Reaching retirement age, succession planning and entrepreneurs looking to move on to their next venture are just some of the reasons why people choose to sell their business.
The Canadian Federation of Independent Business forecasted in 2018 that up to three-quarters of small-business owners would make their exit within a decade, driven by retiring baby boomers, and putting about $1.5-trillion in assets up for grabs.
The pandemic could potentially accelerate these plans, creating a crowded seller’s market that makes it more challenging for sellers to stand out.
“In that kind of environment, anyone selling a business really needs to focus on their growth story,” says Terry Holland, a managing partner at Krystal Growth Partners, a Vancouver-based private equity firm. “It sounds obvious, but it’s amazing how often this is overlooked. Ultimately value is driven by a buyer’s perspective on the future, so it’s critical to identify the opportunities you see; geographic expansion, increased market share, new products or services.”
The problem, Mr. Holland says, is that many owners have trouble articulating the strengths and weaknesses of their business and often rely on their past to convince would-be buyers of the company’s worth.
“Most buyers will come in and say, ‘Okay, but that’s the past,” says Mr. Holland. “Maybe some of your recent success isn’t repeatable. Being able to convince a buyer that it can be continued, or that there are new opportunities, and supporting the story with hard numbers, is critical.”
Hire experts to get the best valuation
Mr. Holland says the best way an owner can increase their company’s value is through preparation, including hiring the right experts to help position the business effectively.
For example, he suggests retaining a mergers and acquisitions (M&A) specialist to identify risks early in the sales process to allow the seller time to mitigate them. An M & A specialist will also help identify possible buyers and create competitive tension amongst them to drive a higher sale price, Mr. Holland says.
“Depending on the size of the business, an M&A specialist could cost 2 to 6 per cent of the sale price,” Mr. Holland says, “but a good one will add at least that much to your selling price and ensure the process is as smooth as it can be.”
Also, an independent accounting firm can help assess the company’s future profitability by assessing past revenues, future risks and other factors that could affect the business. Most strategic buyers will request this kind of information, he adds.
Seek advice from like-minded sellers
Business owners looking to sell should also consider what kind of relationship they want with the business in the months and years after the deal is done, says Steve Chen, head of B.C.-based First West Capital, which works with buyers to provide junior capital for business acquisitions.
He recommends would-be sellers talk to others who have been through the process to understand the experience, both financially and emotionally.
“If you can talk to a friend who’s owned a business and sold it, do so,” Mr. Chen says. “There are a lot of ups and downs, emotionally… Often a person’s business is their social life, their identity even. Do you want to continue being involved in some way? Do you want a gradual exit or a quick one? It’s important to plan out the next three to five years, and how different buyers fit into that.”
The decision may also impact the company’s valuation. For instance, private equity buyers might be more risk-averse and want to know there’s a management team in place to ensure a smooth transition. A well-documented succession plan — or a continued role for the outgoing owner — could help. Or a strategic buyer looking to integrate the business into a larger portfolio may want to go it alone, putting their own stamp on a business, he says.
Aligning the sale with your vision for the business
Not all sellers will prioritize maximum value for the business. Selling the company to an internal party, such as a management team for example, could yield a lower sale price. However, the offer may be more aligned with the owner’s wishes for the future business and/or include more assurance that the employees will be looked after.
These considerations may be deciding factors in a situation with multiple offers or where a seller weighs an outside buyer versus an internal buyout, Mr. Chen says.
“The biggest question for a lot of people is, ‘Do these people share my values and my goals?’” he says. “Do I want them taking charge of what I’ve built?”
Answer that, he says, and you’ve made your decision.
Three tips to help get the best price for your business:
- Identify your personal objectives. Do you want to be part of the business after the sale, or make a clean break? If it’s the latter, is it important that your vision for the company be continued and/or that the team you’ve built will be looked after? Answering these questions will help to determine your potential buyer.
- Build a growth story. Pointing to past profitability isn’t enough. Sellers need to build a solid case for the continued growth prospects for the business, including transparency around risks ranging from supply chain challenges to intellectual property. A competent buyer will likely find those in due diligence and addressing them in advance puts a seller ahead of the competition.
- Don’t DIY. Hire the right people for your goals. Professionals such as accountants, M&A specialists and lawyers play different and critical roles in developing the growth story, identifying risks and opportunities, building competitive tension among prospective buyers and ensuring your interests are being looked after throughout the process.
Advertising feature produced by Globe Content Studio with First West Capital. The Globe’s editorial department was not involved.