What should you do after selling your business?

The sale of your business marks a major turning point, both financially and personally. Once the deal is done, a number of strategic decisions need to be made about taxation, investing cash, transition and planning for the future.

Here are the steps to follow for effective after-sales management.

1. Tax and administrative formalities involved in the transaction

The sale of your business triggers a series of tax and administrative obligations that need to be dealt with quickly and strategically. Good management in the months before and after the transaction can make a major difference to the tax payable and the protection of your capital.

Declaring the capital gain

Inclusion rate

In Canada, when an entrepreneur sells his or her business, the profit made is generally a capital gain. This gain is not taxed at 100%, but at an inclusion rate (i.e. the portion of the gain added to your taxable income).

In practical terms, if you make a large gain, only part of it will be included in your personal income and taxed at your marginal rate. As a guide, the applicable inclusion rate is generally 50%, so only half of the gain is included in taxable income. However, the tax impact can be significant without prior planning.

Lifetime Capital Gains Exemption (LCGE)

If you sell the qualifying shares of an SME, you could benefit from the lifetime capital gains exemption (LCGE).

This exemption allows you to deduct a significant portion of the gain from your taxable income, considerably reducing the tax payable. To qualify, you must meet a number of criteria:

• Company actively carrying on business in Canada.

• Test of qualifying assets.

• Minimum shareholding.

A technical analysis is essential, because the wrong structure can result in the loss of this tax privilege.

Difference between sale of shares and sale of assets

The tax consequences vary greatly depending on the structure of the transaction:

Sale of shares

• Generally allows access to the ECGC;

• More tax-efficient for the seller;

• Complete transfer of the company to the buyer.

Sale of assets

• The company sells its assets (equipment, inventory, clientele);

• Can generate both capital gain and business income;

• Often less tax-efficient for the seller;

• The proceeds of the sale first remain in the company and must then be distributed or withdrawn according to an appropriate tax strategy so that the shareholder can benefit personally.

The structure negotiated at the time of the transaction therefore has a direct impact on your tax bill.

Closing or maintaining the company?

After the sale, many entrepreneurs wonder whether they should dissolve their company or keep it.

Dissolution

Dissolution officially puts an end to the company's legal existence.

It may be appropriate if :

• All assets have been sold;

• No future activity is planned;

• There is no tax deferral strategy.

However, a hasty winding-up can lead to sub-optimal tax consequences.

Maintaining a holding company

In many cases, it may be advantageous to retain or create a holding company.

Possible benefits :

• Tax deferral;

• Asset protection;

• Estate planning;

• More efficient corporate reinvestment.

The holding company can become a strategic tool for structuring your assets after the sale.

Corporate cash management

If the cash remains in a company, determine :

• When a dividend should be paid;

• What types of investments should be made at the corporate level;

• What disbursement strategy to adopt depending on your needs;

• Whether certain tax mechanisms, such as CDC or RDTOH, may come into play depending on the nature of the sums involved.

A large-scale withdrawal without planning can lead to high taxation. A gradual approach is often preferable.

Updating your tax obligations

The sale has a significant impact on your personal tax situation.

Personal tax

The capital gain increases your taxable income for the year of the transaction.

This means :

• Estimate the total tax;

• Plan for the necessary cash flow;

• Avoid surprises when filing your return.

A quick tax simulation, ideally carried out before the transaction and updated afterwards, is highly recommended.

Adjustment of instalments

If you were subject to instalment payments, your new situation may require an adjustment.

• Recalculation of quarterly payments;

• Review of revenue projections;

• Verification of applicable payment schedule.

An incorrect estimate may result in penalties or interest.

GST/QST if applicable

Depending on the nature of the transaction (e.g. sale of assets), specific GST and QST rules may apply.

Certain transactions can benefit from a tax election to avoid immediate tax collection, subject to strict conditions.

2. How can you reduce tax after selling your business?

The tax bill associated with the sale of a business can be substantial. However, there are a number of strategies that can be used to legally reduce the tax payable, provided that the approach is structured and complies with Canadian and Quebec tax rules.

The aim is not to avoid tax, but to optimise it rigorously and compliantly using the mechanisms provided for by law.

Maximising the capital gains exemption

One of the most advantageous measures when selling a business is the lifetime capital gains exemption (LCGE) applicable to the sale of qualifying shares in an SME.

To benefit from this exemption :

• Check that the company meets the qualifying asset tests (assets used primarily in an active business carried on in Canada).

• Ensure that the shares have been held for the minimum required period, i.e. throughout the applicable 24-month period;

• Remove excess passive assets (investments, unused cash) prior to the transaction, if necessary.

Poor preparation can mean losing access to the exemption. Conversely, proper planning can result in major tax savings.

Family trust planning

The family trust is an advanced tax and estate planning tool. When set up in the years preceding the sale, it can multiply access to the capital gains exemption among several eligible beneficiaries (depending on the rules in force).

