Selling your business takes a lot of hard work and it’s my job to make it easier. I’ve tried to cover all the major areas of information a seller might need. My ambition in writing all this content is to help business owners transition in and out of their businesses in the most efficient and productive way.
Source an Intermediary to Represent You
Take the time to find the right representation for you. Having represented myself in my initial transactions, I was not aware of intricacies and challenges of being your own representation. There are just too many things to consider in selling a business and I learned that its best left to someone whose career is selling businesses and who will look after my best interests. In the “Frequently Asked Questions” section of this page, I write about the reasons to use a business intermediary and what to look for in an intermediary. I also write about the challenges of selling your business yourself. Choose your representation wisely as it will make all the difference in the world.
Engage Your Intermediary
This is our engagement meeting where we discuss your business and your succession goals. I review the company and its financials to arrive at a preliminary value. If the business is sellable, the value is agreeable and there is synergy between us, I draft a representation agreement allowing me to represent you and your business. If the business is not immediately sellable or there are significant opportunities to maximize value, I will make recommendations on what can be done to bring the business up to its maximize value for sale. We also discuss your personal financial position and conceive preliminary strategies which can result in more of the proceeds from the sale of the business ending up directly in your pocket.
Meet the Accountants and Lawyers
Depending on the size of the business, I prefer to meet with the seller’s accountant and lawyer (assuming you have them) sooner than later as many sellers already have a succession plan or a tax strategy that will be impacted by the sale of the business. The more information I have on the seller’s succession goals, the more I can help facilitate those goals. Although sometimes getting everyone on the same page can be challenging, it is certainly in your best interest having all your advisors rowing in the same direction at the same time.
Create a Confidential Business Review
At this point I research and create a very detailed Confidential Business Review documentation package of the business containing everything a buyer, accountant and lawyer would want to see if they were buying the business. This package becomes our disclosure package that we release in a strategic and controlled manner. As the buyer becomes more qualified, more of this package is released. Buyers like transparency and the more information they have the more confident they are about purchasing the business. This helps mitigate risk to the buyer and helps ensure maximum value to the seller. This is also the point where we finalize the market price for the business based on the research of the business and documentation collected.
Market the Business
Once we have analyzed all the details of the business we take the business to marketing. This involves creating attractive and engaging presentation material for qualified buyers. Marketing for each business is different depending on the business. Some businesses are privately marketed to buyers by invitation while other smaller businesses may be mass marketed through sources such as MLS. During our initial meetings, I discuss the marketing strategies in more detail.
Interview and Qualify Buyers
This is a very important and time consuming process which I undertake as no one likes their time wasted, especially since information about the business is being exposed to potential strangers. Upon the successful marketing of the business there will be several buyers that will be interested. I document the pre-qualification of each buyer and together we review and select a meeting with who you feel is the most qualified. Qualified doesn’t only mean a buyer who can supply a cheque but also a buyer who can fulfil the exit strategy we (you and your advisors) devised for the business. This is very important in the case of seller financing because if the buyer has the money but can’t run the business, the odds of the seller getting repaid his loan is at risk. This is where someone like me with two decades of experience operating businesses really helps as I can quickly identify buyers who have the skills and qualities to run a business and those that cannot. In my experience, sellers aren’t willing to sell to just anyone, most sellers want to ensure the buyer will succeed well after the seller is gone and carry on the legacy. Having someone like me to help you devise your exit strategy and surround you with the right buyers will go a long way to ensure an easier transaction and a smoother transition out the business.
Seller Meets the Qualified Buyers
Once we have identified the qualified buyers, we meet with the top candidates. By this point the buyers we meet have already been well qualified and have signed a Non Disclosure Agreement. The point of this initial meeting is not for negotiation but is the opportunity to confirm the buyer’s interest and verify that there is synergy between both parties to complete the transaction. Negotiations happen through me offline so that there is no confrontation between buyer and seller. Although questions are exchanged, I try to make the meeting informal as opposed to a firing squad of questions back and forth. Since the buyer is aware of many of the key details of the business at this point, this is really the time to build a personal relationship between buyer and seller to help the next stage of the process.
