How to sell your business
Selling your business is one of the most important decisions you make as an entrepreneur. Whether you want to retire or move on to other challenges, the sale could be your largest-ever financial transaction.
Taking the right steps early on can help you maximize the sale price, minimize tax liabilities and other expenses, and achieve your other goals for the transaction.
“Selling a business is often not an easy decision for a business owner,” says Mark Ohannessian, Director, Growth & Transition Capital at BDC. “It can be a bit like letting go of a family member. As a result, many business owners wait too long before making needed preparations.”
Devesh Dwivedi, a Senior Business Advisor with BDC’s Advisory Services, agrees: “Planning for the sale well in advance makes a big difference, whether your goal is to ensure a comfortable retirement, maintain the company’s legacy, or even remain involved in the business somehow.”
Planning for the sale well in advance makes a big difference.
What are the reasons for selling a business?
Being clear on your reasons for selling is vital. Here are some common ones:
You may be nearing the end of your career and want to enjoy retirement. Welcome to the club. As baby boomers retire, Canada is experiencing a major wave of business ownership transitions. In fact, a 2021 BDC study found that 9% of Canadian businesses would be put up for sale over the following five years.
Pursuing other opportunities
You may want to move on to another project, such as a new business venture or a different lifestyle or career. Or you may have had a dispute with your business partners, or even just want some time off.
Some business owners decide to sell because medical issues are preventing them from adequately running the company.
You or your business may not be doing well financially, and you want to sell to pay off personal or business debts.
You may be wanting to cash out due to favourable market conditions. On the other hand, you may see coming market or technological changes that require significant investment of time and resources, and you’re unwilling or unable to make those needed investments.
Most common objectives when selling a business
Your reasons for selling will likely influence your goals for the transaction—what you want out of it. Being clear on your goals will help you take the appropriate steps to structure and prepare for a transaction that satisfies your needs. Your goals may include:
You may want to maximize your company’s sale price and be able to fund post-transaction activities, such as retirement, having money for family or charity, or pursuing other ventures.
You might prefer to ensure a smooth transition for the legacy of the business, so that it carries on without you and long-time employees keep their jobs. In this case, there’s a benefit for you to remain involved with the company afterward, such as through vendor financing, an earn-out, a phased transfer of ownership, or obtaining a role as an executive, board member or advisor.
A clean break
You may choose to completely end your involvement with the business after the transaction—to focus, for example, on retirement or other projects. Keep in mind that buyers may insist on a reduced price for the business if you choose to cut all ties.
“If it’s a 100%-cash-out deal, the buyer is taking on more risk because the seller isn’t involved any more, and a lot of things could go wrong post-transaction,” says Dwivedi. “The buyer, in that case, would usually want a significant reduction on the valuation.”
Who should you consult when selling a business?
It’s important to assemble the right team to help you achieve your goals for the sale. This typically includes the following professionals:
An accountant is important for helping you prepare year-end and interim financial statements, projections and other documents that buyers typically ask to see as part of due diligence. An accountant can also ensure the transaction is structured in a way to minimize tax liability from the sale.
You’ll need a lawyer familiar with business transitions to supply information to buyers during due diligence, as well as negotiate the purchase agreement and address any legal issues that may arise.
It can be helpful to hire a business valuator to give you a realistic picture of what your business is worth. (See more below on how to value your business.)
Your banker can provide needed funds for vendor financing or investments in the business to make it more attractive to buyers. A banker can also give strategic advice and help find buyers.
A commercial realtor can help you with aspects of the sale that involve real estate holdings and advise you on how to stage properties to make them more appealing.
Depending on your business and goals, you may also want to consult various other professional advisors:
- Strategic advisor—helps you prepare your business for sale and structure the transaction
- Specialized business advisor—addresses specific issues in your company to make it more attractive to a buyer (examples include an operational efficiency expert, a human resources consultant or a marketing specialist)
- Financial or estate planner—helps you determine what to do with the proceeds from the sale
- Family advisor—helps family-owned businesses with succession planning
- Certified exit planning advisor—plans and manages the entire sale process and coordinates the professionals involved in the transaction
Many people wait too long before starting to plan the sale. Then they sell at a time that’s not ideal.
