If you are selling your business and your sales go down in May and June, will that impact your selling price?

You currently have your business for sale and you are hoping to find and investor. Since it takes a long time to find an investor, let’s assume that you find a potential buyer of your business next month. Sales have been normal up until May but sales start to drop. How do you explain the change to the investor? Is this a one time change or is your business really going down hill quickly? What do you do?

Effective May 1, some businesses are now subject to HST. The remainder of businesses on July 1 in Ontario and BC will be subject to HST. If you are selling to a business who has to pay for the PST, it is more economical for them to postpone their purchases and take delivery after July 1 rather than before July 1.

If they can hold off their purchases, they will pay HST instead of PST on the purchase. HST is fully refundable to many businesses therefore those who qualify will get a full refund of the HST. Businesses can save up to 8% on their purchases. What does this include – computer equipment for own use, packaging equipment etc. These can be major purchases if you are doing a large upgrade or your business uses a lot of supplies in the business.

By businesses waiting one month, they can save 8%. This goes straight to the owners pocket therefore this can be a one time savings that may not be repeated in the future. If businesses can save 8% by deferring the purchase that means that businesses which sell to those customers who can get a refund of HST may see a drop in sales. If you are selling your business and the potential investor sees the sales drop, will they try to renegotiate the purchase price. If people defer their purchases until July, the best time for a buyer to close the sale of your business will be on June 30. The only way to prove to the buyer that the business slowed down was due to the implementation of HST, would be to monitor sales in July.

I am sure that many businesses are not anticipating a drop in revenue therefore they may be caught with too much labour in June and not enough labour to satisfy sales in the month of July. If you are buying a business, you want to argue that sales dropped so you can get a better price and close before the seller of the business finds out that sales were extremely good in July.

On the other hand, if you are selling to consumers, you may see large sales in June and no sales in July. Customers will purchase goods in advance but after one or two months, they will have to go back to their normal buying cycle and absorb the additional tax. Buying a retail business will see inflated revenue up to July 1 and if you close on June 30, your cash flow will drop in July when sales drop, wait until August or September to close hoping that the buying patterns of consumers returns back to normal one to two months after the implementation of HST.