• It offers great flexibility in the distribution of amounts.

• It facilitates intergenerational planning.

However, the rules governing trusts are complex and have changed in recent years. A personalized analysis by experts like Mallette is essential to avoid unforeseen tax consequences.

Pre-sales rollover and reorganisation

In some cases, a corporate reorganisation prior to the sale can optimise the transaction.

Examples of possible strategies:

1. Inheritance freeze to crystallise current value.

2. Creation of a management company (holding company) to separate assets.

3. Reorganisation of share capital to facilitate access to exemption.

4. Transfer of excess passive assets out of the operating company.

These strategies should be put in place before the transaction. Late planning may limit the options available.

Split and disbursement strategies

After the sale, the way in which you withdraw the funds has a major influence on the total tax paid.

Among the elements to be analysed:

• Gradual withdrawal by dividends;

• Salary versus dividends if you remain involved;

• Keeping part of the sums in a management company where relevant;

• Disbursement strategy spread over several years to reduce the impact of the marginal rate.

A massive withdrawal in a single year can put you in the highest tax bracket. Good planning of disbursements according to your needs often makes it possible to optimise the tax burden.

3. What should I do with the money?

The sale of your business suddenly transforms your financial situation. You go from a situation where your capital was often tied up in your company to one where you have significant liquid assets. This transition requires a clear strategy for protecting, growing and structuring your assets.

The aim is to define a coherent plan aligned with your life plans, risk tolerance and disbursement strategy.

Investing cash wisely

Diversification

After a sale, many entrepreneurs tend to quickly reinvest in a single project or sector with which they are familiar. However, a diversified approach can be more prudent.

A balanced approach may include :

• Fixed income securities;

• Canadian and international equities;

• Real estate;

• Alternative investments;

• Strategic cash.

Diversification reduces overall volatility and protects capital over the long term.

Conservative vs. growth portfolio

The choice between a conservative or growth-oriented approach depends on a number of factors:

• Your age;

• Your income requirements;

• Your other sources of income;

• Your risk tolerance;

• Your disbursement horizon.

An entrepreneur nearing retirement will often favour stability and capital preservation. Conversely, a younger entrepreneur might keep a growth-oriented portion of the portfolio.

It is also possible to adopt a hybrid strategy: securing part of the capital and investing the other part in more dynamic assets.

Passive income

One of the goals of some entrepreneurs after a sale is to generate recurring passive income.

Possible sources :

• Dividends;

• Rental income;

• Interest;

• Distributions of funds;

• Minority interests in other companies.

A well-structured strategy enables the capital obtained from the sale to be used to generate predictable income streams, thereby reducing financial and tax pressure.

Should you set up or maintain a holding company?

The decision to maintain or create a management company depends on your overall strategy.

Tax benefits

A holding company can be used to :

• Tax deferral when cash remains in the company.

• Corporate management of investments.

• More flexible tax planning.

In some cases, investing at corporate level can be more effective than an immediate withdrawal from staff.

Asset protection

The holding company can also be used to isolate and protect accumulated assets.

In particular, such a structure can help to distinguish heritage assets from operating activities or new business projects, depending on the context.

Estate planning

A corporate structure can also facilitate certain estate or post-mortem planning strategies, depending on the owner's profile and the structure in place.

Plan your withdrawals and your standard of living

Disbursement strategy

Rather than withdrawing capital en bloc, it is generally preferable to adopt a structured disbursement strategy:

• Progressive taxes;

• Combining dividends with investment income;

• Optimising the marginal rate.

Phased retirement

Many entrepreneurs opt for a gradual transition:

• Reduced working hours;

• One-off mandates;

• Strategic involvement without operational management.

Continue as a consultant?

In some transactions, the seller remains involved as a consultant or employee.

Before accepting :

• Analyse the tax impact of remuneration;

• Evaluate the length of commitment;

• Clarify responsibilities.

This can be an attractive source of additional income, while easing the personal and professional transition.

4. The transition with the buyer

The signing of the deed of sale does not always mark the immediate end of your involvement. Many transactions include a transition period to ensure continuity of operations, preserve the company's value and secure business relationships.

A well-structured transition protects both your financial interests and the future of the business you've built.

Post-transaction support

Earn-out clause

An earn-out clause provides for a portion of the sale price to be paid at a later date, depending on the achievement of certain targets (revenue, profitability, growth, etc.).

This mechanism enables :

• Sharing the risk between seller and buyer;

• Potentially increasing the total transaction price;

• Facilitating negotiation.

• However, it involves significant issues:

• Precise definition of performance indicators;

• Length of the valuation period;

• Level of control retained by the seller.

Poor drafting can lead to litigation or financial loss.

Consulting contract

It is common for the vendor to continue their involvement in the form of a consulting contract or temporary employment.

Before accepting :

• Clarifying the exact role and responsibilities;

• Defining the term of the mandate;

• Structuring remuneration in a tax-optimised way;

• Evaluating the tax rules applicable if the mandate is carried out through a company.

