Please delete

The value of a consulting company is your brain and your book of business. In IT consulting you won't have a book of business (like accountants, dentists etc.). Your brain will be leaving and the only thing left will be hidden liabilities (potential lawsuits etc.) Consequently, a new IT consultant would be better off to start his own new corporation rather than to take on potential liabilities. So there is no market value in a one-person consulting business, and I don't think you will receive any offers. The retained earnings will by necessity have to reside in a bank account when you want to sell. So you'd have to liquidate all the assets and get rid of any liabilities, so that the bank account can be distributed to the shareholders (i.e. you, so there is no difference) Segregating the product business from the consulting business on the retained earnings basis now will be a time-consuming exercise for no gain. You'd be better off to keep the business for the product activity and just ride the consulting business into the barn for a rest.

Take your money out of the business. No one wants to buy money with money.

Separating the two parts now makes sense.

The key to the whole deal will be the employment contract. Get an experienced lawyer to draw it up for you and make it part of the sale package.

ViRedFlag wrote: ↑One company is consider buying consulting business so they can get my expertise - for example they will buy business if I will commit x years working for them on full time basis - so really they are buying my expertise that I developed while working as consultant. Is that reasonable?

Why wouldn't they just hire you instead instead of also paying money for the 'consulting business' that is nothing without you anyway? Doesn't make sense to me unless you are telling them you won't work for them unless they buy your business. However, why not then just charge the difference as an extra consulting fee? But, hey, if you can get the extra $ and it's capital gain instead of income to you then great. If I was the buyer I sure wouldn't enter into this kind of deal as there is no guarantee that you will work for them for x years and by paying you more I can pay you over time. If you don't keep working fo them they can't force you to continue but can only sue you, then need to win judgement, pay the lawyers, not get all their legal fees, back, etc then collect, etc. I don't get it.

None of this makes sense to me either. Buying a one man show by buying the business is like buying a building because you like to live in one of the apartments. Good for you if it works out but you'll need to elaborate a bit if you want some serious advice.

ViRedFlag wrote: ↑First of all thank you very much for advice. To add a bit more - my expertise is critical to this other company, so they want me. But if I will do consulting much longer for them, there is possibility that I will become "Personal Service Business", so I would rather move on or they buy my company and I stay. Hopefully this now makes more sense.
If this would go ahead - I am looking if there is any advantage to me from "Canada Capital Gain exemption".

Doesn't even make sense either way from a tax point of view

Isn't this generally called an "acqui-hire"? Happens often in the startup world.

Yes but if that's the amount the legal fees will eat up any tax advantage. Also the acquirer is acquiring the liabilities of the company too and the undisclosed ones and any cleanup of the corporation that has to be done. (Filings etc).

What amount are we actually talking?

Have you ever had a "net investment loss" or claimed carrying charges? If you have this will limit how much capital gains exemption you can claim. In order to calculate your capital gains exemption you must calculate your cumulative investment loss which goes back to 1988. So say since 1988 you have had total investment income of $5000 but deducted carrying charges of $15,000. Then you would have a cumulative loss of $10,000. So you want to claim a capital gains exemption of $5,000. You can't because the $10,000 CNIL (cumulative investment loss) limits the exemption you can claim.

ViRedFlag wrote: ↑Thank you - I just logged in to CRA website and checked my carryover amounts. I had investment losses for 3 years long ago, but for last 5 years it is all cap gains and I have no "unapplied net loss". Anyway my losses were few thousands in all. But cap gain exemption is hundred of thousands..., so it should not be big deal.

That is not the type of loss I'm talking about. Your cumulative investment loss is not tracked on the CRA site. You must calculate it. And it goes back to 1988. Have you ever claimed carrying charges? This increases your amount. And the loss does not limit the gain exemption off the top (ie reduce the $500,000) it reduces what you can you claim. Read my example. Basically the amount of CNIL (cumulative net investment loss) needs be reduced to zero before any exemption can be claimed. So even if you have never used any of your $500,000 in my example you would not be able to claim any exemption of a $5,000 gain if you have a CNIL of $10,000.

Google cumulative net investment loss.

All of this discussion still doesn't answer the question "What is in it for the buyer?" If I want your expertise, then I would just buy you (i.e. hire you as an employee or contract you). What possible reason would I have for buying a worthless shell corporation from you as well? Trying to spin an advantage to yourself by calling some of the payment as capital gains instead of contract or employment income is creating an elaborate dodgy transaction in hopes you might save some tax. Good for you, if you can convince the buyer to participate.

Just Confused wrote: ↑All of this discussion still doesn't answer the question "What is in it for the buyer?" If I want your expertise, then I would just buy you (i.e. hire you as an employee or contract you). What possible reason would I have for buying a worthless shell corporation from you as well? Trying to spin an advantage to yourself by calling some of the payment as capital gains instead of contract or employment income is creating an elaborate dodgy transaction in hopes you might save some tax. Good for you, if you can convince the buyer to participate.

I wonder too, but that is not the OP's question. Nevertheless the OP has inferred that buying his company might be the only way he would end up working for the buyer. The buyer simply paying more for his services is something I mentioned before as an alternative but the OP apparently has figured out he will pay less tax by having the extra remuneration come to him in the form of the purchase of his company. As a buyer, if I really wanted the OP, I would just up his consulting fee even more to match the after tax benefit the OP would get from a company purchase because you're right, why bother ending up with some worthless shell corporation that might have some skeltons in the closet. However, who knows, the buyer may not have the bargaining power required and end up having to go for the OP's company purchase + consulting contract proposal.

Generally speaking, a robust standalone valuation of any business will focus on (NPV of future operating cash flows)+(market value of non-core assets)-(liabilities).

In your situation, the NPV of future cash flows of the consulting part of the business without your continued presence is likely zero. With your continued presence, it is the net present value of the consulting earnings, net of expenses (and taxes), which if you become an employee includes subtracting your future employment income and benefits going forward.

Retained earnings in the company, above and beyond working capital needed for running of the consulting business, will normally fall in the non-core assets. The buyer will likely be indifferent whether they pay you for them, or whether you withdraw them first. I would check with your accountant, since the tax treatment may be different, especially since the tax rate on dividends is different from capital gains, and also since you have some ability to play with the dividends which taxation year they fall into. In particular, based on how good a year you had this year, and how much of your eventual capital gains on sale are shielded from tax with the small business provision, your marginal tax rate on dividends may be higher this year or next. I don't know the details, sounds like you don't either, the product side of the business may make things more complex; so get professional advice on this.

The above valuation formula is for a purely standalone valuation. The reality is the buyer will presumably need to pay a buyer's premium, for a) control, b) since presumably they see some synergies in their own business from acquiring your expertise (and they should share that value), and c) since doubtless they will have you sign a noncompete and you need to be compensated for that as well.

Congrats and good luck!