Selling Your Private Enterprise? (Part 2)
For most business owners, there will come a time when you decide to sell your business, whether it is in preparation for retirement, trying out a new career path, or for financial reasons. Whatever the trigger is, the process can be stressful, from when you decide to when the deal is signed. This is often the most important junction in many entrepreneurs’ careers.
Though it may seem counter-intuitive for a start-up to be thinking about exiting your business, through experience, we have learned that it is never too early to think ahead. No matter what stage of growth your company is at when you decide to sell or how it is performing, you want to make sure to get the best price on the fairest terms and leave your company and employees in good hands.
In the previous edition of this series, we discussed a host of factors such as the importance of having an accurate and data-backed valuation of your business, timing the sale properly, improving your operational hygiene practices before a deal can be signed, identifying a potential buyer and how to respond to unsolicited offers to purchase your business.
Now, let us examine some other factors to consider as you contemplate your exit strategy:
6. A Due-Diligence “Dry-Run”
Due diligence is a critical component of the sale process, and any potential buyer will want to verify that financial statements and other reporting documents are accurate, that there are no outstanding legal issues or disputes, and that the business is compliant with all regulatory requirements.
One way to prepare for this is to do a “practice” due diligence review yourself, with the goal of performing a high-level check to ensure your organization is prepared to undergo real-life, external due diligence. You can even have these results ready to share with a potential buyer, to show how well-run your organization is, thereby decreasing perceived risk by a potential investor, and helping increase your valuation.
As you undertake this process, you might stumble across outstanding issues that need to be addressed internally before you even engage a potential buyer. You should always assume that any unattractive parts of the business will be exposed during the buyer’s due diligence review, so make sure you are going in with a fine-toothed comb to resolve these rather than leaving them unaddressed, thereby risking a hit to your valuation.
7. Growth Drivers and Opportunities
As you start to put together your sales pitch, it is important for you to have an iron-clad understanding of what drives your company’s top and bottom lines so you can articulate this to interested parties. One way to do this is to lay out Key Performance Indicators (KPIs) and track progress made on them on a regular basis.
Common metrics you may want to consider include EBITDA, the quality and nature of your revenues, the cost of customer acquisition, and setting working capital targets. In addition, you might want to keep track of ideas to improve your market strategy and positioning, customer contracts, personal goodwill with customers and staff/management, potential new markets to enter, and potential product line expansions.
Starting on these at least 5 years out (or ideally from the get-go) gives you a chance to focus on these metrics/KPIs and improve them, thereby boosting the value of your business. You should also make it part of your regular business cadence to periodically review your company’s short-term and long-term strategic plan, which will help you position your business as a better acquisition target for interested buyers.
8. Honestly Evaluating Risks
You should operate under the assumption that the experts hired by your potential buyer will provide an accurate assessment of the risks of your business. As such, it is a good idea for you to be aware of what these risks are and be transparent about them. It might be tempting to only showcase the rosy aspects of your organization, but having an explanation ready for some of these risks is likely to be more reassuring to potential buyers or investors who are evaluating the business with a critical eye.
Even as you exit the business, you will want to leave it and the people working there in the best possible hands. The best investors or buyers will appreciate your honesty and transparency in discussing the nitty-gritty of your organization.
9. Get All your Tax Ducklings in a Row
The structure of the sale can have significant tax implications for both the seller and the buyer. Depending on the structure of the sale, you may be subject to capital gains tax. In this case, evaluating the tax “ducklings” can involve a variety of tasks, such as reviewing your business’ corporate tax structure to ensure that you maximize your lifetime capital gains exemption (LCGE).
The cap on the LCGE in 2022 is $913,630, equal to $228,408 of cash tax savings. Taking advantage of the LCGE includes ensuring your organization meets various requirements including being a Qualified Small Business Corporation. If your corporation holds significant excess cash or other assets not used in an active business in Canada, your ability to take advantage of the LCGE could be at risk.
In addition, keep in mind that the laws and requirements are more complex if your business operates or your customers are located in multiple jurisdictions, whether that be countries, provinces or states. An experienced tax advisor can help you navigate these complex rules.
Exiting your business is an emotionally weighty and complicated process, with many considerations. At a glance, this can seem overwhelming, which is why having the right advisors is beneficial. Whether to guide you through the process, stay on top of the latest developments and help you maximize your benefit.
If you are planning to sell your business or simply evaluating a potential exit strategy for yourself, please reach out to our team today.