Would you call a Dentist to sell your business?

Dentists provide an essential service and help maintain good dental health. Accountants provide an essential service for your financial reporting needs and meet CRA requirements. So why would you call your accountant to help sell your business?

It is astounding to discover that a number of business owners have a very narrow range of professional business relationships, often resulting in a default decision to use their accounting firm. While the larger accounting firms do have M&A knowledge – they simply lack the marketing “know-how” to create a competitive bidding environment for the effective sale of businesses. In addition, accountants lack the negotiation expertise necessary to facilitate the best value offering for the client. Going down this path is not only expensive; it also results in an outcome that leaves a substantial amount of money left on the table that should have been in the sellers’ pocket.

Savvy business owners know that a professional M&A (merger and acquisitions) firm will have the track record and expertise to not only put the “deal together” – moreover, they will have the industry connections and marketing “know – how” to enable a satisfactory outcome.

It takes a team to put the deal together: Accounting firm, M&A advisors, Lawyer, Tax planner are all essential elements to achieve deal success.

After decades of building your business, make sure to call to an M&A professional to develop an effective exit plan and get the job done effectively.

TOP 10 EXCUSES FOR NOT SELLING

Every business owner has a favourite reason for not selling. Whether it’s “I’m gonna live forever!” “I don’t want to face what it’s not worth,” or even “There are plenty of interested buyers—I get calls all the time!” We’ve heard them all. Here’s our analysis.

  1. I want to continue not going fishing every chance I get. Some business owners are just having too much fun. They, in fact, are having so much fun not selling their businesses that they don’t ever want to stop not selling them. You might even be surprised to learn that “not-for-sale” sellers are acquired all the time by strategic buyers that see more value in their businesses than they do.
  2. I am waiting ‘til the business peaks again. Congratulations, but you’re already too late! It will take six months to create a selling document and eliminate the tire kickers. It will take another six months to negotiate with the first serious buyers and another six months to complete negotiations with the final buyer. That adds up to a year and a half. Remember that a positive outlook will drive your earn out or protect your position. Now we are talking three-and-a-half years (very likely at a minimum). Make no mistake, acquirers buy future earnings.
  3. I’m getting ready to get ready. You’re right. You’re building a longer growth history that should be of value. It’s important to the buyer, especially when you don’t have it. But once you have established that strong sales history, your company’s future will be discounted in some other way—your company’s future always will be discounted on one basis or another—too often, quite drastically and unexpectedly, on the basis of circumstances you never anticipated.
  4. I don’t know where to better invest the proceeds. Few can be sure of where to invest their money in these times, but one thing is certain: were you to sell, no one could possibly convince you to invest the entire proceeds in a medium-sized, privately-held business, even if you were offered the titles of Chairman and CEO. Like you are now.
  5. I’m waiting for the kids’ IQ to improve. Well, there are lots of people holding out hope on that one. It certainly is most admirable wanting to eventually entrust your retirement to the hands of your children rather than dispassionate pubic company business executives who are expert in the management of corporate assets.
  6. I can’t spare the time. It does take a lot of time to manage the sale of a company, especially when the seller is dealing directly with the buyer. The best route is working with a professional M&A firm, this allows you to take advantage inherent in an auction process in which several prospective buyers compete to acquire you, the seller.

This process enables sellers to evaluate each suitor’s relative seriousness even as the competitive process ensures that each buyer offers maximum value.

  1. There are plenty of interested buyers: I get calls all the time…Buyers begin to disappear from the market altogether as interest rates make acquisitions more and more prohibitive. Strategic buyers come and go very quickly as do the perfect selling opportunities.
  2. I don’t want to face what it’s not worth. Value is in the eye of the beholder, and the best value is realized when you make sure you’re talking to the right buyers.
  3. I’m gonna live forever. Besides, you’re riding a winning streak, and every gambler’s motto is: “Cash in later.” The plain truth is that few of us will know when we will be called to cash in. You don’t want that burden to fall on those left behind. Expecting a widow or children to manage the selling process from scratch invites disaster. Your heirs will be pegged as “desperate” sellers by every suitor, and the longer it takes to close a transaction, the worse things will become.
  4. I’m waiting to lose a few more options: I always do best when I’m under pressure. If you’re market share is slipping, your product line needs updating, key personnel are leaving, key customers are defecting to competitors, revenues and/or profits are declining, and your market is disappearing, what are you waiting for? Do you want to see your business model completely invalidated?

