Market Insight – Q4 2022 Selling Your Business: The Good, The Bad and the Must-Have

Are you ready road

For entrepreneurs and family business owners, selling their business is, for most, a once-in-a-lifetime undertaking. It’s also likely one of their most significant transactions, the one to cement a legacy and the culmination of the owner’s career. As a business owner, whether you are cashing out and retiring, selling the business for succession-related reasons, or because there is a timely strategic rationale, following a sell-side process” will go a long way to ensuring you achieve your various objectives.

As with selling a home, taking the time to improve the property’ will result in a higher sale price. However, sellers are rarely ready for the intense scrutiny of a potential buyer. Although the seller may be an expert in their industry, most don’t have the expertise to prepare detailed financial models and sophisticated groundwork necessary to prepare a business for sale. Most sellers also don’t have the expertise to know how to value their business.

The following should be key considerations when contemplating the sale of your business.

What are the objectives of the sale?

Your business and personal reasons for selling your business will drive the pre-sale checklist’ of improvements that you will want to make to your business.

Do you intend to retire with no immediate successor? If so, there are management considerations that may impact value. Having a strong management team in place gives the potential buyer continuity and added assurance that the business will continue to operate.

Do you plan to sell a majority stake, help the buyer grow the business, and make a full exit down the road? In this situation, there are additional considerations around how to protect your shareholdings and decision-making power.

Put yourself in the shoes of the buyer

You can improve the process of selling your business by adopting the mindset of a potential buyer in an effort to remove all personal bias.

That being said, as the business owner, you understand its challenges and issues better than anyone. A few of the questions you should ask yourself are:

  • What would happen if I, as the operating shareholder suddenly left the company?
  • Do I hold key relationships with customers and/​or suppliers?
  • Have I established processes to measure performance of my team on a daily/​weekly/​monthly basis?
  • Am I able to forecast, with a good degree of certainty, how my business will perform in the next 12 – 36 months?
  • What external factors could potentially help or hinder future performance and what are we as a company doing to control these?
  • Is our business overly reliant on any one customer or supplier and how are we mitigating the inherent risks associated with this concentration?
  • Do I have strong agreements with my key employees that incent them while protecting the business?

Very often, a significant amount of a small business’s intellectual property and competitive edge lies with the shareholder leadership team. However, in order to maximize value on a potential exit, the operating shareholders need to take steps to institutionalize these company assets, as the more the company can function independently of its shareholders, the more saleable the business is. Being proactive about recruiting management and building a business that can thrive without the seller during the months and years leading to a potential sale will yield massive dividends.

What can you do to facilitate a clean transfer of ownership and realize maximum sale value?

Consider conducting an informal audit of corporate strategy, operations, management, finance, and legal and corporate structure elements. Depending on the company, this can be a demanding process, so starting it 18 months to two years before the buyer search begins, is essential. One of your earliest considerations is to build a transition team.

Under the general heading of structure and legal matters, there will be numerous tasks. Upgrading financial statements and governance, refining your reporting and documentation processes, cleaning up your employment contracts and overall business contracts/​licenses and ensuring that your IP is protected, are amongst the most important.

You should also consider simplifying or reorganizing your corporate and shareholder structure with the tax implications of a sale in mind.

From a business perspective, this is an excellent time to review the strengths and weaknesses of your business, including identifying its critical assets and your ability to deliver them. It’s advisable to carry out a profitability improvement exercise and to normalize your working capital by adjusting non-recurring, excessive or insufficient expenses and revenues. Ask yourself whether revenue is sustainable, for example, if you had a spike in last year’s sales. Addressing any potential red flags upfront makes for a more compelling argument during negotiations.

Part of increasing your business’s value before the sale should involve understanding your KPIs. Meet regularly to discuss them while also considering growth opportunities for the company and addressing customer and supplier concentration issues. Is a significant portion of your revenue generated by a small percentage of your customer base? Are your customer relationships strong enough to withstand an ownership change? What happens if your largest supplier goes out of business or there’s a disruption in the supply chain? A diversified customer base and supply chain is imperative to mitigating these risks.

Speak to an advisor (or several)

As part of this self-reflection, consider meeting with an M&A advisor to have them answer the following:

  • Is the company in the best possible saleable position today?
  • What is the value of the company in its current state?
  • If you waited 18 months to address its issues, could you get a higher price?

M&A Advisors will take an unbiased look at your business to help you identify weaknesses that are negatively impacting value and opportunities for further growth.

Most sellers say understanding your priorities and getting clarity about what you want from a buyer and your transaction is critical to achieving a successful sale and a path to exit . It’s never too early to get expert advice on how to achieve those priorities.

At some point in the process, you will want to learn about your buyer universe and do informal valuations. Remember, value is in the eye of the beholder – different buyers have different perspectives.

Seasoned investment bankers and advisors have managed hundreds of transactions and can provide these essential value-added services. Firepower’s M&A Sell-side team guides Canadian businesses through the sale process, helping clients get the most value for their business. Our team can prepare a preliminary valuation for your company and recommend areas of focus and improvement to get your business ready for sale. Reach out to one of our dealmakers for a complimentary consultation.

By putting yourself in the shoes of a potential buyer and taking steps to improve your business, which includes engaging an investment banker or advisor, you better your chances of achieving your goals around selling your business.

every successful relationship starts
with a conversation

let’s talk