Letter of Intent
At this point a buyer (or multiple buyers) has demonstrated enough interest to create a Letter of Intent. The Letter of Intent is most often a non binding commitment to buy the business subject to possible conditions such as due diligence and financing. Since the next stage of the process is quite involved with costs being incurred, many buyers at this point request exclusivity in the Letter of Intent. Most buyers do not want any interference from other buyers beyond this point. Sellers need to be careful with exclusivity as the business could be off the market for a period of time. This is where it is important that we evaluate all options and work with your advisors to ensure the Letter of Intent suits your interests first.
Due Diligence and Conditions
This is potentially the most intensive portion of the process. This is the buyer’s opportunity to verify all the details of the business that have been disclosed as well as satisfy themselves of any risks within the business to make a final purchase decision. This is where the seller exposes some of the most sensitive information about the business to the buyer. At this stage it is crucial to have good representation as this is the buyers’ opportunity to rummage through the closet looking for skeletons. Your intermediary must govern this carefully since there is no binding commitment from the buyer to buy the business and significant details of the business are being exposed. Giving away sensitive information may leave you vulnerable if the buyer walks away after viewing the information.
Purchase and Sale Agreement
Upon the buyers satisfaction of the due diligence process, they are ready to complete a Purchase and Sale Agreement. At this point, we write up a binding Purchase and Sale Agreement outlining the details of the sale along with any remaining conditions. Both parties sign this agreement which then gets sent to both representing lawyers. They lawyers complete their due diligence and upon the removal of any remaining conditions a final Purchase and Sale Agreement is completed by both parties.
Once all conditions have been released and the lawyers have completed their investigative and procedural documentation, the final Purchase and Sale Agreement is presented for signing by both parties. Buyer and seller meet (usually at the office of the seller’s lawyer), get out their shiny pens and sign the final Purchase and Sale Agreement documentation.
Depending on the conditions of the sale of the business, there may be a transition period for the buyer and seller. This can involve seller to buyer training or the seller staying on in some capacity for a period of time. This is where having synergy between buyer and seller is crucial to ensure a positive transition of the exiting seller and the new buyer.
PREPARING TO SELL A BUSINESS
5 SUGGESTIONS FOR PERSONAL PREPARATION
1. EMBRACE THE FEAR
Fear is a powerful emotion. Fear can sour, stall or terminate a business sale and can be a costly situation, especially at the end of negotiations. For many owners the thought of selling can create fear and stress due to uncertainty about what happens after the sale. “what will I do after?”, ”how will I earn an income?”, ”what will people think of me?” All these questions are valid and need some soul searching and self scrutiny. Personally the question “what will people think of me?” was a difficult one. Giving something up that was profitable and had taken 10 years to build was not easy. Make sure that you are certain about your plan, rely on it in moments of doubt and execute it with authority. Action overcomes fear!
2. DETACH YOURSELF FROM THE BUSINESS
This means physically, mentally and emotionally. Find ways to begin withdrawing yourself from the business by delegating your daily routine tasks. Hire people that make you better and take your load. Businesses that operate without the owner are more valuable so focus your attention to working “on” your business instead of “in” it. Use your staff effectively so you can focus on the big picture. Begin to shift your thinking from your business being your baby to it being an investment you can sell.
3. ESTABLISH YOUR EXPECTATIONS
Be very clear on your reason for selling, take the time to sit down and write all the things that you’re expecting from the sale of your business. All too often a seller will walk away from a deal in the late stages because their expectations keep changing. Are you expecting to retire with the big cheque or will you offer seller financing? Are you anticipating being part of the transition with the buyer? Who will collect the receivables? What will your income stream be after you sell? What will your daily schedule look like not having a business to go to? Are you clear on what you will be giving up by selling the business? How do your family and friends feel about you selling the business? List all your expectations so that when it comes time to negotiate, you have a clear understanding of what you need, want and are prepared to give up. Remember, preparing and selling your business could be a lengthy process, having this list will help keep you focused and motivated throughout. Make the list dynamic by constantly adding and modifying expectations as they occur in and out of your life.