Ninety-nine percent of all entrepreneurs hold on too long and sell their businesses three to five years too late. They postpone the inevitable decision until they find themselves trapped by “must sell” circumstances.

While some might consider the analogy unflattering, business owners all too often fall victim to an unwillingness to let go at the appropriate time. Business owners recognize the critical importance of timing even as they admit to postponing the process, perpetuating delays even as they seem powerless to know when to let go and escape the inevitable trap. Sooner or later, the executives recognize the true price of their reticence: Someone else winds up making their estate planning decisions.

THE IMPORTANCE OF EXIT PLANNING – 6 CRUCIAL STEPS

Despite having spent a significant part of their working lives establishing and building a successful company, surprisingly few owner-managers spend enough time planning how and when they will exit their business and crystallise the value they have built up.

In many cases owner-managers remain focused on day to day matters and leave the exit to chance, meaning they often don’t achieve the best deal with the best terms. Below is a six point checklist for owner-managers to help them with this final phase.

  1. Plan Early – ideally at least 18-24 months before the exit event. This gives sufficient time for real changes to be made which can enhance the value of the business. Leaving it until the last three months before exit means that any changes are likely to be superficial, something that the due diligence process will identify.
  2. Prepare an exit plan – identify potential exit options e.g. trade sale, MBO/MBI, flotation etc. Consider current/anticipated valuation. Look at potential opportunities – what areas should the business focus on in order to enhance value ahead of exit? Look at potential threats – what actions could the business take to mitigate these threats?
  3. Plan for succession – the initial success and growth of many owner managed businesses is often down to the drive of the owner and the strength of personal relationships with customers and suppliers. Although there may well be an earn-out period (a time when the seller remains with the business to ensure a smooth handover), a purchaser wants to acquire a business where the underlying value is in the business itself, rather than the owner.For this to be the case, there usually needs to be a successor and the process of transition needs to be well progressed by the time of sale. This phase can be particularly difficult for the owner-manager but is often one of the most important in terms of achieving optimum value.
  4. Identify future potential / opportunity – it is important for the purchaser to have a clear picture of the short and medium term prospects and opportunities for the business they are acquiring. They will want to make the acquisition a success and will want to ‘take the business to the next level’.

This may be through international expansion or through the introduction of new products or services etc. Clearly the purchaser will be more willing to ascribe value to the opportunities if there has been some progress made towards them, e.g. a successful product launch or the opening of a new market which demonstrates that the product or service is transferable.

  1. Management information – purchasers are keen to see proper management reporting and analysis (clearly the level of reporting should be appropriate to the size, nature and complexity of the business). It should be timely, relevant and reliable. In many owner-managed businesses this area can often be overlooked so it is one that may need attention in the two years prior to a planned sale. As a minimum, businesses should look at monthly management accounts against budget figures, with reviews of material variances.
  2. Maximizing value – in its simplest form, purchasers will most often value businesses based on Earnings Before Interest, Tax and Depreciation/Amortization (EBITDA), to which they will apply a multiple e.g. 3x, 4x, 5 or more. During the planning period it is worth focusing on the key drivers to identify how they might be improved.For EBITDA – look at how sales might be increased, how the gross profit margin could be improved, how costs might be reduced. The multiple is more reflective of the quality of the earnings made, so owner-managers should look at future potential and what progress they can make towards demonstrating the potential that exists.Finally, having invested time in planning for an exit and having identified those areas on which to focus, it is important to keep the Exit Plan and progress made towards achieving it under review and to be prepared to update, adjust or refocus it as required.

