Posted on November 5th, 2021 by Robert Plenderleith in Business Valuations

Thinking of Selling Your Business: What to Expect and When

Black and White sign that reads Business for Sale

Many business owners are asking about and considering what steps are needed to sell their businesses and get the best price. Over the past two years, business owners have spent time reflecting on their priorities, goals, and lifestyles. A large number have had to delay exiting their business, instead they are focusing primarily on business survival and maintaining cash flow. While some of these owners have since decided that they are now ready for retirement, others have decided to divest their businesses in the pursuit of new ventures and “pivot” in a different direction. At the same time, the business sale market has exhibited incredible strength for sellers; many eager buyers have entered the market, bringing with them large amounts of capital and a strong demand for profitable and growing businesses. This has also created many opportunities for business owners who may be receiving unexpected and unsolicited offers to purchase their business.

Meanwhile, many family-owned businesses are evaluating when the best time is to transfer ownership to the next generation. Recently proposed changes to the taxation of intergenerational transfers of family businesses have led many to ask about strategic estate planning opportunities.

The process for selling a business varies depending on who the potential buyer may be, the structure of the sale, and when the sale will take place. However, the following steps are common in many transactions and are important for business owners to understand in order to ensure they receive the best price and terms.

Preparing to sell Whether you are retiring, passing on the business to family, or moving on to another endeavour, the process of selling your business can be complex and there are many issues to consider. When considering the sale of your business, it is important to examine these key issues.

  • Is the business ready to sell? In a successful sale process, buyers want to see that the business has a history of profitability and growth, a clean balance sheet (i.e., only operational items without related party and shareholder balances), defined processes and procedures for operations, a stable customer base, and future growth plans.
  • Who will buy your business? Whether selling to family members, outside buyers, or key managers/ employees, it is important to examine the pros and cons of each exit strategy and the appropriate steps to take when planning for each.
  • Who will run the business after the sale? Businesses that rely less on their owner to manage daily operations are generally seen as more attractive. There is value in having a strong management team with defined operational processes in place so that when you do sell, a buyer will be able to transition seamlessly without interruption.

Once you have decided to sell, it is important to begin the planning process as early as possible. Planning early on will give you the best chance of maximizing your business value before a sale and will better prepare you for the exit process. Business owners that do not take the necessary time to plan for their exit are often faced with less favourable results, such as a lower sale price, deferred payments (i.e., earnouts, contingent considerations, and vendor take-back), or a failed family transfer. Proper planning gives you the best chance of successfully closing a sale and receiving the highest price available.

Putting together a team

One of the most important steps is to put together a team of trusted and knowledgeable advisors to assist you throughout the sale process. Specialists, such as accountants, lawyers, and other professional advisors will all play key roles in ensuring you successfully sell your business and maximize the after-tax proceeds. Additionally, many business owners also consider whether to enlist a Mergers and Acquisitions (M&A) advisor or Business Broker to assist in marketing and negotiating the sale.

Knowing your value

In order to evaluate offers and successfully navigate the negotiation process, it is important to know the value of your business. A Chartered Business Valuator (CBV) can provide a better understanding of the common question, “What is it worth?” and can help you better understand the key drivers of value.

Even if you do not intend to sell in the immediate future, understanding these key value drivers will better prepare you to build a valuable and growing business, and will help ensure FSAT NEWS FALL/WINTER 2021 5 you receive the best price possible when the time does come for a sale. For instance, while it is generally preferable to begin the planning process for a sale as early as possible, this is not always feasible; sometimes, buyers approach sellers with unsolicited offers. If you ever receive an unsolicited offer for your business, it is also likely you will be given a limited timeframe to assess the offer, leaving you with little time to implement changes to your business that will increase its value in preparation for the sale. For this reason, business owners should constantly be evaluating their business, and should make changes that will increase value when given the opportunity. Additionally, certain steps need to be taken a year or more in advance such as tax planning/ structuring and getting the proper management in place.

It is also important to examine your personal financial situation and goals to determine whether a sale will provide you with adequate proceeds to fund your future endeavours, whether it be retirement or another venture. If it will not, then it is important to take steps now that will generate future value growth. This can often be done by identifying opportunities and making investments in areas of the business that will drive future sales growth, or by optimizing the operational and financial processes of the business to reduce costs and improve profitability at current volumes. However, many of these changes can take time to implement, reaffirming the importance of starting the planning process well in advance.

Marketing your business for sale

In order to market your business for sale, your team of trusted advisors will assist you in preparing marketing materials that can be used to attract potential buyers, one of which is called a Confidential Information Memorandum (CIM). This document provides potential buyers with an overview of the business and its operations, historical and projected financial results, and other information pertinent to the sale.

When selling your business, it is normally preferred that the business is marketed for sale confidentially. This is because public knowledge of a sale can often lead to employees resigning or customers leaving for your competition. Before potential buyers can receive confidential information about your business, they will first be given a generic description outlining the sale opportunity. They will then be required to sign a Non-Disclosure Agreement (NDA) in order to receive the CIM and other confidential information about the business. This agreement provides you with legal recourse in the event that an interested party shares confidential information publicly about your business.

Due diligence

Once you have received an offer for your business, there is still a considerable amount of work that is required to ensure the sale closes successfully. Assuming you are satisfied with the offer, you will then enter into a Letter Of Intent (LOI) with the buyer and move on to the next phase of the sale process, called the ‘due diligence’ phase.

During the due diligence phase, potential buyers will closely examine the operational, financial, and legal aspects of your business. The purpose of this process is to allow buyers to confirm the accuracy of the information presented by you about your business, and additionally allows you to confirm the representations made by them regarding their ability to purchase the business. This process involves the exchange of a variety of documents and supporting information and establishing some baseline business aspects, such as operating working capital amounts. The buyer will then have their own team of advisors review the information.

The success or failure of a business sale is directly related to how prepared the seller is for the due diligence process. Preparing well in advance for this phase of the sale process has many benefits as unidentified issues that arise during the due diligence process are likely to lead to a buyer reducing their offer price, or declining to move forward all together. Adequately preparing for the due diligence process early in advance allows you the opportunity to recognize and resolve any of these issues that would have been likely to come up later on, increasing the chances that a buyer will pay you full value for your business.

Closing the deal

After a deal has been agreed to and the due diligence phase has successfully been completed, the next step is to execute the sale based on the agreed upon terms. At this stage, closing adjustments are made to the purchase price and necessary legal agreements are drafted. The lawyers and accountants will assist in reviewing all of these important documents to ensure that agreed upon terms are properly documented during the closing process. After all agreements have been reviewed and signed by both parties, the funds will be transferred and the sale will be closed with a few possible post-closing adjustments.

At DJB, our team of specialists has the professional experience to assist business owners throughout the sale process. Our trusted professionals can assist in all aspects of preparing for a sale, including assessing the complex issues involved in determining the value of a business and preparing the documents and information that will be required during the due diligence process. This will help ensure the sale occurs in a tax-efficient manner, and advising you on steps that you can take to increase your business’s value. Our specialists also recognize the importance of not just transitioning a family business, but understanding the soft issues around such an important even

Article originally published in: FSAT News: Fall/Winter 2021

About the Author

Robert PlenderleithPartner | CPA, CA, CBV, CFF

Robert is an experienced Chartered Professional Accountant (CPA), Chartered Business Valuator (CBV), and Certified in Financial Forensics (CFF) with a focus on private companies. He provides advice on corporate reorganizations, financial reporting, strategic planning, tax and estate planning, matrimonial/family law, and shareholder transactions.
More About Robert >