Selling one’s own privately held business can be very rewarding but at the same time very challenging at many levels. With this blog, I hope to explain why and how to approach the sale of your own business so as to minimize the challenges.
Reasons for sale
The supply of private company sales has been driven by baby boomers reaching the age of retirement, either selling the business to other family members or to external third parties.
The supply is also driven by owners realizing that for their businesses to reach full potential in this global market, they need to be a part of a larger organization that has established back office functions (accounting, marketing, sales, communications etc) and economies of scale.
One other reason for driving the supply stack is underperformance of the company or any of its divisions, especially in this economic environment. Owners are existing from the market and realizing any gains they have incurred.
While the environment for selling has been trending upward, the demand has also been on a similar trend mainly driven by availability of capital and access to low-cost financing
Steps of a private sale
Set aside emotions: The seller needs to be aware that the sale process is often difficult and emotional given that they have never experienced a sale before and that he/she is letting go of an asset that they have worked hard to build over the years. The owners need to be able to separate pragmatic decision-making from the emotional side of a sale.
Pre-transaction planning: Once an owner is mentally ready and willing to expose the company for sale, planning initiatives need to start. The longer one plans before the sale, the better position is the owner. Planning should begin at least two years before a sale and should include discussions with professionals including lawyers and accountants. An example of a planning initiative is the Capital Gains Exemption which requires that the owner have held the shares for at least two years.
Search for a buyer: This step can involve several considerations such as the number of buyers to be approached, whether to approach them in tandem or sequentially and whether deadlines should be established for certain important events such as for the response for expressing interest, signing of confidentiality agreements etc.
Preliminary due diligence: Is the stage when buyer reviews all the information provided before signing a letter of intent with the seller. No non-public information is disclosed until a confidentiality agreement is signed.
Valuation: A range of value is determined for the company by valuation advisors. However, that process is not an exact science and the final price actually negotiated may differ than the range depending on negotiations, skills of the parties involved and the structure of the deal.
Deal Structuring / Negotiation: Several approaches exist when structuring a private sale which include whether it is an asset sale vs a share sale, when and how the purchase price will be paid and whether a management term exists for the existing owner.
Final due diligence: in this stage, the seller would be dealing with a handful of buyers, managing the exchange of information with them. It is important that the seller be prepared internally, including its books, taxes, contracts, and other diligence material that the potential buyer might be interested in reviewing. It is critical for the seller to keep management’s focus on running the business at this point as the sale has not yet been consummated.
Closing: Once the deal is closed, the owner either is no longer a part of the business or transitions to become an employee if a management contract was drafted as part of the purchase. The owner must always be mentally ready for this stage to avoid conflicts
While the sale of a business is rewarding, the process may be complex and intensive. No one “cookie-cutter” approach exists for all private businesses as they all offer unique challenges and issues however the main takeaway is that the seller is in the driver’s seat, with his/her mental readiness being at the forefont for the success of any sale.
Need some advice on selling your company? As your local Ottawa Accountants, we’re happy to help. Contact us today to schedule a free consultation.