WHAT IS THE DIFFERENCE BETWEEN VALUE AND PRICE?

Some would argue that a business valuation is not useful to business owners for exit planning purposes because the valuation can become outdated quickly and it may not provide an accurate assessment of what a potential purchaser would be willing to pay for the company. However, the facts are that a valuation can be very useful to business owners in exit planning.

Fair market value (FMV) is a common value term used by business valuators. According to the International Glossary of Business Valuation Terms, FMV is defined as follows:

“The highest price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.”

FMV is a notional market concept. Price, however, is what is agreed upon by parties in an actual transaction. Under certain circumstances FMV and price will be similar, however, the two will rarely be equal. This is because certain factors reflected in price are generally not reflected in FMV, including:

Economies of scale or synergies: Potential cost savings, increased sales, eliminated competition, etc., that may result from combining the target company with the purchaser’s existing business, are generally not reflected in FMV.

  1. Negotiating strength: Relative bargaining abilities of the buyer/seller and their individual perception as to the future of the business and risk will affect price but not FMV.
  2. Transaction structure: Price will often include non-cash consideration whereas FMV is expressed in terms of cash.
  3. Underlying motivations: Buyer/seller motivations for purchase/sale that impact price are generally not reflected in FMV.

It is true that an outdated valuation may not be useful to business owners when the facts and circumstances affecting value have changed since the valuation date. However, a current FMV assessment can be useful for exit planning purposes for the following reasons:

  1. FMV can be used in negotiations with a potential purchaser because buyers generally consider the same valuation approaches and techniques used by business valuators in a FMV assessment.
  2. FMV provides a good intrinsic value benchmark (i.e. prior to economies of scale or synergies) that is useful for identifying and implementing value enhancement initiatives.
  3. FMV can serve as a basis for a pricing analysis, which does consider value from the perspective of a specific purchaser and attempts to quantify the economies of scale or synergies that may be realized by incorporating the target business with the purchaser’s existing business.

At the end of the day, price will be determined through negotiations between a buyer and seller which will be influenced by negotiating strength and a supportable value analysis. A current valuation or pricing analysis prepared by an independent business valuator provides the business owner with the edge needed in negotiations with a potential purchaser.

WHAT IS AN EXIT PLAN?

An exit plan is a comprehensive road map to successfully exit a privately held business. An exit plan asks and answers all the business, personal, financial, legal, and tax questions involved in selling a privately owned business. It includes contingencies for illness, burnout, divorce, and even the owner’s death. Its’ purpose is to maximize the value of the business at the time of exit, minimize the amount of taxes paid, and ensure that the business owner is able to accomplish all his or her personal and financial goals in the process.

An exit plan can be complex and usually requires advice from a number of different specialties. A well-designed and implemented exit plan enables business owners to:

  • Control how and when they exit
  • Maximize company value in good times and bad
  • Minimize, defer, or eliminate capital gains taxes
  • Retain control by generating a number of strategic exit options
  • Ensure they achieve all their business and personal goals
  • Reduce their stress and that of their employees and families
  • Ensure continuity of the business

On the other hand, the failure to create a well-defined exit plan virtually guarantees that business owners will:

  • Exit their companies as a result of pressure from outside circumstances, not as a result of their own desires
  • Exit their companies on a timetable that’s forced on them instead of one that meets their needs
  • Undervalue their companies and leave hard-earned wealth on the table
  • Pay too much in taxes
  • Lose control over the process by being reactive and limiting their exit options
  • Fail to realize all their business and personal goals
  • Suffer unnecessary psychological stress
  • Watch a lifetime of work disintegrate as a result of poor business continuity planning
  • Lose confidentiality during the sale or exit process

A recent survey showed the number one reason private business sales fail or only partially succeed is a lack of planning on the seller’s part.

However, in spite of the importance of exit planning, most business owners spend more time planning a family vacation, than when and how to exit their businesses.