How to Sell Your Business

  • By Bob Hughes
  • 04 Jan, 2015

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You only sell your business once.
That thought alone may be enough to keep you up at night when you decide it’s time to cash in on your years of hard work — as if there isn’t enough pressure associated with every step of the sale of a business. But there’s much you can do to prepare for the sale, and it’s not a bad idea to start thinking about it long before the day arrives.

While every transfer of business ownership is unique, there are some important questions that sellers should ask themselves and there is a common process that is used for the sale of most small businesses. The more you prepare, the more successful the outcome is likely to be. What follows is a brief outline of the process for small, closely held companies. Many of these principles apply to larger transactions as well. First, ask yourself three questions:

Can Your Business Be Sold?
Many elements of a business make it attractive to buyers. For example, does it have a solid history of profitability, a large and loyal base of customers, a competitive advantage (intellectual property rights, long-term contracts with clients, exclusive distributorships), opportunities for growth, a desirable location and a skilled work force?

Are You Ready to Sell?
Make sure you are ready, both financially and emotionally. Think about what life will be like after the sale. What will you do — not just for money but also with your time? Many business owners suffer real remorse after handing over their business to a new owner.

Here are a few indicators that it may be time to move on:
  • It’s not fun anymore. Burnout is a very real issue for business owners, and an entirely legitimate reason to sell.
  • You’re not inclined to invest in growth. You may be comfortable with the current size and profitability of your business and have no desire to make the capital expenditures necessary to take it to the next level.
  • You feel your management skills are overmatched. It is not uncommon for business owners to build their business to a certain point and then realize they lack the skill set required to go further.
What’s Your Business Worth?
Many owners have no idea. On one end of the spectrum, for example, was a client who owned a professional services firm. She felt the firm was worth more than $1 million. After a lengthy search, a buyer paid her less than half that amount. Then there was a client who was about to sell his I.T. company to an employee for $200,000. After advertising the business for sale nationwide, he sold it for one dollar shy of $1 million.

Selling a business is both art and science, and in no other area is this more evident than the valuation. While every seller wants to achieve maximum value, setting an asking price that is too high signals to buyers that you may not be serious about selling.

While there are a number of methods used to value a business, the most common formula for smaller transactions is a multiple of seller’s discretionary earnings (S.D.E.). This type of market-based valuation involves recasting profit-and-loss statements — adding back owner’s salary, perks and nonrecurring expenses — to find the S.D.E. of the business and then using comparable data for similar businesses to arrive at an appropriate multiple.

Prepare Your Business for Sale (Now!)
Another client owned a popular sports bar and grill. He’d made repairs to some of his kitchen equipment, brought his books current and determined a reasonable asking price. He got an inquiry from a serious buyer — an industry veteran on a nationwide buying spree with his partner. The buyer liked everything about the business, and asked for data from his point-of-sale system, which my client was unable to produce quickly. By the time he assembled the information, the buyer had made an offer on a similar business in another state.

There is no way to overstate the intensity with which buyers will scrutinize your business. But here are things you can do to put your best foot forward.

First, get your books in order. Not being able to provide accurate financial statements in a timely manner can cause a deal to unravel in short order. Be sure to have the following on hand before you go to market:
  • Last three years’ profit-and-loss statements.
  • Last three years’ balance sheets.
  • Year-to-date profit-and-loss statement.
  • Current balance sheet.
  • Last three years’ full tax returns.
  • List of furniture, fixtures and equipment.
  • List of inventories.
  • Commercial property appraisal or lease agreement.
Be ready to furnish other documentation — particularly during the due diligence phase — when you will probably be asked to produce insurance policies, employment agreements, customer contracts, lists of patents issued, equipment leases and bank statements.

Spread the Word
Not surprisingly, most savvy buyers use the Internet to research available businesses for sale. Some sites specialize in selling certain kinds of businesses like manufacturing, distribution, wholesale, franchises, Internet properties, retail, service businesses or restaurants. Most of these sites charge a monthly subscription fee to advertise your business for sale.

