Selling A Business

What Do Buyers Want to Know?

At VR Business Sales we receive approximately 80 inquiries from Buyers on a weekly basis looking to buy a business. What are these buyers looking for? What are some of their questions and what do they want to see in a business they are looking to invest in…….

Here are some of the questions we get on a weekly basis from qualified buyers:

1. What is the required capital investment I need to purchase this business?
2. What is the annual net increase in sales in this business?
3. How much of inventory I am buying and what is the inventory?
4. How much money can I borrow from the bank for this business based on its current cash flow?
5. What is the possibility of the owner staying on for a minimum of 3 – 6 months to assist with the transition of the business?
6. What makes this business different, special and/or unique?
7. What further defines the product or service in this business? Does it consist of bid work? Repeat Business? Written contracts?, etc.
8. How can I grow this business further?
9. What can a Buyer do to increase the value of this business?
10. What is the profit picture of this business in good times and bad times?

So if you are thinking of selling your business now or in the future, please take a few minutes and see if you can answer some of the questions above.

Veterans as Likely Entrepreneurs

This week the Prime Minister of Canada announced a new program for Canadian Veterans.  The Helmets to Hard Hats program is designed to assist veterans who is in the process of transitioning to civilian lifepriority access to jobs and training opportunities in the trade. I believe that this is truly great for veterans. However I also believe that Veterans and military personnels also make natural entrepreneurs. 

A recent study published by the US Small Business Adminstration's Office of Advocacy had shown a strong corelation between military service and self - employment. The report found that veterans are at least 45% more likely to be self-employed compared to those with no active-duty military experience.

I believe that Veterans can make excellent entrepreneurs due to the many traits that one develops during active military service such as self-discipline, working as a team, winning attitude, and many more. I hope that the Government of Canada will recognize this as well and perhaps provide some financing support for veterans who has a desire to become entrepreneurs.

The US report on "Factors Affecting Entrepreneurship Among Veterans" can be found by clicking the link here.

 

Should I Sell My Business?

Selling your business will change your life so it's important to consider the options and implications before you decide to sell. Whatever your reasons for selling, ensure you're making the right decision by asking yourself the following:

• Am I really ready to sell, or do I just need a break?
• Have I considered other options, such as bringing in outside management?
• Why am I selling? Buyers will want to know the answer to this question so prepare a truthful answer that will not jeopardize the success of the sale.
• Will my family and friends support my decision to sell?
• Is the timing right? Could the market and sale price be better if I waited? As a general rule, the best time to sell is when the business and your sales are peaking and the industry is likely to attract great interest.
• Will the sale benefit me financially?
• Will I be restricted from trading in my profession once the business is sold? This is a common clause in contracts for the sale of a business.

You should also seek professional advice, so talk with a business or financial advisor, accountant, and lawyer to make sure you achieve the best possible outcome from your decision.

 

Think about your staff

You also need to consider your employees. How will they be affected by the sale of your business? It's important to note that whoever buys your business is not obliged to employ your former employees. When the business is sold you may have obligations to pay entitlements which could include severance pay and leave entitlements.

 

What are the tax implications if you sell your business?

There are many tax issues to consider when selling your business which include:

• goods and services tax;
• capital gains tax;
• private expenses;
• finalizing employee/independent contract or obligations;
• record keeping obligations;
• completing final income tax returns;

 

Do I have obligations under my lease if I sell the business?

If you operate your business from leased commercial premises, your obligations under the lease do not automatically transfer to the new owner upon sale of the business. You may still be legally liable for the rent and all other obligations under the lease unless you arrange to have the lease assigned (transferred from one tenant to another) to the new owner of your business who will then become the new tenant. Refer to your lease to ensure you are permitted to assign the lease and understand the process required for the assignment. Generally, leases will require the tenant to request the assignment of the lease in writing.

Common Questions from Business Sellers

As a professional business intermediary, I interact daily with business owners and understand many of their concerns. Here a few of the questions I am often asked.

1. What key points do I need to negotiate in addition to the price of my Company?

The sale of a business involves many elements of financial opportunity to the Seller. The purchase price is only one component of the overall goal. When representing a client, my understanding of all of the available options maximizes the total financial yield for a Seller. I take into account all of the elements of the financial transaction including: yields from a stock sale versus asset sale; amount of initial investment; terms and interest rate on promissory notes; liabilities to be assumed by the acquirer; transfer and negotiation of leases; personal guarantees; employment contracts; consulting agreements; non-compete agreements; current assets to be retained by the Seller; earn-outs (percentages of future sales paid to Seller); stock ownership retention; continuation of perks and fringe benefits (i.e. health insurance); purchase price allocation and other pertinent details. The total financial package goes well beyond the base purchase price.

2. Is it necessary to get environmental clearance even if I do not own the property?

It is the responsibility of the Seller to obtain required environmental clearances prior to the closing of a business sale, regardless of whether the Seller owns or leases the business property. This generally applies to businesses subject to environmental scrutiny such as manufacturing businesses or firms routinely dealing with hazardous substances. It is always in the Seller’s best interest to conduct an Environmental Assessment before handing over the property to a Buyer so that there is some record indicating that the property was handed over to the Buyer in a “clean” state.  

