As part of CCIF Toronto’s virtual experience, two speakers explained how to prepare for the sale or transfer of one’s business.
Donald Cooper, an entrepreneur and business consultant, opened the discussion by explaining that a business owner who wishes to sell or transfer his or her business must first establish a grid of key people in the organization. The purpose of the exercise is to demonstrate that the workshop can work even if the owner sells or retires.
“No one wants to think about retirement or even selling their business, says Cooper. But sometimes you get caught off guard by circumstances and without planning, the business won’t have the value you want.” He notes that an ill-prepared owner will often overvalue his business. Planning is the best approach to protect the business and its team.
The owner may want to transfer the business to his or her family. Cooper understands this but raises a red flag. “Children aren’t necessarily interested or competent to take over,” he says. “You have to take the emotion out of it and understand that only 30% of businesses will survive the second generation.”
Years of preparation
Planning to sell or transfer the business for maximum value is a three- to eight-year exercise. Before thinking about selling, the business needs to be cleaned up: get rid of toxic employees, eliminate unprofitable services and dispose of worthless inventory.
Then, you have to prepare the numbers. According to this expert, a company’s value is largely based on its profit margin. For example, to expect to sell a shop for $4 million, you need to make $1.2 million in annual profits. This ratio applies regardless of the expected selling price. Achieving this goal requires a growth strategy, an effort that can be spread over five years and revolves around increasing sales, reducing expenses and carefully evaluating staff.
Any new investment should be made with an ROI objective of at least 12% annually. “If you’re looking at 5% sales growth per year, eliminating everything that doesn’t pay off even if it affects sales volume a little will not only bring more profit into the business in the short term, but will also increase the resale value,” says Cooper.
A solid track record
Brahm Elkin of the M&A Club agrees with his colleague that a sale is at least two to five years in advance. In addition to preparing financial statements, with updated tax information, he recommends putting a sales projection for the next three years on paper. “A potential buyer will put a value on the company’s growth potential,” says Elkin. You also have to put in order the list of customers, contracts with suppliers and the value of the building, if the contractor owns it. “He also suggests presenting a team diagram with a definition of each person’s tasks.
Like his colleague, Elkin strongly recommends that the owner surround himself with experts when preparing for the sale. This expertise will be invaluable in building the file, but also in analyzing the letter of intent preceding the sale contract.
Before the sale, he advises meeting with a tax specialist to determine how the receipt of the sale amount will affect the contractor’s tax level.
For the two experts who spoke at the virtual CCIF event, a precise analysis of the sale objectives must be done with rigour and without emotion, even if they agree that for many owners the sale of their business can be a difficult step.