5 do’s and don’ts when selling a business
Read time: 6 minutes
Buying or selling a house or condo is the largest transaction most people will complete in their lifetime. It’s usually their most valuable personal asset. As such, a lot of care and attention is put into preparing its sale. This often includes carrying out deferred maintenance, obtaining an appraisal or hiring sales professionals to stage and market your property.
For an entrepreneur, the buying or selling of a business is just like the sale of a residence. It is typically the largest and most significant transaction they will ever undertake. And, as for a house, careful preparation is an important step that will precede any successful sale.
Careful preparation may be more important today than it’s ever been. Canada is undergoing a major shift in business ownership as the baby boomer generation moves to retire. With so many businesses coming to market, one could argue that we are in a “buyer’s market.” Just like for the sale of a residence in a buyer’s market, it’s important that your business can stand out from the crowd.
If you plan on selling your business in the near future, you should consider the following do’s and don’ts to maximize value and preserve your hard-earned wealth.
5 do’s when selling a business
1. Plan ahead
When is it time to start planning your transition? It’s never too early.
At the extreme, planning for a sale could start as early as when you establish your business and write out a shareholder agreement between business owners. Among other things, this agreement can outline the ground rules of a business sale between shareholders (often called shotgun clauses) to avoid the potential for a long and costly dispute resolution.
Also keep in mind that, as with most sale situations, you may not realize the return you want if you are in a hurry. Buyers are likely to see through cosmetic changes made at the last minute. So make sure you are doing necessary improvements ahead of time.
2. Maximize the value of your business
Many of the steps you will need to complete to get the maximum return from the sale of your business will have to be done well in advance of the transaction.
The best way to boost the value of your business is to show solid performance and profits in recent years. You can improve your top line earnings by developing and implementing a marketing plan that’s focused on creating a diversified client base that generates repeat business. Improved profitability can be accomplished by analyzing your processes for efficiency gains and establishing repeatable, teachable processes to boost your productivity.
Remember: The biggest driver of business value is profitability and your ability to prove it.
3. Keep a cool head
It’s easy to become emotional about selling a company you’ve built from the ground up, but now is not the time to let emotions override good business sense.
Keeping a cool head is even more important for family business transitions since you will need time to sort out family issues, pick successors and prepare them for business ownership.
4. Organize your records
Any serious buyer will want to perform due diligence before purchasing your business, and you need to be ready. Documents that need to be readily available include, but may not be limited to, financial statements, minute books, customer and supplier contracts, employment contracts, detailed list and description of assets, outstanding and contingent liabilities, etc.
You’ll want to prepare a confidential information memorandum (CIM) that provides a high level summary of the business to interested buyers. Also consider setting up an electronic data room that qualified, interested parties can use to go over your due diligence documents.
Finally, make sure you are organized and ready to respond to questions. A potential transaction can get derailed at the due diligence stage—particularly in a buyer’s market.
5. Expect delays and be patient
The sale of a business can be a complicated endeavour. Things such as deal structure (i.e., an asset sale versus a share sale), validating the value of intangible assets (such as goodwill or intellectual property), or the level and type of financing required all add to the timeline to complete a sale.
5 don’ts when selling a business
1. Don’t choose the price, choose the buyer
I know what you are thinking: “What? Shouldn’t I choose the price?” Well, ideally you could have both. But the type of buyer you find can impact the outcome of the transaction, including the purchase price, how much cash you receive at close versus what you may have to defer, as well as the success of the business following the transaction.
You will need to decide what’s most important for you. Insiders, such as management or family, will generally not be able to provide as much upfront cash on closing, but the transaction is generally less disruptive to the continuity of the company and has a greater chance of post-transaction success. On the other hand, an external sale is likely to lead to the best price—particularly if you can garner multiple offers.
2. Don’t make yourself irreplaceable
If a business is highly reliant on the exiting owner or cannot function without you, the value will be diminished and it will be hard to find a buyer.
As noted above, develop repeatable and teachable processes, and empower your people so they can take over the business when you decide to leave.
3. Don’t rush things
Taking a bit more time to get things just right will allow you to sell your business at a higher value than if you try to rush things. Also, be empathetic to the buyer’s circumstances as they may be dealing with multiple parties, such as lenders and investors, to fund the transaction, while you will only typically be dealing with one party—the buyer.
4. Don’t control the relationship with lenders and investors
When it comes to dealing with external financiers, think of it as a partnership and work closely with the buyer to help them get the financing they need to realize the sale. This not only means being ready for the buyer’s due diligence, but also for financiers’ information requests.
5. Don’t do it on your own
Get external advice: A business transition is complex and the stakes are high.
Make sure to consult early and often with key advisors including your bankers and financial partners, your accountant and your lawyer. You may also want to hire a consultant who specializes in business successions or mergers and acquisitions to help plan your transition.
What about you? Do you have any tips or experiences you want to share about selling a business? I look forward to reading your comments.