3. Is my transaction likely to be a share sale or asset sale?

In most cases, a Buyer will be interested in acquiring 100% of the assets of the Company, as opposed to buying the shares. In a share purchase, Buyers are primarily concerned about inheriting any potential or contingent liabilities flowing from the past operation of the Company. An asset transaction also enables the Buyer to restate the value of the assets to fair market value (as opposed to its current depreciated book value on the balance sheet) and to re-depreciate these assets. The difference in accounting treatment of buying assets versus shares has tangible financial and tax benefits to the Seller and the Buyer. If the Company is an Incorporated business, it is advantageous for the Seller to sell the shares of the Company to avoid being taxed both at the corporate and individual level plus the Seller may be able to take advantage of the capital gains tax exemption. However, there are a number of creative techniques in deal structuring that can be considered in order to minimize the tax impact for both Buyer and Seller regardless of the transaction being an asset or share sale. It is imperative to retain the advice of a professional that is familiar with these strategies early in the M&A process.

4. How many years of financial information does a Buyer typically want to review?

Three years of historical financial information should be sufficient for potential Buyer to formulate an opinion of value and a comfort level with the business. In today’s fast changing world, statements more than three years old are not very relevant to the operations of the current ongoing business. In addition to historical information, year-to-date or interim financial statements are required. It may be advantageous to prepare a projected income statement for the upcoming period as well. The Seller should also be prepared to discuss any dramatic swings (up or down) in sales, profit margins or expenses.

When Selling your Business...Experience is Important

Experience is worth millions.  Selling your business is a once in a lifetime event.  Deciding on who will represent you in the sale of the business may mean the difference between selling your business and closing your doors.  For business owners, this is a high stakes decision.  When studies show that up to 85% of an owner's personal wealth is tied up in his business, there is no option for the owner other than assuring that the job is done right. 

Someone that has completed numerous business transactions has seen the good, bad, and ugly.  They are business intermediaries that have the experience to pull through turbulent waters to get to the closing table.  They are business brokers that have seen the last minute issues pop-up that become potential deal killers. They are deal makers working with all of the other business advisors such as attorneys, accountants, lenders, to make sure that everything comes together to complete the business sale.  When selling a business, the company does not get sold overnight.  It takes time to find the right business buyer for the company.  An experienced business broker will maintain confidentiality while qualifying buyers. 

Business owners must concentrate on maintaining their business while letting an experienced professional look for mergers or candidates for the acquisition.  Emotions often become driving factors of a business sale and a skilled business broker can help the buyer and seller separate irrational decision making from the facts.  Experience is not a commodity.  It cannot be shopped for price.  I have learned in life that experience comes at a cost; however there is a return on this investment.  In the case of selling a business, the return on investment can easily be worth tens of thousands.

Can you sell something with no value?

As I go on appointments to meet prospective clients wanting to sell their business,  I caution them that there are two ways in which one can normally value small businesses (notice the word “normally” and “small”). One way values Tangible Assets, such as inventories, receivables, furniture, fixtures and equipment. The other uses a multiple of Owners Benefit (Operating Profit plus owner’s salaries, depreciation, amortization, interest and personal benefits charged to the business). In other words, if your business generates minimal or no Owner’s Benefit, what you are really selling are the business’ tangible assets — what we call an Asset Sale. Ordinarily, you would not be able to sell your business for an amount greater than the market value of those assets — market value is in the “eye of the beholder”. However, buyers normally define Market Value at 25-35% of the assets’ original value.

Now, there are cases in which sellers pay more than the value of the net tangible assets—creating Goodwill in the seller’s balance sheet equal to the amount in which the purchase price exceeds the net tangible assets of the acquired company. Goodwill, however, normally has a value—such as competitive advantage, brand, employees, customer base, etc.

In summary, if your business is not generating profits, what you have is an Asset Sale and those assets need to have a realistic value assigned to them for buyers to want to buy.  In my opinion, you cannot sell anything that does not have a value attached to it that is equal to or better than the buyer’s expectations. So, if you are selling, take a hard look at what you are REALLY selling and consult with your business broker on pricing your business properly.

Selling your Business Confidentially

Once you have an established asking price and terms, your search for the right buyer begins. Buyers may be found through a targeted search of potential candidates in your industry, or by a business broker in contact with a number of qualified prospective buyers. Regardless, a business broker can assist in the discreet search and screening of qualified buyers.

Confidentiality
Confidentiality is KEY in maintaining the goodwill of your business and in minimizing the disruptions at the work place during the sale process. If employees, customers and suppliers learn about the potential sale of the business too soon through other channels, they could begin to look elsewhere for employment and services. It is usually best to wait until a transaction looks imminent before key individuals are told of a sale.

To help minimize exposure, specific information regarding your business should be revealed only to qualified prospective buyers after they have executed a confidentiality and non-disclosure agreement. A qualified prospective buyer is someone that has established the following:

* A desire to purchase your business.
* Has sufficient financial capability to complete the transaction.
* Has the qualifications and resources necessary to manage your business.
* Has the willingness and ability to move forward in a timely fashion.

The information presented to a qualified purchaser after execution of a confidentiality agreement may include:

* A history of your business
* An overview of your business, including information about its products and services, operations information and personnel structure
* Information regarding your market, including customer mix, competitor, and industry trends.
* A list of the fixed assets included in the sale.
* Information regarding your facilities, including lease terms etc.
* Financial information that may include: balance sheets, income statements, details of liabilities to be assumed, equipment leases, etc.
* Details on the price, terms, and sale structure of which you are offering your business.

In-depth confidential information need only be revealed during the due diligence process.