Expert advice on preparing your business for sale
By ATB Financial 21 June 2018 6 min read
Selling a business is unfamiliar territory for many entrepreneurs. It comes with unique challenges that are very different from building a business. Such hurdles can prevent an owner from receiving a fair price for what they have worked so hard to create. In some cases, it can even prevent a sale from taking place.
To help you avoid this unfortunate outcome, it is difficult to overstate the importance of preparation for selling your business. An owner looking to sell their business quickly is an owner who may be forced to sell for less. It usually takes between two and five years to properly prepare, market and sell a business. In some instances, it can take longer.
Here, three of ATB’s most seasoned and successful business sales experts provide some insight into preparing your business for sale, tax planning and analyzing prospective buyers.
Alfred Sailer, Managing Director, M&A Advisory Services ATB Financial
When it comes to financial records, independently audited financial statements are the gold standard. They should go back at least three years.
Preparing these records serves two purposes: it puts relevant information at the fingertips of potential buyers and it gives you a refresher on your business’ performance, making the facts top-of-mind when meeting potential buyers. “Let me get back to you on that,” can be a destructive answer in conversation with a would- be buyer. Good records mean you’ll never need to say it.
Starting early on prepping your business for sale also gives you time to find the right team of advisors to guide you through the process, which can make an enormous difference in the sale price of your business. Picking an M&A (mergers and acquisitions) advisor is a bit like picking a spouse—both are long-term relationships with high stakes. It is worth taking the time to find advisors with which you connect. Your M&A advisor should inspire absolute faith in their competence.
They should also have deep knowledge of the market for your business, including insight and a deep network of potential buyers. Such knowledge can pay dividends.
For instance, a business owner I was advising some years ago received two offers from prospective buyers. The higher offer came from a firm whose negotiating tactics were familiar to my team. This firm was in the habit of making very generous initial offers to business owners. Once the parties agreed the deal was exclusive, the firm would pare the offer back by nitpicking the business. Our knowledge allowed our client to avoid this unpleasant and unprofitable experience.
Giving yourself years to sell your business also gives you the time needed to reshape the management structure, if necessary. Some owners are wary of creating a “thick middle” to their business. Too many middle managers, they fear, will reduce the company’s agility and create waste.
Yet many prospective buyers look for robust and competent middle management teams. This is because such a team signals that the future of the business does not depend on the owner alone. The more capable your team of managers, the more attractive your business looks on the market—especially if your team is clearly committed to staying on after the sale. Such teams are not built overnight.
Michelle Seymour, Director, Tax and Business Succession Planning ATB Investment Management Inc.
The abundance of possible strategies for lowering the tax bill when selling your business can seem over- whelming. Charting a path forward and executing on your plan takes time, which is another reason it pays to start early.
Regardless of the fine details of your tax strategy, every business owner needs to decide whether to conduct a share sale or an asset sale. Share sales tend to favour owners, while asset sales tend to favour buyers.
For this reason, your choice of structure can give you negotiating leverage. For instance, you might offer a buyer a lower sale price in exchange for agreeing to structure the deal as a share sale. Your tax advisor can help you figure out which choice is best for you.
Where a share sale is an option, business owners should give consideration to the availability of the lifetime capital gains exemption, or LCGE. The LCGE can add hundreds of thousands of dollars to your tax savings if the sale of your business meets certain criteria.
However, the application of the exemption is complex and considers the 24-month period leading up to the sale of the business. The earlier you meet with a tax advisor, the more likely you can take full advantage of the LCGE.
Mark Donnelly, Director, ATB Capital ATB Financial
ATB Capital partners with management teams to help transition ownership from founder to management team, as well as taking an ownership stake. Providing this service gives us added insight into the process of selling a business.
It takes hard work, talent, persistence and insight to create a successful business. Business builders take justifiable pride in their creations. However, that pride can sometimes create blind spots when it comes time to sell.
For instance, many business owners are surprised by the critical comments made by prospective purchasers. Hearing their creation insulted raises an owner’s hackles and makes them less likely to deal. Yet this is a common negotiating tac- tic that buyers use in their efforts to bring down the price of a business they want to buy. It’s not that different from telling the car salesman that you love the vehicle, but it’s just the wrong colour.
Another consequence of an owner’s justified pride in their business that can turn off a would-be buyer is an owner with a crucial role in operations. Buyers want to see that the business can run smoothly without the owner.
Of course, buyers want more than assurance that the business won’t implode without you. They also want to know that the business has a good chance of continuing to succeed in the future. While past performance does not guarantee future success, it goes a long way in reassuring a prospective buyer.
Many buyers like to see more than simple financial performance here—they want to see how the business’ measured performance matches up with any projections you made. The closer those two lines fit, the more faith the would-be buyer can have in your predictions of future performance.
There are more reliable ways of evaluating prospective buyers, which is an important part of selling your business. Sorting the tire-kickers from the serious players can save you time and protect the competitive edge of your business. The information in a business’ financial records or in a confidential information memorandum can be of great interest to competitors. Identifying serious prospects from the outset can lead to a higher sale price.
Basic research and due diligence can go a long way here. It is also useful in this process to consider the question of operational fit. Does it make sense for the buyer to purchase your business based on their core mandate? If your business is completely alien to the other interests of the buyer and the deal only makes sense on paper, we consider that a red flag.
Selling a business is a bit like tell- ing the story of a human life—they all share some common themes, but each one is different in important ways. For this reason, the best sale advice is tailored to specific businesses, and there’s no better time to start the process than right now.
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The information contained herein has been compiled or arrived at from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness, and ATB Wealth does not accept any liability or responsibility whatsoever for any loss arising from any use of this document or its contents. ATB Wealth does not undertake to provide updated information should a change occur. This document may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions and conclusions contained in it be referred to without the prior consent of ATB Wealth. This document is being provided for information purposes only and is not intended to replace or serve as a substitute for professional advice, nor as an offer to sell or a solicitation of an offer to buy any investment.