4. ESTABLISH A SUCCESSION PLAN
Most business owners give very little thought to succession which is essentially the plan for selling your business and how it impacts the rest of your life. Succession planning is fairly unfamiliar to most owners and is usually only considered when at or close to retirement. However, from an income perspective, waiting for the later stages of life to consider succession planning can be costly to both you and your family. Succession planning can consist of the identifying most tax advantageous ways to receive compensation from the sale of business, the strategy to buying or starting another business, investing, retiring, estate planning and should even include a will with funeral arrangements. Make sure your intermediary has some experience and resources with success planning, it can go a long way to putting more money in your pocket.
5. TAKE CAUTION IF TRANSFERRING THE BUSINESS TO A FAMILY MEMBER
In my experience, the business owner should always look after their own interests first. The idea of continuing the legacy of a family business is a noble one, however, the statistical reality of family succession is quite poor. According to the Canadian Association of Family Enterprise, an alarming 70% of family owned businesses will not succeed into the second generation and even worse, an astonishing 90% will fail by the third generation. In many cases, it may be better for the business owner to sell to an arms-length buyer and then disperse a portion of the proceeds to a family member so they can start or buy their own business. Speak to a business intermediary for advice.
5 SUGGESTIONS FOR BUSINESS PREPARATION
1. GET THE FINANCIALS IN ORDER
Without proper financials the value of the business will be difficult to substantiate. If the income and assets cannot be substantiated it will create uncertainty and risk leading to a potential devaluation of the business. Accurate financials are vital and will help the sale of the business, assist in more efficient operations and certainly attract more offers. Do not overlook the importance of proper financials. I have many strategies and tips on how to structure financials in a manner to benefit daily operations and assist in selling the business.
2. GET THE BUSINESS PROCESS IN ORDER
Document your entire business process flow from sales to shipping. This will demonstrate good organization throughout the business and increase buyer confidence. An organized business runs more efficiently, is more attractive to a buyer, potentially more profitable and certainly more valuable. This is my area of expertise, if you are unsure about how to do this, contact me for more information.
3. ESTABLISH ORGANIZATIONAL STRUCTURE
Adding organizational structure will help ensure that you are not essential to the day to day operation of the business and will increase its value. Having a business that can run without the owner’s involvement adds value and opens the opportunity to the business for potential investment and strategic buyers. The most sought after businesses are the ones where the owner can easily be replaced.
4. UNDERSTAND THE TRUE VALUE OF YOUR BUSINESS
The value of your business comprises of tangible and intangible assets. Ensure all tangible assets included in the sale such as cash, equipment and inventory are clearly shown in the financial records. Goodwill is an intangible asset that generates economic benefit but its value may not be easily identified. Think about and document all the goodwill such as customer lists, intellectual property, trademarks, patents and overall know-how. Be prepared to present that information to your business intermediary. Being able to substantiate goodwill will have a positive impact on the value of your business and attract investment and strategic buyers. In some cases the goodwill may be more valuable than the tangible assets. If you are unclear as to the goodwill in your business, contact me, an industry experienced intermediary, to help identify and value the goodwill.
5. ASSEMBLE AN ADVISORY TEAM
Getting maximum value out of the sale of your business requires a concerted effort between the right business intermediary, accountant and lawyer. Pick your advisory team wisely and make sure these professionals are experienced in the sale of a business. This collective experience will not only be invaluable to the planning, implementation and overall success of the sale but will result in a smoother, less stressful and quicker sale. Cost is always a consideration but if you have the right team they will maximize the value of the business and more than pay for themselves.
FREQUENTLY ASKED QUESTIONS
WHEN IS THE RIGHT TIME TO SELL MY BUSINESS?