How do you prepare for selling a business?
Once you decide to sell your business, you’ll need some time to get your business ready. For example, you may have to take care of some unfinished housekeeping to ensure you get the best possible sale price.
“Many people wait too long before starting to plan the sale,” says Ohannesian. “We see a lot of entrepreneurs nearing retirement age who haven’t put any thought into selling their business. Then they sell at a time that’s not ideal—for example, due to health issues—and they don’t get the best outcome compared to what they would have gotten had they planned it out. A lot of people underestimate how long it takes to prepare a business for sale, especially if they have issues to address in the company.”
With input from your advisors, think about how you could make your company as attractive as possible and mitigate any nagging business issues. Here are some key questions to ask yourself:
Are my financials in order?
Buyers want to understand your financial performance to ensure your business has a solid track record that will continue in the future. They’ll ask to look at your historic and interim financial statements, projections, tax returns and other records.
Review your records with your accountant to make sure they’re up to date, and that interim statements are accurate and projections are realistic.
Do I have a plan for the business?
Buyers want to see that your business has a track record of past profits and solid growth prospects. Make sure you have an updated strategic plan and a solid business model.
How is my business doing?
Business performance issues and risks are important to address and identify. Take the time to do the following:
- Check your financial ratios in order to gauge and benchmark your performance.
- Review and improve your operational efficiency by using lean principles and a Gemba walk and tackling the eight types of waste.
- Document and update standard operating procedures so the company’s operations are more easily transferrable to a new owner.
- Maintain equipment, check on investments and ensure good record-keeping.
- Address any supplier or customer concentration issues; if this isn’t possible, think about ways a buyer could mitigate them.
- Fill in any potential human resources gaps, especially in your management team. Make sure the business does not rely on your presence to continue functioning.
Do I have legal or regulatory issues that need addressing?
Make sure you’re not passing on any legal headaches. Review contracts, leases and business agreements, and update them if needed. Identify and address any potential legal questions, such as employee or environmental issues.
You may not be able to resolve every issue in your company before the sale, but it’s helpful to at least show a buyer you have a plan to address them.
“Unaddressed issues complicate the sale because the buyer has to think about resolving them without the knowledge you have of the business,” says Ohannessian.
“This could impact the price or terms of the sale. You won’t get full value for your business if you’re not maintaining your equipment or there’s a customer concentration risk. As a seller, you want to try to avoid these kinds of complications.”
Owners sometimes have a mistaken perception of their company’s value.
How to value a business to sell
It’s a good idea to have a clear idea of how much your company is worth before you seek to sell it. That puts you in a better negotiating position with buyers and helps you have a reasonable expectation for the sale price.
“Owners sometimes have a mistaken perception of their company’s value,” says Dwivedi. “They usually have a very emotional connection to their business, and that may cloud their perception.”
Establishing the market value of a company can be fairly complex. A business valuator can give you an accurate sense of what price it could fetch. If the value is below your expectations, it’s an opportunity to go back and look at ways to improve your business to achieve a higher valuation.
A valuator’s report can also help you evaluate buyers’ offers and bolster your position in negotiating the price or terms. “If the seller knows the value of what they’re selling, the power dynamic will tip in their favour,” says Dwivedi.
In a family succession or management buyout, a valuation report can also be useful for discussions about the sale, or in later dealings with tax authorities.
There are three steps to take to determine the value of a company:
1. Decide the level of valuation
A valuator can prepare three types of reports, ranging from basic to highly detailed. The more thorough, the greater the cost—and assurance that the valuation reflects the company’s true worth.
In ascending order, from basic to thorough, the three report types are:
- calculation—a brief report providing basic details following a minimal review and little or no corroboration of information
- estimate—a moderately detailed report based on limited review, analysis and corroboration
- comprehensive—a highly detailed report based on a comprehensive, corroborated review and analysis
2. Get business information
The valuator typically reviews a variety of records, including:
- financial statements
- prior-year tax return
- discretionary and non-recurring expenses
- management compensation
- list of employees
3. Apply appropriate valuation method
The valuator chooses an appropriate valuation method, or combination of methods, depending on the type of business and available information. The three main ones are:
- Earnings-based methods
These determine the valuation based on past results and forecasted cash flow or earnings. This is commonly used for businesses that generate reasonable profits and whose value is greater than that of their net assets alone.
