure, and incentives available here in Canada. We have worked with R&D incubators and accelerators, municipal investment attraction agencies and foreign direct investment across the country. From hundreds of conversations, we compiled seven practical considerations based on our experience helping tech innovators to grow their businesses in Canada.
1. Foreign-owned (or acquired) corporate innovation labs and R&D centres – don’t forget to set up a transfer pricing structure
When setting up a corporate innovation centre – whether you are a domestic operation that is acquired by a foreign owner or a corporation investing in a new facility from overseas – you need to develop a transfer pricing structure and establish what is taxable in Canada. While it might seem natural to view such labs as simple innovation cost centres because they are not generating revenue, the tax laws in this area are broad in scope and in most cases will require profits to be recognized by the innovation centre, at least to some degree. This step is particularly important, as the Canada Revenue Agency (CRA) has been intensifying its enforcement of transfer pricing laws due to the worldwide focus on the 115 member country OECD Inclusive Framework on Base Erosion & Profit Shifting (BEPS).
2. Big fish buying a little fish – Changes to your SR&ED tax credits on acquisition by a foreign company or larger domestic enterprise
If your business benefits from – or has applied for – research and development tax credits, it is essential to understand how these might change in the event of any merger or acquisition. The Scientific Research and Experimental Development (SR&ED) Tax Incentive Programprovides incentives for companies in Canada to conduct scientific research and experimental development. However, the size and nationality of the parent corporation can make a significant difference in what level of support is provided. For example, a Canadian-controlled private corporation (CCPC) receives a federal refundable investment tax-credit of 35% on qualified expenses up to $3 million. However, if that CCPC is bought by a large Canadian-based company or foreign-based enterprise, the SR&ED tax credit rate drops to 15%, and the tax credit is no longer refundable – i.e., it can only be applied to offset other taxes actually incurred. We have seen this change negatively impact corporate cash flow and valuation of the business.
3. Know when your company’s stock options become taxable – and who pays
Stock options can be a powerful compensation tool for start-ups and high-growth companies to retain and engage employees, but as compensation, they are eventually taxable. By understanding what triggers this tax liability and who is responsible for paying it, you and your valued employees can avoid unpleasant surprises.
4. Government grants are taxable, and the name on the cheque matters
Funds received from government grants are viewed as income by the CRA, and the recipients must account for them on their financial statements and tax returns. Further, it makes a difference how that grant is given, and there are unique considerations for when the grantee is a company, an individual or a group of individuals.
When a grant is given to a company, it becomes corporate income, but when the grant is awarded to an individual, it must be reported on their personal tax return. The situation becomes more complicated when a group of students or researchers receive a grant together, and differences of opinion on how to use the funding can create challenges. It is best to have an agreement set in advance regarding how such grants will be used if won or awarded.
In addition to income concerns, the government grants could be viewed as taxable for GST/HST purposes. A review of the funding agreement and the CRA guidelines is often required to make this determination as a grant may not always be a grant for GST/HST purposes.
5. The recent Wayfair ruling by the US Supreme Court has consequences for businesses selling online into the US
The recent US Supreme Court ruling in Wayfair vs South Dakota has changed the expectations for those selling products across state and international borders. The decision overturned precedent and may make it easier for state and local governments to require businesses that have no physical presence in a jurisdiction to collect and remit sales taxes. The impact of the protectionist Wayfair decision will make remote sellers consider US tax implications in the early revenue stages. Canadian companies should start thinking now about how they might comply with complex and nuanced requirements in the US state and local tax regimes.
While comparable provisions have yet to be implemented across Canada, Quebec has announced a similar obligation that may need to be considered when selling into that province. This may set a precedent for other provinces in Canada to follow suit.
It is important that business owners take the time to understand the potential impact of these tax obligations, which can lead to significant and often unnecessary challenges if not planned in advance.
6. Consider the pros and cons of registering for GST/HST, even before it’s required
Your business is only required to register for GST/HST once your revenue exceeds $30,000-including sales of any associated entities. Despite this, we often advise start-ups to voluntarily register earlier, as once registered, your business can claim GST/HST incurred as an input tax credit for your current business expenses – even before you generate revenue.
Once your business is registered however, GST/HST needs to be charged on all taxable supplies even if you have not met the $30,000 threshold.
There may be Provincial Sales Tax (PST) requirements that need to be considered in certain provinces (BC, SK, MB and QC) if an entity is expanding into these provinces or acquiring an existing business in these provinces.
7. Prepare now for how intangibles will be evaluated in the future
If and when the ownership of your business changes – whether it’s an exit, acquisition or merger – you will have to define and assign a dollar value to intangible assets such as goodwill. In general, the goal is to maximize the tax outcomes for entrepreneurs and family members, but you have to make your plans well before any transaction occurs, not when someone is knocking at the door ready to buy your business.
GST/HST should also be factored into any potential ownership change, as it will generally apply on the value of assets being sold, including intangibles. Relief from sales tax may be available in certain instances but being proactive and ready in advance will help ensure there are no surprises to you or the potential buyer.
Don’t hesitate to seek advice
Your Grant Thornton advisor understands the challenges you face in starting and growing your technology business. We assist entrepreneurs and leaders in the tech sector by helping them maximize potential and identify financial opportunities – while avoiding these pitfalls and mitigating their risk.]]>
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The Volta Cohort program awarded a total of $150,000 to six companies on Wednesday night, handing out an extra $25,000 bundle due to the strength of the pitches.
In its third pitching event, the Volta Cohort advertised that it would invest as much as $25,000 to as many as five companies, but it added a bonus investment to a sixth company at the event. Volta Labs, the Halifax startup house, organizes the event to help out early-stage companies that need their first equity investment to help them reach the market.
Thirteen companies pitched at the event, and the winners were:
Aurea Technologies (Halifax)
Byos Cybersecurity (Halifax)
iLokol Technologies (Halifax)
Milk Moovement (St John’s)
Neothermal Energy Storage Inc. (Bridgewater, NS)
Tranquility Online (Halifax) – Tranquility offers an online, Software-as-a-Service solution that uses the gold standard therapy approach for anxiety: Cognitive Behavioural Therapy, or CBT. Tranquility’s interactive CBT software was built by experts and can also be accompanied by coaching from real people, who will be trained with an internally developed training protocol. The company recently launched a $1400-a-month pilot project with Volta-resident entrepreneurs.]]>
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Dental technology company BlueLight Analytics has closed a $3 million funding round and plans to use the money to launch a new data analytics product that can be installed in any dental office.
The Halifax company released a statement Wednesday saying the lead investor in the funding round was CIC Capital Ventures, the North American venture capital arm of French private equity firm CM-CIC Investissement. Innovacorp, the Nova Scotia government’s early-stage venture capital agency, also joined the round.
It was the first time BlueLight has raised venture capital financing, though it has raised about $3 million in equity funding from angel investors.
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After taking his online treatment for anxiety through an initial pilot, Joel Muise is now working with those at the coalface of anxiety—entrepreneurs—before launching TranquilityOnline to the general public in the new year.
TranquilityOnline aims to make getting treatment for anxiety affordable and timely by allowing users to access online support through a coach rather than a therapist. Coaches use Cognitive Behavioural Therapy, or CBT, to show sufferers how to shift negative thought patterns to balanced ones, and how to face challenges rather than avoid them.
Muise said the new paid pilot with Halifax’s Volta Labs startup house will allow Tranquility to work with seven entrepreneurs over six months. Volta will pay Tranquility $1,400 each month — money which will go toward covering the costs associated with launching to the general public in the new year.