Should I pick a successor before considering a third-party sale?

The order in which an owner looks at buyers is a planning choice, and none of the sources cited here makes it a required step. BDC’s guidance on selling a business says to start by thinking about who the ideal buyer would be: a family member, a group of employees or an external buyer. It adds that the right buyer may depend partly on the owner’s goals and reasons for selling. The useful question is therefore what you need from the sale, and whether a successor can meet it.

What an internal successor has to bring

A family member or employee may not be able to pay the whole price at closing. BDC lists vendor financing, an earn-out and a phased transfer of ownership among the ways an owner can stay involved after the sale, and it offers a loan that it says can help a buyer complete a management or employee buyout or take over a family business. If part of the price is paid over several years, the CRA says a capital gains reserve may let the gain be reported as the proceeds are received. The Income Tax Act also has separate provisions on intergenerational business transfers, which an accountant should read before a family price is agreed.

What waiting costs

CFIB says poorly managed ownership transitions can end in a premature sale, in which the owner does not receive the full value of the business, or in closure. BDC says many people wait too long before starting to plan a sale and then sell at a time that is not ideal, for example because of health issues.

Preparing before you choose

BDC’s advice on preparing a business for sale includes ensuring good record-keeping, documenting standard operating procedures so operations are more easily transferable to a new owner, and making sure the business does not rely on your presence to continue functioning. It adds that in a family succession or management buyout, a valuation report can also be useful for discussions about the sale, or in later dealings with tax authorities. For how the two paths compare, see management buyout vs third-party sale.