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Selling Your BC Business: Part One - Preparing To Exit

Updated: Jan 9

Whether it is the receipt of an offer that finally provides the financial security to retire, the need to pass the torch to a new generation or simply the realization that it is time to move on to new things - it is not uncommon for any entrepreneur to consider the sale of their business at some time. If and when the time comes, preparing to sell your business can add value and ease process.

Preparing to Sell Your Business
Preparing to Sell Your Business

In this article, part of a series of articles that will explore the transfer of a BC business undertaking from the seller's perspective, we consider what is perhaps the likely first stage of the sale process - preparing for a possible exit. Specifically this article will outline five items worth considering early in the process to maximize or protect the seller's valuation; minimize or at least mitigate deal costs; increase the probability of a successful exit process; and hopefully decrease the potential of a failed deal and, perhaps, litigation.

1. Who would be a potential buyer? Perhaps you have had discussions with persons who have expressed interest in acquiring your business previously. Maybe a customer or supplier has expressed interest based on their experience in dealing with your business. A potential buyer may be a competitor or company operating in another market looking to expand into British Columbia. A potential purchaser may be right in front of you - the next generation of family members; current management or even your employees. Business brokers may, but not always do, have active buyers looking to acquire a business but often will solicit potential buyers over their platform or through their connections. There is value in identifying as many potential purchasers of your business as possible for the simple observation that often the best terms and price possible for a seller is often when the seller has choices from a competitive bidding process with multiple, motivated potential buyers!

2. When would be the best time to sell? Obviously the best time to sell a business is when the demand is high and the revenues look good. Perhaps a few good years have made the financial statements particularly attractive or, perhaps, you see an equipment replacement or technology upgrade expense on the horizon or even the need to manage growth that you simply do not have the bandwidth for. For some smaller businesses timing can be as simple as the pending expiration of a commercial lease and the reluctance to undertake another personal commitment to a further two, five or ten years of lease payments. If at all possible seeking to initiate a sale process at a time when your business or financial statements will look their best - or perhaps when the distraction and potential expense of a sale process will have the least disruption - is worth the time to consider.

3. Do a health check on the business operations. While most business owners are generally aware of the day-to-day administration of their particular business, sometimes bad habits can accrue or standards may slip that can go unnoticed until scrutinized by a third party with a critical eye. Employee turnover; deteriorating or non-existent supplier relationships; issues with collection of accounts receivable; issues with commercial landlords, enquiries from tax authorities or other regulators (for example with respect to environmental or working safety concerns); accumulating obsolete inventory or potential loss of key customers - all can be indications of potential problems that, at the very least, a purchaser may use to negotiate a lower price, deferred payment or more problematic representations and warranties. Take the time to consider a business health check to identify any potential issues and, hopefully, resolve them prior to a potential purchaser's expression of concern.

4. Do a reality check on the financial, corporate and business records. Do you have annual financial statements prepared by an external accountant? Even better, audited? Do you generate monthly or at least quarterly financial statements consistent with the preparation of your accountant generated annual statements? Do you maintain proper corporate records? Are they complete and up to date? Even better, maintained by an experienced corporate secretary or corporate law firm? Do you maintain a list of machinery and equipment; do you maintain a list of suppliers, customers, employees and other service providers; do you have an up-to-date list of material contracts and copies of those contacts? Have your employees signed employment agreements, confidentiality agreements and (if applicable) IP ownership and transfer agreements? Are tax filings and payments up-to-date with copies of any correspondence related to them available? To be sure, most if not all of these items should be in place from the beginning of any business and maintained through the course of doing business but that is not always the case particularly in smaller, closely-held businesses or start-ups. Take the time, again, to do a check-up with your accountants and law firm and an informal audit of your own office recordkeeping. These are all items that will certainly be requested by any potential purchaser as part of a due diligence process and having them substantially complete and ready for review will speed up the sale process and, perhaps, provide comfort to a purchaser in terms of both value you are asking for and the risk any purchaser may be taking.

5. Understanding the what and why of valuation and purchase price. Perhaps more than anything, the most difficult issue between a purchaser and seller is the value of whatever is being sold. From the seller's perspective, it is often having a sense of a businesses value and a price target that would even justify pursing the sale process with a particular purchaser (and having some justification for that valuation and price target). To start, it should be understood that valuation and price can be, and usually are, two different things. A valuation may simply be a relative comparison to other similar businesses in a particular market; it may look to specific "fair market" values of each and every asset and contract, less any liabilities; or could seek to take historical revenues and expenses and project them into the future. It could be a combination of any or all of them. Price may be the result of a particular valuation but can be so much more (or less) including the eventual identity of the potential purchaser(s) and the motivations of both the purchaser and seller; competition among multiple purchasers or the existence of alternate targets for buyers; even simply the sophistication and tenacity of the negotiating parties. When considering the possibility of a future sale (and assuming no offer is on the table) it may not be necessary for a seller to determine what, exactly, an external valuator may conclude is a fair valuation of a particular business or even what price would be acceptable in theory. However, it is worthwhile for a seller to have a general understanding some valuation methodologies applicable to the particular business; a familiarity of recent macro trends within the relevant market that may affect valuation and price; and knowledge of specific factors relevant to the particular business and/or local market that may justify pricing at a discount or premium to any subsequent valuation. Having a grounded sense of value and price today, with a general understanding of the factors likely affecting that value and price, gives a seller a sense of when, or if, to eventually trigger a sale process in response to a future offer or in search of that offer.

If given some attention and reasonable effort early, attending to the above items before engaging any search for, or discussion with, potential purchasers can greatly increase the probability of a successful sale of a business and decrease the potential for a false start, wasted time and/or money or failed deal. None of the above need require unusual or extraordinary time and expense to business owners but all, if properly considered and attended to, are likely to significantly mitigate the time an expense to both buyer and seller when and if a sale process is eventually pursued.

Endeavor Law can assist those looking to potentially sell or exit their current business undertaking and, of course, provides legal advice and services related to any business purchase and sale process. Endeavor Law will always seek to provide competitive pricing for any legal services requested and is pleased to discuss fee arrangements that suit any potential client.

Does not constitute legal or other advice and must not be used as a substitute for legal advice from a qualified legal professional in your jurisdiction who has been fully informed of your specific circumstances. Information may not be up-dated subsequent to its initial publication and may therefore be out of date at the time it is read or viewed. Always consult a qualified legal professional in your jurisdiction.


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