“A person who never made a mistake never tried anything new.”
– Albert Einstein
There are 2 important questions to ask. The first is whether or not the value of your practice is at its peak. This is gut feel, and largely determined by your energy levels as the key driver.
The second question (speaking of energy levels) is if you feel ready to move on. That’s not necessarily retirement. It may be that you’ve built up enough value to finance the next big step in your professional life.
Avoid the kneejerk “I should sell next year.” Starting 2-5 years out will have the best tax benefits. Here’s how:
You’ll need to own the shares for at least 2 years before selling to get the exemption, plus time to set up the corporation and get the ball rolling. Not being in a hurry is your best bet tax-wise. The wait can help lead to great results from a tax perspective.
Consider that any gain on your personal income tax return (in the highest tax bracket in Alberta) will cost you 24% in taxes where a gain using your capital gains exemption will, in most cases, be tax-free.
No, it doesn’t involve any ancient rituals. To claim the capital gains exemption, and save a boat-load of tax, your shares must meet these criteria:
“Fair value” is the purity part. If more than 10% of your cash/ investments aren’t being actively used in the company operations (ie. excess investment capital), you’ll need to purify the corporation.
Sometimes purifying is straightforward (ie. using investments to pay down business debts), but other aspects, like extracting non-business assets, will require professional advice.
Now that we’re proactive about taxes, let’s ask the big question: what’s it worth? Selling your practice is like selling your home, in that its worth is ultimately determined by the amount someone is willing to pay, and you run the risk of losing your shirt without professional assistance.
Valuation is both complicated and surprisingly subjective. The key factors are:
Don’t rely on a canned formula to derive valuation. There’s too much at stake. This is where you need a professional the most, one who will take your business seriously and treat you like a unique entity with its own unique opportunities.