There is no denying that Canada is going through its fair share of economic challenges. Rising inflation and increased interest rates put continuous pressure on the average small business owner. The ability to meet financial targets, manage liabilities, and ultimately keep their doors open is getting harder and harder.
As the market is recovering from the COVID-19 pandemic, there is fear that we may enter a recession. Despite that, Canadians are optimistic about the future.
While over 50% of business owners say they are doing better financially compared to a few years ago, the mounting stress of increased costs and supply shortages are leading some to say: “I want to close my business and walk away.”
In fact, insolvencies in Canada have increased by 22.7% in 2023 compared to the previous year. There are many reasons for business failure, and the everyday stress of running a business can be extremely overwhelming. As economic pressures impact thousands of small business owners, simply shutting doors and walking away seems like the easiest way out. However, we want to encourage you to sell your business instead of closing it.
Why You Should Sell Your Business Instead of Closing It
Parting with your business is a difficult choice. After all the long hours, endless nights, and months or even years of dedication, the time has come. However, there are numerous advantages to selling your business instead of closing it. We’ve listed the top four below:
Tax benefits
There are tax benefits and exemptions when selling a business. For example, if your business qualifies for LGCE, you will be exempt from paying capital gains tax on the profit made from the sale.
Shutting the business down means you will end up with the profit made up to the closing date, but this will also get taxed alongside employee and provincial/federal taxes that need to be paid prior to dissolving the business.
Knowing the Canadian tax rules and exemptions makes a significant difference. A good accountant will help reduce the overall taxes when you sell a business.
Personal benefits
The personal impact of selling a business vs. closing it is rarely discussed. As humans, defeat is a hard pill to swallow. Recognizing that you need to close up shop can have a negative impact on one’s mental well-being and pride.
A business closing down impacts the community, employees, and its owner. However, by selling the business - even if it’s slowly declining - the new owner can recuperate the business, protect employees, and continue serving the community.
If you sell your business, there is a chance that it can become profitable again under new ownership. This alone gives business owners a sense of pride and accomplishment compared to simply shutting the doors.
Financial benefits
In most cases, selling your business versus simply dissolving it will come with financial benefits.
Depending on the option you take to close your business, you will seize operations and liquidate all your assets, often at a lower market price. Transferring ownership to a qualified buyer will, at the very least, provide a minimal return on investment rather than simply closing down. In some instances, selling a failing business can bring unexpected returns.
However, you must be fully transparent with the prospective buyer. Let them know the state of the company’s financial health and its current debts and liabilities. Being fully upfront when selling is the best option to get the most money from the sale. After all, your business may have failed because of challenges outside of your control. If you can prove your business has growth potential and was profitable once, you may make a favorable deal with the right buyer.
Selling an insolvent business is possible
Knowing when to sell a business is all about timing. Although selling a business when it’s profitable is the best route, selling an insolvent business is still an option, and you can avoid the challenges that come with filing for bankruptcy.
But what is insolvency? In simple terms, insolvency is when a business’s liabilities and debts overpower its assets and profits. This means not being able to pay suppliers, debtors, or employees on time.
Several direct and indirect factors can negatively impact a business, leading to insolvency. A downtrend in the market or economy, taking on more debt, and lower-than-expected profit projections are some reasons businesses become insolvent and eventually file for bankruptcy or other legal processes.
In Canada, owing more than $1,000 to creditors and not paying your bills on time is enough to file for bankruptcy. However, that should be a last resort for any business owner as the process could take years to resolve and negatively impact your credit score.
What Factors Should You Consider Before Closing or Selling a Business?
The decision to sell or close your business involves numerous factors. Financial standing, market outlook, legal implications, and brand reputation are essential in choosing to sell or close your business.
Financial analysis
Knowing the economic status of your business plays an important role in making the final decision. Before throwing in the towel and saying: “my business is falling,” look closely at your finances.
If the business has assets, calculate their value. If it is generating income, take that into account too. Compare the cost of dissolving the business against the cost of selling it to a buyer.
A financial consultant or advisor can provide expert advice on what path you should choose. But in most cases, selling your business instead of closing it can be a better option.
Market and industry trends
The market fluctuates and industry trends come and go. Are you selling the business because it’s in a declining industry, or is the current economic state the problem? Answering these questions will help influence your decision.
Some buyers will purchase a business even when the market is down as they see its long-term potential.
Understanding the cyclical nature of markets and what sectors are currently in demand will help you choose between selling or closing your business in Canada. Working together with the right buyer who understands this gives you a better chance of selling.
Legal implications
There are legal requirements that need to be settled when closing or selling a business. When closing a business, you’ll need to consider severance packages, outstanding debts, and which legal process you’ll go through (for example, liquidation).
Selling a business also involves legal implications. Transferring contracts with suppliers, merging licenses, and uncovering potential liabilities are all part of the process.
Part of the legal process involves taxes. Transferring ownership (selling) involves canceling your business number (BN) and closing your GST/HST account. Closing a business does require filing a final tax return by the owner, and all outstanding debts are to be paid before dissolving the company.
Brand reputation
A loyal customer base, strong reputation, and unique market offering can help sell the business faster and at a better price. A good reputation translates to a higher valuation for the right potential buyer.
On the other hand, brand reputation can negatively impact a sale. A business with poor customer service, low product quality, or ethical concerns will struggle to find an investor. If this is the case, closing the business is the best plan of action.
Brand reputation can play a significant role in the final decision of whether you should sell or close a business.
Helpful FAQs
What is the difference between selling and closing down a business?
Selling a business means transferring ownership to a qualified buyer. Closing down a business means it will cease to exist. Operations will be shut down, and any assets will be sold.
When should you walk away from a small business?
When the product or service you offer no longer covers the operating costs of the business, it is generally a good indicator that you should think about exiting the business.
What are the disadvantages of closing down a business?
The disadvantages of closing a small business include financial losses, potential legal complications, and the emotional hardship of giving up.
What are the advantages of selling a failing business?
Compared to closing a failing business, selling it gives you the opportunity to recoup a part of the capital initially invested. Selling a failing business can also help prevent further financial burdens by transferring its liabilities to the new owners, who will also have the expertise to save the business.
The Bottom Line: Sell, Don’t Close.
At the end of the day, selling your small business is an excellent alternative to simply shutting it down. Not only do you have a better chance of profiting financially from the sale, but the brand you’ve built can continue under new ownership.
Ready to sell your small business? We help business owners like you connect with thousands of qualified buyers who are interested in both profitable and distressed businesses. We can help maximize your exposure to ensure you get top dollar for your business.
If you are looking for a broker to help sell your business, we work with a team of intermediaries ready to take on any challenge.
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