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indicatorSuccession Planning

So you want to sell your business

By ATB Financial 21 July 2020 6 min read

You’ve accomplished a lot as an entrepreneur and now you’re looking at the next step – selling your business. The trigger can be anything from an eye on retirement to discovering a new passion, to a global crisis like COVID-19.

But what’s the same for most entrepreneurs is the objective: to get the maximum value and the best terms possible. Here are a few fundamental steps to meet your goals.

 

Take time to build the sale

There are four key issues to address when selling (or buying) a business, says ATB Senior Manager, Entrepreneur Education Jason Bacon.

  • Deal structure
  • Valuation
  • Vision
  • Capital

“At the end of the day, how much do you want to sell your business for,” Bacon asks. “If you have a specific goal in mind, then you have to understand what is required for the business to get to that point.”

Deal structure

Know what you want to achieve with a sale and structure it accordingly. Do you want to get out of the business completely or keep an interest? Financing will vary for either choice, so take the time to understand each.

Are you willing to stay on to help transition the business to the new owner? If so, make sure to define the terms in a contract. And do you want to include a non-compete clause? Ensuring you have done the work to make sure your business is transition ready will help reduce the requirements of things like earn-outs. The person purchasing may want that in the contract for peace of mind.

Lastly, figure out the tax implications of a sale so you don’t take a big hit. You can add value by structuring the sale to minimize the buyer’s tax burden, too. This is where your team of specialists can help you, such as your accountant.

Valuation

Valuation is a mix of an art and a science, since what you think your business is worth could be different from what the market values it at. It’s like putting your home up for sale – you might have invested a lot to renovate it but if it’s listed too high, it won’t move.

Get an experienced chartered business valuator for an unbiased reading of your enterprise’s value. It’s worth noting that a chartered valuator does come with a cost. Another option would be to again turn to your team of partners, such as your financial advisor, lawyer or accountant. Maybe even reach out to other entrepreneurs who have been through the valuation process. Having this clarity will help determine a realistic asking price and if an offer is reasonable.

Vision

Your passion brought you here. How you run your business and provide value to your customers can be a major selling point to potential buyers. If you have a strong brand, experienced staff, policies and practices in place and clean books, a new owner can hit the ground running.

One ATB client Jason worked with was a heavy-duty mechanic who was interested in buying the grocery store in the small town his wife was raised in. The seller agreed to mentor the buyer for a year, teaching him specific skills needed in operating and maintaining a grocery store, cinching the sale and setting the buyer up for success.

 

Capital

The capital you offer is more than cash in a transaction. Capital also represents the entrepreneurial skills, sector knowledge and social cache.

Taking from the example above, the mechanic-turned-grocery-store-owner knew everyone in town and was a trusted community member. That social capital helped in the handing over of the business as the community supported the transition. The capital of his skills as a business owner also played into the seller’s decision to sign over the store.

Know who you want to sell to

As a seller, you need to understand the different types of buyers there are on the market and which one you want to attract, notes Ricardo Flores, ATB Entrepreneur Strategist.

“Different buyers have different interests in mind,” he says. “When you know that, you know what to highlight in the sale, and what to focus on. You want to show you are strong in the area that is of most interest to the buyer.”

Flores reflects on insights from Elizabeth McRae with Commercial Ventures, where she notes most buyers fall into four groups; lifestyle, independent, strategic and financial.

  • Lifestyle buyer – They simply want to earn a living wage out of business. Not overly ambitious, the lifestyle buyer is happy to take over a small business that’s not too complex to manage.

  • Independent buyer – The biggest motivation of an independent buyer is to grow the business by bringing their expertise to the table.

  • Strategic buyer – This could be a competitor, or a business owner who wants to grow by absorbing your business or complimenting their business by adding your services.

  • Financial buyer – Investment groups have become more prominent in Canada, buying up independent businesses.

 

When should I sell

One thing every entrepreneur works on is getting the timing right – to launch an idea, to grow, to sell. In the world of COVID, timing is even more important as financial institutions figure out how to manage the impact of a global economic storm.

“One of several ways businesses are valued is through multiples of EBITDA – earnings before interest, taxes, depreciation and amortization. Now they are discussing EBITDAC; earnings before interest taxes depreciation and amortization and corona,” Bacon says. Given the many approaches to business valuation, connecting with your strategic financial, accounting and legal could be the most valuable first touch point in assessing which approach is best for you.

“If you are going through turmoil like we currently are, and you don’t feel like you have to sell, don’t,” Flores adds. “If your business is being negatively impacted, it might be better to wait.”

In the interim, work on focusing in on your core market, building your customer base, straightening out your finances and making other improvements.

The best way to make your business attractive is to run it like a business and keep personal expenses out of the business and know owners compensation will be adjusted to a market rate as part of the valuation. If you do pay yourself a salary, base it on market wage in the same way you would pay someone else to come in and take on your role. A salary proves you are making a profit, not just breaking even.

“There’s a difference between the job you have in your business and being the owner of your business,” notes Bacon. “If you don’t understand what that relationship is, it makes for very messy situations.

Boost your curb appeal

Engage with your partners: Specifically, your accountant, banking representative and your lawyer. They will help you address the four fundamentals.

Identify your weaknesses and pivot accordingly to increase the value of your enterprise.

Keep promoting your business or risk losing the customers, profits and value you’ve built up.

Find out more about selling your business successfully with ATB’s Business Transition Guide. Want to talk some more? Book time with an ATB Entrepreneur Strategist or visit an Entrepreneur Centre closest to you; we look forward to helping you design the right strategy for now and the future.

Business Transition Guide

Learn the steps you should take to successfully sell and transition out of your business.

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Our Client Care team will be happy to assist.