Remuneration may be paid in the form of a salary or a fee, depending on the structure chosen. Each option has a different tax impact.

Transition period

The transition period aims to :

• Transferring key knowledge;

• Presenting the buyer to customers and partners;

• Securing banking and supplier relationships.

A well-planned transition reduces operational risks and promotes continuity of business relationships, particularly when the relationship with customers relies heavily on the person of the founder.

Maintaining team stability

The announcement of a sale can generate uncertainty among employees. Human management of this stage is crucial.

Role of ambassador

As a former owner, you play a strategic role:

• Reassure employees;

• Publicly support the new leader;

• Maintain a climate of trust.

Your attitude strongly influences the internal and external perception of the transaction.

Internal communications

Clear, structured communication is essential.

Best practice :

• Explain the reasons for the transaction;

• Present the buyer's vision;

• Clarify organisational impacts;

• Respond to team concerns.

Proactive communication limits rumours, reduces staff turnover and protects the value of the company during the transition.

5. Managing the post-recession blues

We often talk about tax, investment and strategy after the sale of a business. But the human aspect is often overlooked.

For many entrepreneurs, the company was more than just a financial asset. It represented an identity, a routine, a team, a mission. Once the deal is done, a feeling of emptiness can arise. This phenomenon is frequently referred to as the "post-sale blues".

Recognising this is an important step in making a successful transition.

Loss of corporate identity

For years, your daily life was structured around strategic decisions, team management and growth.

After the sale :

• The pace suddenly slows;

• Responsibilities disappear;

• Solicitations diminish;

• Social roles change.

This loss of entrepreneurial identity can create a feeling of uncertainty, even when the financial situation is solid.

It's important to understand that this transition is normal. Selling your business often represents the end of a cycle, but also the beginning of a new phase.

Taking a step back before embarking on a new project

After a major transaction, there can be a strong temptation to immediately embark on a new project.

However, a period of strategic reflection can be beneficial:

• Review your personal goals;

• Redefine your priorities;

• Evaluate your energy level;

• Reflect on the type of involvement you want.

Taking time helps you to avoid impulsive decisions and to align the next project with your current values, which may have evolved.

Mentoring, investment, a new challenge

Selling doesn't mean the end of your entrepreneurial journey. Rather, it opens up new possibilities.

There are several avenues open to you:

• Be a mentor to young entrepreneurs;

• Act as an investor or business angel;

• Sit on boards of directors;

• Launch a new project on a smaller scale;

• Get involved in philanthropic causes.

These options allow you to maintain an active role in the business ecosystem, while benefiting from a different pace.

6. Should I start a new project after the sale?

After the sale of your business, one question often comes up: Should I go back into business?

Some entrepreneurs want to take a well-deserved break. Others quickly feel the need to take on a new challenge. There is no right or wrong answer, only a decision in line with your goals, your energy and your financial situation.

Here are some of the avenues frequently considered.

Become an investor in young companies

Acting as an investor in young companies means investing in start-ups and growth companies, while contributing your expertise.

Advantages :

• Maintain an active role in the entrepreneurial ecosystem;

• Leverage your strategic experience;

• Diversify your investments;

• High return potential.

However, this type of investment carries a high level of risk. A diversified and structured approach is essential.

Acquisition of a new SME

Some entrepreneurs choose to buy an existing business rather than start from scratch.

This option allows :

• Invest in a proven business model;

• Use your expertise in a new sector;

• Generate cash flow quickly.

However, an acquisition must be analysed rigorously (due diligence, financing, tax structure). It's also important to make sure that this new project is really in line with your current motivation and not just a reflex to get back into business.

Investing in real estate

Real estate is a popular strategy after the sale of a business.

This may include :

• Residential rental properties;

• Commercial properties;

• Investments in real estate projects.

Possible benefits :

• Recurring passive income;

• Inflation protection;

• Portfolio diversification.

However, property also involves active management, market risks and specific tax obligations. An overall financial analysis is recommended before allocating a significant proportion of capital to this sector.

Sitting on boards of directors

Putting your experience to work for other organisations can represent an interesting balance between involvement and flexibility.

Sitting on a board of directors allows :

• Maintain a strategic role;

• Expand your network;

• Contribute to the governance of companies or organisations.

This approach generally offers less operational involvement than a new entrepreneurial project, while remaining stimulating.

A successful transaction deserves strategic planning

The sale of your business is not the end, but the beginning of a new strategic phase. The decisions taken in the months following the transaction will have a direct impact on your tax situation, your financial security and the transfer of your assets.

An integrated approach combining tax, transactional services, financial planning and actuarial services enables you to optimise tax, structure your investments and plan your future with clarity.

Every situation is unique, and at Mallette, we know that! With this in mind, our experts are with you every step of the way to analyse your transaction, protect your capital and build a coherent, sustainable strategy for the future.