Our last TEC Advisory board meeting we discussed the usual things such as how is business been this past month, what major issues are on the table & what you’re doing about it, and what major issues do your clients have at this time.  Nothing out of the ordinary, except sales cycles are taking longer which leads me to ask the question how many companies out there currently have salespeople who have not been trained for those bad times? We all know its easy to sell during good times, for many it was make a couple of calls and get the deal signed, but now I would say that consensus around the table is that we haven’t seen sales cycles like this in over the past decade!

The point that was being made was that we need to start training our younger sales staff the art of sales and getting to the real needs and objectives of the prospect and letting them know that it will take longer to close sales in today’s business environment.  The alternative is that are you leaning on your more experienced sales staff, or in other words people probably in their 40’s or 50’s who have been through tough economic times and know that they have to do a lot more digging to qualify prospects and know more sales techniques to better meet the needs of prospects?

Sales are tough today, do you have the right people, invested in the right systems, and training and touching customers more often to maintain those relationships?  If not, your shareholders, owners, and bankers could be asking the more difficult questions of you.

Written by Richard Wong, CMA          email: rwong@firstchoicecapital.ca

In the sale or purchase of a private company its still necessary to use best practices in order to have the parties feel good about the transaction.  Using the services of a corporate financial advisor, a tax accountant, a corporate lawyer who work together as a team from the beginning will provide you with the ability to see things that are often overlooked by purchaser in a company.

In a past transaction the sole shareholder(owner) of a private company sold his shares to an independent purchaser and the capital gain realized was eligible for the small business corporation shares capital gains deduction.  So far so good for both parties.

However, one of the most common issues which is misunderstood by both the purchase & seller is the “Due to/from shareholder” account.  On the surface it seems like a fairly straight forward liability account, the credit balance in the account is owed to the shareholder.  Here is where the 3 professional advisors, a corporate finance lawyer, the tax accountant, and the corporate financial advisor know that this is a liability like any other liability and is owed to the shareholder.  Some accountants have trouble understanding this because they assume that the company had sold its shares, but the shares are separate from its liabilities.

Another effect of this “credit balance” in the Due to Shareholder account is when the new owner decides to draw money out of this account he will have been deemed to have received a “taxable benefit” under Section 15 of the Income Tax Act. Why? The withdrawal transaction isn’t a return of capital it’s a debt owed to its the former owner.  The capital gain for the seller of the business in this situation is also overstated which the capital gains exemption the owner has here.

An example might help here: the seller of the business sells her business for $500,000 and the owner has a credit balance of $150,000 in the Due to Shareholder account.  In the sales agreement the buyer of the business should ensure that the agreement reflects an allocation of the purchase price of $150,000 to purchasing the debt of the Due to shareholder account and the remainder allocated to the purchase of the seller’s shares.  The reason is that the purchaser has a debt owed by the company to herself and when she wants to withdraw some of it, it will be tax free unlike the prior situation.

This unfortunate situation can be reversed, but if the parties use best practices and have a coordinated team of advisors working from the beginning  it will save time and money for both the buyer and the seller.  But sometimes, the transaction go through due to no advice for either party and the consequences are a tax project case resulting in more money spent on a tax advisor later.  In a case documented in CMA magazine an accountant figured they fixed this by exchanging the debt for more shares, but caused more tax problems in the allowable business investment loss  issues and failed to take into account subsection 80(2) of the income tax act which allows the debt to be settled for the fair market values of shares issued.

The lesson here is that it is easier to have a team in place before you decide to do a sale or purchase of a private business to advise you on the issues, because they’re not as straight forward as you may think.  You can’t substitute the expertise of a group of advisors to help you save you money and headaches in the long run.

Written by Richard Wong, CMA      rwong@firstchoicecapital.ca