There is a right time to sell every business. The right time depends on a number of factors including personal timing, market conditions and the business’ financial performance. Personal timing may include retirement, ill health, burnout, partnership disagreements etc. Avoid not having control over the timing of the sale of the business. Selling a business under duress removes negotiating leverage and value. Market conditions such as a declining market will impact the value of the business. Financial performance is critical in determining the right time to sell. Businesses are most valuable when they are profitable and well managed. In summary, the best time to sell is when you are not pressured to do so, when the business is in a growing market and is profitable. This of course is also when most owners are happily earning profit and not currently in the frame of mind to sell.
IS MY BUSINESS SELLABLE?
Many business owners feel they would like to sell their business but think it has no value. The reality is that every business is sellable as long as there is some value to a buyer. Business owners tend to have higher expectations of value than buyers are willing to pay. Businesses that are well priced, have good finances and have an organized process will always attract buyers. Remember that a proper valuation performed by an industry experienced intermediary is the key to identifying your business’ true market value and therefore its saleability.
SHOULD I LIQUIDATE MY BUSINESS?
Some circumstances do arise where liquidating the assets rather than selling the business is the best option; however, this is rare and should be the last course of action. Owners who liquidate assets rather than sell the business are not taking into consideration the goodwill and intrinsic value of the business which can have substantial value. For example, a special purpose machine may have the value of its scrap at an auction but to a competitor could mean production benefits. Another example would be a recipe. Knowing the ingredients and amounts could be considered a trade secret and valuable to competitors or start ups. Always consider selling your business first and liquidating assets last.
WHY USE A BUSINESS INTERMEDIARY?
In my experience, choosing the right business intermediary is the most important decision a seller can make apart from the actual decision to sell a business. When choosing a business intermediary, consider the following:
- Confidentiality: Selling a business requires discretion. Improper disclosure may have a serious effect on the business. Customers, employees, suppliers and creditors can react adversely to word that a business is for sale. It can also impact negotiating leverage and reduce the company’s value. Although it is important that the seller retains control over the release of information, a licensed intermediary who is trained and bound to a code of ethics will have a fiduciary duty to uphold confidentially. An experienced intermediary will guide the seller to know how much disclosure is required, when to release it and the most effective way to protect it.
- Valuation: An experienced intermediary with knowledge of your industry will be able to assess and maximize the value of your business. Having the experience to understand the true value of all assets, including goodwill, will ensure an accurate valuation. Your intermediary must be able to understand the investment value of the business and articulate it to the right buyer.
- Marketing: A well networked business intermediary from your industry with a good marketing program will increase exposure of your business. They will know what methods of advertising will work and how to target the right buyers. A good intermediary will have developed a toolbox of techniques consisting of social media, memberships, affiliations, subscriptions, associations and agreements with advertising sources in order to maximize the exposure of the business.
- Negotiation: Direct negotiations between the seller and the buyer are often confrontational due to their separate interests. An intermediary with negotiating experience and adhering to a code of ethics will provide a non bias, non emotional intermediation between the parties. An experienced intermediary will identify the motivations and expectations of both parties and continuously provide solutions to challenges that may arise during the negotiations.
- Due Diligence: It is extremely important that your business intermediary be well versed in the due diligence process. The due diligence process is where the buyer has the opportunity to really get inside the business and open the closet to reveal any skeletons. This process can be lengthy, tedious and emotionally exhausting for both the buyer and seller if not handled properly. The role of an intermediary is to organize, facilitate, and expedite the due diligence process by preparing a comprehensive disclosure documentation package well in advance of the buyers needs. At this stage the intermediary must know the business inside out in order to anticipate any challenges and alleviate the stress on the seller so that the focus remains on operating the business. In my experience, this is typically the stage where many deals fail. For this reason I have developed very thorough processes for gathering confidential information and preparing due diligence documentation to facilitate the disclosure of the information in a strategic and timely manner. Feel free to contact me and I would be happy to explain my process further and discuss its effectiveness
WHAT TO LOOK FOR IN AN INTERMEDIARY?