There are two primary marketing materials that are typically used to describe your business to potential buyers. The first is a one-page document that offers highlights of the business without revealing its identity and is sometimes referred to as a “blind profile.” The second is a comprehensive selling memorandum or prospectus to be sent to serious buyers who have signed a confidentiality agreement.

Make Sure Potential Buyers Are Qualified
There’s no bigger waste of time than working with a buyer who will not be able to complete a transaction. Ideally, you will want all interested buyers to sign a confidentiality agreement before sending out anything other than the “blind profile” for your business. In addition, you should require buyers to submit some basic information:
  • Name and all contact information.
  • Previous employment and business ownership.
  • Educational background.
  • Funds available to invest and sources of financing.
  • Minimum monthly income requirement.
  • Intended timeframe for completing a transaction.
  • Reason for interest in your business.
Negotiating the Deal
You will also want to spruce up your business to make it attractive to buyers. Make any needed cosmetic improvements to the premises, get rid of outdated inventory and make sure that equipment is in good working order

After you've found a qualified buyer, provided a selling memorandum and had an initial meeting, it will be time to stop the flow of information and ask that an offer be presented. This can take the form of a nonbinding letter of intent (LOI) or a term sheet. It should spell out the primary terms of a deal so that all parties can move forward in good faith.

My client ended up receiving three offers on her professional services firm. One was from a competitor, one was from an industry expert residing out of the country and one was from a regional firm looking to extend its geographic footprint. While that last offer was the weakest from a financial standpoint, we knew that this buyer would be able to complete a seamless transition and build her business. We decided to negotiate with the regional firm.

The asking price was $500,000. The regional firm offered a disappointing $400,000, with $50,000 down and the balance financed by the seller over five years at 6 percent interest. My client planned to stay with the firm under new ownership and was relatively certain that gross sales would increase substantially when her company became part of a regional brand. She offered a counter proposal: In lieu of financing the balance of $350,000, she asked to receive 10 percent of gross monthly sales for five years. She conservatively estimated that she would realize an additional $108,000 -- over and above the selling price of $400,000 -- at the end of the five-year period using this deal
structure. Both parties accepted.

All sellers hope to get a full-price cash offer for their business. But in the real world this rarely happens. More often buyers will make a down payment and then pay some or all of the remainder in installments to either you or a lender. Don’t be dismayed by an offer that doesn't meet your original expectations. As this case illustrates, a willingness to be creative with the terms of a transaction can go a long way toward a successful sale. Be sure to enlist an accountant and a lawyer to help you assess the tax consequences of the terms you suggest or accept. Be sure the accountant and you agree to the “market value” of the business. You can obtain a valuation through a professional consultant.

Selling a business is largely about setting realistic expectations, avoiding surprises and just plain hanging in there. It can be an arduous journey, but one with a very tangible (and rewarding) light at the end of the tunnel. Once you’ve successfully sold your business, savor an accomplishment that not every entrepreneur gets to enjoy. Whether you’re lying on the beach, retiring by the lake or starting your next venture, you did it!

Quick Tips:
  • Put yourself in the buyer’s shoes.
  • Don’t go it alone. Assemble a team of professionals, most importantly a businessbroker, an legal advisor and an accountant that you trust.
  • Get a professional valuation of your business.
  • Make sure your financial house is in order prior to sale.
Let us help you to value and conduct a professional business offering. Contact us.
By Loren Marc Schmerler is President and Founder of Bottom Line Management, Inc., IBBA Member 12 Jan, 2018
1. How much is my business worth? The correct answer is the price a Buyer offers you that you are willing to accept. It makes no difference whether you are making money or losing money. It makes no difference whether sales are increasing, declining or flat. It makes no difference how much blood, sweat and tears you have put into your business. It makes no difference how much money you have invested in the business. It makes no difference how much money you owe to the bank or to yourself.

