Written By J. Paul D. Barbeau and Kristos J. Iatridis
The decision to sell a private business often represents the culmination of a life's work. Preparing your business for a sale involves an investment of time, effort and planning on a number of fronts. However, investing in these matters well in advance of a sale will often result in larger returns upon an exit. By focusing on a few key areas, business owners and potential sellers can help create additional value down the road.
1. “Clean up” the Business
Buyers are looking for "turn-key" operations that are efficiently structured. However, over its lifetime, a private business often ends up holding personal and non-core assets that are not directly related to the business being sold. Owners should identify these assets and transfer them into separate entities prior to initiating a sale process. In addition, redundant or under-utilized assets can be monetized. Removing these assets results in clean balance sheets and generally results in a more attractive target.
Special consideration should be given to real estate assets. Excluding real estate can result in a number of very positive outcomes for a seller, including expanding the universe of buyers by reducing the purchase price for the business, generating a potential “lift” on the value of the real estate and preserving rental income for the owner in the future.
Buyers shy away from businesses that have "hair" on them. Outstanding claims, pending or threatened lawsuits or other potential impairments on value will be priced in by the buyer, resulting in a lower offer. To the extent possible, owners should resolve outstanding litigation and address any claims registered against its assets.
Undertaking a due diligence dry run well in advance of launching a sale process will identify aspects of the business that have significant deal and value implications.
2. Plan to Keep More of Your MoneyBusiness owners may spend decades of their lives building their businesses and will want to ensure that they realize the maximum amount of benefit from an ultimate sale. In Canada, there are a number of tax planning strategies which can be implemented to assist an owner in reducing tax payable on the sale of a business. Proven structures, such as estate freezes (which may vary in complexity), can be implemented as a means of assisting an owner in reducing her tax burden in connection with a sale.
However, this planning needs to be considered and implemented well in advance of a sale in order to realize its full potential. For example, with many businesses in Western Canada feeling the effects of a prolonged commodity downturn, owners are waiting to sell their businesses in the next cycle. By implementing an estate freeze now, at a lower valuation, a business owner could potentially save thousands and, given the right circumstances, millions of dollars in taxes upon an ultimate sale.
3. Have a Vision for the Future
Owners are more likely to receive high offers for their businesses if they clearly convey their vision for the future, and explain to buyers how their current strategy will allow them to expand market growth and profitability. Owners can demonstrate value to buyers by identifying opportunities for untapped growth in a given industry and persuading buyers that the business is uniquely positioned to capitalize on those opportunities. Financial forecasts are also critical. These forecasts should provide sufficient detail about the business to accurately demonstrate the basis for projecting future value. Of course, forecasts should be realistic and achievable.
4. Who will Operate the Business after Closing?
Private business owners know their businesses and are usually involved in the day-to-day operations. Unfortunately this means that following the sale, a significant amount of institutional "know-how" walks out the door. Buyers require comfort that there will be no business interruptions resulting from management turnover and will pay more for such assurances. Well in advance of a sale, owners should train management and create a succession plan. Alternatively, the owner can remain in a consulting or employee position following the sale during a transition period.
5. Invest in Quality Financial Information
Many a sale process has been scuttled by poorly prepared financial statements and sloppy or otherwise questionable financial practices, including commingling business and personal funds and excessive related-party transactions. Sound bookkeeping practices, preparing audited annual financial statements for at least two years and unaudited quarterly financial statements for the most recently completed quarter and limiting the commingling of personal and corporate finances results in financial transparency and higher offer prices.