- Licensed: Choose an intermediary who is licensed. In Ontario a licensed business intermediary is registered and insured by the Real Estate Council of Ontario (RECO). A registered intermediary operates within a framework of defined regulations and a strict code of ethics. In Ontario the Real Estate & Business Brokers Act of 2002 (REBBA 2002) is the regulatory framework to which registered intermediaries must adhere to. Registered intermediaries are accountable to the act and violations are punishable by fines, litigation, suspension and revocation of their license. As a licensed RECO member I understand the importance of the regulations and code of ethics and certainly would not trust the sale of my business to an unlicensed intermediary.
- Industry knowledge: Choose a intermediary who understands your industry. A licensed intermediary who understands your industry will be better equipped to determine the accurate value of your business. Your intermediary will also know the value of assets and goodwill and will be in a better position to extract the true market value of your business. An intermediary who understands your industry will have a better understanding of how to market the business and is better equipped to identify and qualify the right buyer.
- Insured: Ensure that your intermediary has some form of Deposit and Error and Omissions Insurance. No insurance adds risk to you and the parties involved. A RECO registered intermediary in Ontario is required to carry insurance. Ask your intermediary for his insurance details.
- Organized: An organized intermediary will have a proven process for selling a business. A complete and thorough process helps ensure the presentation of accurate documentation. It is the intermediaries’ responsibility to document all discussions, concessions, conditions and agreements to provide a clear understanding of the detail of the transaction between both parties. Poor documentation may lead to misunderstandings, presents the risk of litigation and may cause the deal to fall apart. Ask your intermediary to show you an example of how they document the sale of the business from start to finish.
- Professional: A professional intermediary will be trustworthy, confidential, competent, organized, experienced, effective communicator, non judgmental and above all puts your interests before theirs.
HOW LONG DOES IT TAKE TO SELL A BUSINESS?
This can vary due to market conditions and the saleability of the business. The sale of a business typically takes 6 – 9 months; however, you should plan and allow for a year. Additional time may be required if opportunities for improvement in the business are identified during the valuation process and the decision is made to implement the improvements prior to marketing the business.
CAN I SELL THE BUSINESS MYSELF?
It surprises me that most business owners would hire a real estate agent to sell their home but decline to hire an intermediary to sell their business. Perhaps this is because owners feel they are the only ones who know enough about their business to sell it or perhaps it is to save the cost of the intermediaries fees. Either way business owners should question whether they have the necessary time and experience to maximize the value and properly market the business. The following are the main reasons why “for sale by owner” should be carefully considered:
- Perception of “for sale by owner”: When you see a home with a “for sale by owner” sign what is your impression? Typically the thought is bargain and these are the type of buyers that will be attracted.
- Preparation/valuation: Accuracy of the valuation is vital and without the proper experience the business could be undervalued or even worse, overpriced and not attractive to buyers.
- Disclosure of information: Without the proper understanding and experience of knowing what information to disclose and when to disclose it, you could cause irreparable damage to the business. Customers, employees, suppliers and creditors may react adversely to word that your business is for sale. Prospecting buyers who review your corporate information could use it and become your competitor. It is important to be aware that improper control of disclosure can be harmful but non disclosure material facts is much more serious and may lead to litigation by the buyer.
- Marketing: Marketing a business can be both time-consuming and expensive. The most effective marketing tools are available to intermediaries and are not typically available to business owners. Many of these tools require costly memberships or subscriptions and are not conducive for a single “sale by owner”. The options for owners to attract good buyers are limited in comparison to an experienced intermediary who knows your industry and has a solid network in place. Marketing isn’t about just attracting buyers; it’s about attracting the right buyers.
- Qualifying buyers: The effort required to qualify significant numbers of potential buyers is very time consuming and demanding. The question is always whether your time is better spent operating and increasing the value of the business or interviewing and qualifying an extensive list of potential buyers.