It makes no difference what a business valuation or appraisal says. It makes no difference what your hard assets are. It makes no difference what your customer list or client list contains. It makes no difference what your patents or service marks cost you. It makes no difference whether you are a Franchiser, Franchisee, Licensor, Licensee, Distributor or Independent Contractor. The bottom line is that what you finally accept is what your business is worth.

2. How long will it take to sell my business? The correct answer is no one knows for sure. But I tell my clients that the average time is seven months from listing to closing. For companies that sell for $1 million or more, the average is nine to twelve months. But I also explain that the quickest I ever sold a business was one week, and the longest it ever took me to sell a business was six years. Additionally, I explain that price and terms sell a business. The lower the price the more affordable the business will be. The lower the down payment, the more people will be able to consider it. The greater the amount of owner financing, the easier the business will be to sell.

3. Is there anything I can do to make my business more desirable? The answer is yes. The most important thing you can do is to put your ego aside and not make the business dependent upon you. Ideally, the goodwill of the business should be at the lowest level that interfaces with customers or clients. This means that you want to hire and keep employees that make your customers happy with high quality work and excellent customer service.

4. Is there anything I should not due during the listing period? The answer is that you should not slack off in any way. You need to stay focused and operate your business as if it will never sell. You need to work as hard or harder no matter how burned out you feel. Do not make any major changes during the listing period. Try to retain all good and excellent employees and remove those that are not contributing as they should. Try to keep your inventory fresh and eliminate any obsolete items. Keep your equipment and machinery well maintained and properly functioning.

5. What is due diligence? It is the process where the Buyer examines all your books and records, gets approved by the Landlord, gets approved (if applicable) by the Franchiser, Licenser, Distributor, bank, etc. Your books and records need to be current and “bullet proof.” Your tax returns for payroll taxes, sales tax, state income tax, federal income tax, county income tax, city income tax and any other municipality taxes are 100% current. Your various licenses need to be current whether or not the buyer will have to apply for their own. You want to fully disclose everything and not leave any skeletons in the closet.

6. What else do you suggest I do to impress a Buyer? Have a job description for each employee. Put together a Policies and Procedures Manual. This will make the corporate buyer feel more comfortable about taking over the reins. Make sure all your employee reviews are current. The last thing a new owner wants to do is to sit down in a vacuum with an employee who is expecting a raise. Make sure you clean everything that is dirty. Make sure you fix anything that is broken. You do not want the Buyer to wonder what else might be a potential problem. Prepare a business plan and/or marketing plan to show the Buyer how he or she can grow the business. Put together a transition plan that shows the Buyer how you will assist them daily for a period of 28 days. The Buyer may not want you for the full transition period, but at least you are showing that you have thought it through and are willing to make yourself available.

7. What happens if I agree to do some owner financing and the Buyer misses a payment? The way the closing attorney prepares the paperwork, if a Buyer misses a rent payment or a note payment, it is considered an event of default under the note. This will allow you to take back the business in a worst-case scenario or enter into serious discussions to protect your financial interests. While the best outcome is a Seller getting paid all their money and a Buyer being successful, you must plan for the worst and hope for the best. But I also tell my clients that they should never sell their business to a person they feel will not treat their employees, customers, clients or vendors properly. If you ever get a knot in your stomach during the negotiation that is the time to throw in the towel and let me gently explain to the Buyer that you do not feel it is a good fit.
By Jonathan Funk 23 Aug, 2017
On July 18th 2017, The Federal Government announced major tax changes on business owners - triple taxation.
Previously you would have received much more on the sale of the share or assets of your company.
The new legislation taxes could be as high as 75%.

Astra has a proven program that will mitigate this new onerous tax legislation. We would like to have the opportunity to show you how we can do that. To avoid “triple taxation” you must plan your exit strategy through a proven program. Our SuperMax and MiniMax programs will abate these new punishing tax changes. Our financial consultant will review your situation and demonstrate how Astra’s Super or Mini Max programs will work for you to save you many, many thousands. Please contact us at info@abc-astra.com or bhughes@abc-astra.com.


