For business owners, buying or selling a business is like selling a home. It’s usually the largest transaction you’ll ever make in your professional life. As with a home, careful preparation is the key to a successful sale.
Today, this preparation is arguably more vital than ever. With the baby boom generation retiring , Canada is currently experiencing a significant wave of business transfers. Given the number of businesses now on the market, it could be called a “buyer’s market.” Just like selling a home in this type of market, you need to make sure your business stands out from the crowd.
If you're planning to sell your business soon, consider the following key factors and pitfalls to maximize its value and preserve the wealth you've worked hard to build.
5 Key Factors to Sell Your Business
1. Plan ahead
When should you start planning for the transfer ? It's never too early to begin the process.
In an extreme case, planning for the sale could begin as soon as you set up your business and a shareholders' agreement is drawn up between the owners. This may include the ground rules (often called "ultimatum clauses") that govern the sale of the business between the shareholders to avoid the risk of a lengthy and costly dispute.
Also remember that, as is often the case with selling, you may not get the price you were hoping for if you move too quickly. Buyers won't be fooled by last-minute cosmetic changes, so make sure you make any needed improvements well in advance.
2. Maximize the value of your business
Many of the steps you need to take to get the maximum sale price should be done well in advance of the transaction.
The best way to increase your value is to ensure your business has a strong track record of performance and profits. You can improve your bottom line by developing and implementing a marketing plan focused advertising database on building a diverse, repeatable customer base. To increase profitability, analyze your processes to identify potential efficiencies and establish repeatable, teachable processes that will drive productivity.
Reminder: Profitability, and your ability to demonstrate it, are the primary factors that determine the value of your business .
3. Keep a cool head
Selling a business you built from scratch can be a lot of emotions, but you don't want to let them overwhelm your business acumen.
Keeping a cool head is especially essential when it comes to transferring the family business, as you will need to take the time to sort out family issues as well as choose and prepare successors to take over.
4. Organize your files
A buyer who is even remotely serious will require that due diligence be carried out prior to the purchase. You must therefore prepare accordingly. You will need to be able to provide, among other things, the following documents: financial statements, minute book, customer and supplier contracts, employment contracts, detailed descriptive list of assets, and current or contingent liabilities.
You may also want to prepare a confidential information memorandum that provides a general summary of the business for interested buyers. Also, provide an electronic information room that eligible interested parties can use to review your due diligence documents.
Finally, make sure you are well organized and able to answer any questions you may be asked. Any potential deal can fall through at the due diligence stage, especially when the market is favourable to buyers.
5. Expect delays and be patient
Selling a business can sometimes be complicated. Various factors, such as the structure of the transaction (e.g., an asset sale versus a share sale), confirming the value of intangible assets (such as goodwill or intellectual property), or the level or type of financing required, can lengthen the time it takes to close the sale.
5 Pitfalls to Avoid When Selling Your Business
1. Don't choose the price - choose the buyer
I can already anticipate your reaction: “What? Isn’t that my place to set the price?” In an ideal scenario, you could actually choose both. However, the type of buyer can impact the outcome of the sale. It can affect the purchase price, how much you’ll receive at closing, how much you’ll receive down the road, and the future success of the business you just sold.
You will need to decide what is most important to you. Close friends (such as management or family) are usually not in a position to provide a large sum of money at closing; however, the transaction is often less disruptive to the business continuity of the company and is more likely to be successful. On the other hand, you will likely get a better price in an outside sale, especially if you receive multiple offers.
2. Don't make yourself irreplaceable
When a business relies too heavily on the outgoing owner or cannot function without him or her, its value diminishes, and finding a buyer becomes difficult.
As mentioned above, you need to develop repeatable, teachable processes and equip your staff members to take over when you leave.
3. Don't go too fast
Taking the time to do it right can help you sell your business for a much better price than if you rush into it. Also, be empathetic to the buyer. They may have to deal with multiple parties, such as lenders and investors, to finance the transaction, while you only have to deal with one person, the buyer.
4. Don’t control the relationship with lenders/investors
If there are outside lenders or investors, treat it as a partnership and work closely with the buyer to help them secure the financing they need to close the sale. This means that you will not only need to be able to perform due diligence at the buyer’s request, but also provide the information that the lenders request.
5. Don't do everything without help
Get external advice: A business transfer is a complex process and the stakes are high.
Consult key advisors, such as your bank, financial partners, accountant and lawyer, early in the process and throughout it. You may also want to hire a consultant who specializes in business succession or mergers and acquisitions to help you plan the transfer.
What about you? Are there any business selling tips or experiences you'd like to share? I look forward to hearing from you.
