The business sale process may not be something you assist with regularly, but sometimes a family law situation or a significant shareholder dispute may result in a business being marketed for sale. If this is the ultimate means to assist in resolving the dispute, the more work that can be done in advance will significantly enhance the ultimate proceeds available.
And the more proceeds available, the higher the likelihood that the financial implications of the dispute can be resolved. Below is a summary of a few key questions that can be asked to assist in the process to be prepared for sale.
Is there a preferred timing for a sale?
In most cases, timing is critical. It can be a factor in ensuring that the sale occurs in the strong period of the economic cycle, or provide additional certainty that the key Management is still with the business for a reasonable period if retirement is in the not-too-distant future.
It may be important if there are major multi-year contracts that have just been renewed which give the new buyer comfort in the future revenue stream. All these things assist in reducing the risk for the new owner. Lower risk typically means higher multiples of earnings (if it is an income or cash flow approach to determining the value), and higher multiples mean higher values.
Perhaps it is as simple as time is required to execute the company’s key strategies which are designed to enhance value. Whatever the case, the earlier the company can start the process of being prepared for sale, the higher the likelihood of an enhanced value.
Do the owners understand their pricing and non-pricing objectives?
The owners need to have a realistic understanding of what the value of the Company is, and even more important is understanding what the value drivers of the company are and how an external party will determine value.
- What is the scalability of the business model without adding on significant new costs?
- What are the recurring revenue streams that can be relied upon?
- What is the “stickiness” of customer relationships?
- What are the growth possibilities?
- Is there any intellectual property that exists?
- Do we have a strategic competitive advantage that enhances value?
- Do we have a strong Management Team?
- Do our financial systems provide timely, accurate financial information that allows us to really understand the operations?
- What is our market position and market share?
- Do we work in an industry where safety statistics are critical?
- What is our safety rating?
- Do we have any cost advantages relative to our competitors?
- Do economies of scale exist?
How Chartered Business Valuators can help
Work with a Chartered Business Valuator to get an understanding of value, and what can be done to enhance value prior to the sale process.
Non-pricing objectives are critical as well. In a number of cases, the non-financial elements of a transaction can be just as sensitive as the pricing objectives.
- Will the existing Management Team remain in place, or will the new owners put in their own management?
- Will the new owners change the name of the company?
- Move the operations to a different city?
- Get into product lines that are more controversial from a public perception perspective?
- Do the owners have significant Environmental, Social & Governance (ESG) principles that they want maintained?
The earlier that the exiting owners can think about and understand how they would react to such potential changes helps to limit the risk of the deal falling apart at the end.
Have the owners considered the different types of potential proceeds?
If the business is an operating entity, and particularly if it is of significant value, it is rare for the purchaser to simply pay cash and have everyone go their separate ways. Purchasers are looking to limit their risk, and one means to do this is to have the exiting owners retain some of this risk for a period of time. This might mean that part of the proceeds is not immediately received by the exiting owners.
The purchasers may request that the owners finance part of the sale by taking both cash and debt (i.e. a “Vendor Take Back”), with the debt paid over time from the earnings of the Company. Alternatively, they may request that the “debt” is not fully quantified on sale, and is based on the future earnings of the Company (i.e. an “Earn Out”).
Or they may want the owners to remain as a minority shareholder, and share the future risk associated with the Company. The exiting owners need to consider each of these alternatives and be prepared to either accept or reject these structures.
Are there assets or divisions that would be excluded from the sale?
The owners need to consider what assets may or may not be included in the sale process. Perhaps there is an entire division that could be carved out of the sale process and the owner / owners will continue to operate that division.
- If the Company owns the land and building that are utilized for operations, are they included in the sale or would they be stripped out?
- Are there certain assets in the business (we have seen everything from pieces of art to airplanes) that are not to be included in the sale?
- Life insurance can be difficult to obtain as we age….are the existing life insurance policies held within the business to be stripped out? All of these decisions, when made early in the process, assist in avoiding issues that could derail the deal later.
All of these decisions, when made early in the process, assist in avoiding issues that could derail the deal later.
Are the potential buyers known?
Understanding who the likely buyers are assists in the marketing process. Is it likely that a “Strategic Buyer” (perhaps a competitor) is the preferred option?
They would have knowledge of the industry, the Company, the economic environment it is operating in, and perhaps able to take advantage of synergies that will make the transaction more economically justified.
Or is it more likely to be a “Financial Buyer”, like a private equity group, that will assist in providing additional capital needed for expansion, etc.? Are the key employees a possibility? Do they have the expertise necessary to run the full business, and can they obtain financing to do the acquisition?
Are all contracts and agreements up to date?
When going through the sale process, the buyer’s due diligence process can be intense. This means that the sellers need to be organized and ready for the barrage of questions that the buyers will want answers for. This will include ensuring that the legal and governance aspects of the organization are well documented.
- Are the building lease agreements and renewals up to date?
- Do we know where all the equipment lease documents are, and what the buyouts might be?
- Is the corporate minute book current?
- Do we have copies of any manufacturing or service contracts available?
- Distribution or dealer contracts?
- Can we quickly provide copies of all contracts associated with our credit facilities?
- Are all key employees under an employment agreement?
By being able to quickly provide copies of these critical documents continues to show the potential purchasers that you are organized. And being organized helps to reduce the concept of risk. And as identified above….lower risk means higher multiples, and higher multiples mean a higher value.
Tax and Legal Considerations
When preparing a business for sale, it can also take significant time for tax and legal considerations to be implemented. In addition, some tax changes require that the new structure be in place for a reasonable period (i.e. two years in some cases), for the changes to result in the desired outcome. As a result, forethought on these strategies is required.
- Is a restructure necessary to take advantage of the Lifetime Capital Gains Exemption?
- Can we simplify the structure to avoid additional due diligent costs or ensure effective tax planning?
- Do we have any outstanding CRA audit issues?
- Have we considered all the locations where the Company does business, and are we comfortable that we have considered all the tax requirements for these different jurisdictions?
- Do we have any existing lawsuits or potential litigation that may have to be disclosed? Any product recall or product warranty issues that could come up?
Again, answers to all these questions need to be prepared to mitigate any issues late in the sale process.
What does it all mean?
The discussion above is the tip of the iceberg of the issues to be considered when a company prepares for sale. It has been mentioned a few times above, but the most important message can be summarized as follows…if we can show that we are organized, and we limit any surprises, it reduces the level of risk in the eyes of the potential purchaser. Again, reduced risk means higher multiples, and higher multiples mean a higher overall value.
We all know that litigation cases can go on for a long period of time. We should not miss the opportunity of having a discussion of a potential sale early in the process. If the time comes for a sale to take place, we will have utilized that time effectively to maximize value.
If in the end a sale does not take place, the worst-case scenario is that the Company is more organized, understands its value drivers, and the owners have a clearer picture of what their objectives might be when the time does come for a sale.
Do not be afraid to consult a Chartered Business Valuator for guidance. We are only a phone call away, and will typically be able to assess the needs quickly for you and your client.
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