Being an entrepreneur is hard work and, even though the rewards can be great, there may come a time when you want to move on from your business. Some people simply close up shop, but if you’ve built up a successful business, selling it can be a profitable way to move on to the next stage of your professional life. This guide will walk you through the steps to selling a sole proprietorship in Canada.
Why sell your sole proprietorship?
There are lots of good reasons for an entrepreneur to sell their business, whether it’s a sole proprietorship or has a different business structure. Some common reasons include:
New business opportunities
Maybe you’ve had a great run with your sole proprietorship, but you’ve come across a different professional opportunity that you see more potential in.
Your business has grown
Business growth is the goal of every entrepreneur, and it’s exciting when you get to experience it yourself. However, it can also present a great selling opportunity. Selling when your business experiences a high level of growth can result in a higher selling price than if you were to wait and try to sell when business is flatter from one year to the next.
Lack of interest
Whether you’ve been in business for decades or for a short while, it’s always possible for your interests to change and for the daily routine of running your business day to no longer appeal to you. That’s a perfectly valid reason to sell a sole proprietorship. Running a business takes a lot of work and dedication, so it can be difficult to keep it going if you lose interest.
Retirement
If a sole proprietorship has been successful, selling it can be a great way to fund retirement as a small business owner.
Business valuation
Business valuation refers to the process of determining the total value of a business. It’s an estimate rather than a number you can arrive at with 100 per cent certainty, but a chartered business valuator can help you get a realistic idea of how much your business is worth.
If you want to be sure that an offer you’re getting for your business is reasonable, it’s a good idea to hire a professional to help you with your valuation. They can also help you optimize the tax implications of selling your sole proprietorship.
There are three main methods used in business valuation. These are:
- The earnings-based method: A business owner or valuator looks at past cash flow and forecasted earnings to establish the value of a business. This approach is useful for businesses that generate revenue worth more than the assets they own. In other words, the business’s value lies in the revenue it can generate rather than the assets, such as land or equipment, it owns.
The annual revenue is typically multiplied by a certain number of years to arrive at a sale price. For example, a business with a yearly revenue of $500,000 a year may multiply by three years to arrive at a $1,500,000 sale price.
- The market-based method: This method establishes a selling price based on the selling price of similar businesses.
- The asset-based method: If the value of your business lies more in the assets you own than in the business operations, this method may be appropriate. This approach is also used if a business is not generating much revenue, but money can be made by liquidating its assets.
These only offer a starting point; your real selling price may be higher or lower depending on your specific circumstances.
Assets you can sell
A sole proprietorship is not a legal entity independent from its owner, the way a corporation is. This means a sole proprietorship can’t be sold off in whole or as shares. The owner of the sole proprietorship legally owns the various assets that make up the business. When it’s time to sell, it’s those assets that will be sold to another business or another individual sole proprietor.
As a sole proprietor selling your business, this means you need to identify all of the assets you can sell. These assets include intangible things that have value and will enable the buyer to generate revenue, such as intellectual property and goodwill.
Tangible assets to incorporate in your business valuation include:
- Land
- Buildings owned or leased by the sole proprietor
- Equipment and machinery
- Inventory
- Raw materials
- Supplies
Intangible assets include:
- Goodwill, including things like brand recognition and reputation
- Brand names and logos
- Trademarks
- Copyrights
- Patents
- Intellectual property rights
Steps in selling your sole proprietorship
As a sole proprietorship, your business assets can’t be directly transferred to a new owner. Instead, the buyer needs to establish a business structure to receive the assets. This can be another sole proprietorship, a corporation, or a different business structure.
When it’s time to sell your business, here are the steps to take:
- Identify the valuation of your business. This will help you establish a fair selling price.
- Advertise that your business is for sale. You may do this within your own personal network, through a business broker, on a website dedicated to listing businesses for sale, or even through a real estate agent if part of your business assets include real estate.
- Negotiate with potential buyers. It helps to create a professional brochure that provides an overview of your business as a starting point for discussions.
- Review offers. If you have several offers, the total price is important, but you may also want to give preference to buyers who can provide a lump-sum payment.
- Hire a lawyer to create the sales agreement. This will outline the specifics of the sale, including the price and the assets being sold.
- Transfer the assets of your sole proprietorship.
After the sale
After the sale, the Government of Canada requires you to close your business number (BN) and all your Canada Revenue Agency (CRA) program accounts, such as your import-export number. The buyer of your business will create their own new BN and CRA program accounts to receive the business, as these can’t be transferred.
You are also responsible for any debts associated with your sole proprietorship, since those are legally under your name. Pay off any debts and close any other accounts associated with your business. Depending on the nature of your business, you may also want to let your customers know about the sale, and even introduce the owner to key customers.
With the sale of your sole proprietorship complete, you’re free to go on the next stage of your professional life.
This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.