- Market-based methods
These calculate the valuation based on a multiple of metrics, such as earnings before interest, taxes, depreciation and amortization. The specific multiple used and type of ratio vary greatly based on the industry, market conditions and other factors.
- Asset-based methods
These determine the value of assets minus liabilities. Typically used for businesses whose value is asset-related rather than operations-related—for example in the real estate sector.
It’s important to recognize that a company’s fair market value isn’t necessarily the price it will sell for. The final selling price can be affected by numerous factors, such as market conditions, the buyer’s strategic interests, due diligence, availability of financing, your eagerness to sell and your post-transaction involvement in the company.
You can download our free guide on business valuation to learn more about the subject.
A strategic buyer is often willing to pay more because they see synergies.
How to find a buyer to sell a business
Start by thinking about who would be an ideal buyer for your company. A family member? A group of employees? An external buyer? The right buyer may depend partly on your goals and reasons for selling.
There are various people you can turn to who can help in finding buyers:
1. Team of advisors
Your accountant, lawyer, banker and other professionals will often hear of entrepreneurs who are interested in acquiring a new business. An advisory board, if you have one, could also connect you with potential buyers.
2. Business broker or investment banker
Depending on your company’s size, you can find buyers through a business broker (for smaller businesses) or investment banker (for larger ones).
These intermediaries have access to a broad network of qualified buyers—whom they can discreetly approach on your behalf. They can also help you navigate the sale process.
“Working with a professional of this kind is highly recommended,” says Ohannesian. “They have a process for reaching out to a very broad number of acquirers, vetting them and following a timeline for them to express their interest.”
3. Industry contacts
Industry contacts can be a good source for buyers. Potential acquirers could include competitors interested in expanding their product line or market share, or other companies in your value chain. “A strategic buyer will often pay more because they see synergies,” says Ohannesian.
Dwivedi agrees: “If I’m a paper manufacturer, my supplier may want to buy me because they want to increase their margin by getting into manufacturing. Or if you go up in the value chain, you could approach a publishing company that you sell paper to and say, ‘Listen, why are you losing money by buying paper from me? If you manufacture it yourself, you would get to keep the margin I make.’”
A broker or other intermediary can help you approach such potential buyers.
4. Online platforms
Owners of smaller companies may consider putting a listing on a business-for-sale website. But be sure to check the site’s reliability before signing on. Also be aware that, depending on the site’s confidentiality procedures, word could get out to employees, customers or suppliers that you’re selling the company.
Change of ownership tips
A change in business ownership can be disruptive for employees, customers and suppliers. It’s important to do some planning to ensure the transition goes smoothly. The seller has an especially strong interest in a seamless transition if they remain involved with the company post-transaction, such as through vendor financing or an earn-out.
Work out a transition plan with the buyer that includes:
- a timeline for transferring responsibilities and information
- a plan to retain employees, customers and suppliers, and how you’ll communicate with them about the change and what it means for them
- details of what you’ll give the new owner to help run the business successfully, such as getting them up to speed on operations, informing them about intellectual property and making introductions to suppliers
“People often think of the sale as high-fives, handshakes and cheques with lots of zeroes exchanged, but your employees, suppliers and competitors may be asking themselves, ‘What does this mean for us?’” says Dwivedi. “This is where communication becomes extremely critical.”
What kind of expenses and taxes do you have to pay when you sell a business?
When you sell a business, you may have to pay:
- fees for professionals, such as accountants, lawyers, realtors, valuators, business brokers and investment bankers
- closing costs, such as title search and legal fees and any penalty for early repayment of financing
- taxes, on capital gains and income
Depending on the terms and conditions of the purchase agreement, you may also need to repay outstanding financing and assume part of the due diligence costs.
Create a plan to maximize the value of your business
Contact our business advisors to prepare your business for its sale and get the maximum value for your company.