SUMMARY

This note is a summary and clarification of the 27 page announcement by the Minister of Finance on July 18 which has major implications for private business owners in Canada. Please take the time to review this note and give yourself time for reflection. We suggest you read this more than once.

The tax consequences of the NEW Rules could cost you millions of dollars without putting smart tax planning in place.

Scenario A - Under the old rules, you could sell your company’s shares and after it paid the capital gains taxes due, the net cash proceeds could be put into your hands personally with no additional tax to pay on the transaction. Not any more.

The proposed new rules should not impact your company 's ability to pay capital dividends (net after tax proceeds from the sale) to you as a shareholder unless the buyer and the seller are not dealing at arm's length (for example, between family members). With a non arm’s length transaction, the net proceeds are taxed again in your hands as an ineligible dividend at an effective tax rate of between 42 to 57% depending on your province of residence.

Scenario B - Under the old rules, you could sell your company’s assets and after it paid the capital gains taxes due (if any), the net cash proceeds could sent to your Holdco as an after tax intercorporate dividend with no additional tax to pay on the transaction. This would have allowed yo to redeploy cash for other investments. Not any more.        

The proposed new NEW Rules will disallow the inter-corporate dividend as a tax free transfer to your holdco and instead tax it as an ineligible dividend at highest possible tax rates.

Scenario C - Old rules: Shareholder dies, creating a deemed disposition of shares. No tax paid liquidity is in hands of estate to pay tax. Estate uses a capital loss manoeuvre in combination with “stop-loss” rules and acceptance of a promissory note from a corporation to mitigate the amount of actual tax due as a result of deemed disposition of shares when the shareholder dies.

The proposed new NEW Rules will disallow the estate from transferring shares with a high cost base to a parent company in exchange for a tax-free promissory note.    

NEW Rules : Shareholder dies, creating a deemed disposition (CRA considers shares and other personal property to be disposed/sold) of shares. No tax paid liquidity (ready cash (on hand) is in hands of estate to pay tax. Estate raises cash to pay this tax by selling corporate assets with attending cap gains tax "A". Net proceeds are paid off of the balance sheet to pay the cap gains tax on the deemed disposition caused by shareholder's death. This is Tax "B". However since it all came off the balance sheet, CRA wants additional tax as they regard this as a non-eligible dividend or Tax "C". This is "triple taxation". A+B+C=CRA The total tax bill could be as much as 75%!!!

Scenario D- Old and New rules are the same: Shareholder dies, creating a deemed disposition of shares. No tax paid liquidity is in hands of estate to pay tax. However life insurance proceeds come into and out of the corporation tax free by way of capital dividend account (CDA. Sec. 89) to pay required taxes. Estate now transfers shares to whomever it is directed by the Will of the deceased shareholder. No corp assets were sold, no taxable cash came off the balance sheet's current assets yet the cap gains tax were paid. The new shareholder's capital is still on the balance sheet but it is now tax paid or paid up capital (PUC). Dividend income paid at say 8-10% of the tax paid PUC are within CRA's "safe income" rules but taxed at the attending marginal rate.

Here are the main reasons tax practitioner’s advocate the use of life insurance in corporate-estate situations: A) it’s a lot cheaper than paying ANY amount of tax and B) it is already pre-approved by CRA and does not cause any tax burdens.

In summary: either from action or inaction when large blocks of capital are moved into the hands of a shareholder or an estate, the transactions are on CRA’s maximum tax radar. On the other hand if dividend income on capital is employed as a source of income, the tax rates are far less than taxes on salary or high amounts of capital treted as ineligible dividends.

In Brief, CRA does not want you to take capital off a balance sheet, but keep it employed ON the balance sheet, and CRA is satisfied.

Therefore smart planning will open doors for tax efficient succession planning for your family and provides options to negate asset sales triggering double or even triple taxation.
And, smart planning utilizes the Income Tax Act’s rules to get your hard earned capital into shareholders hands while you're alive either tax free or with a lot less tax paid during your lifetime and after death.

Bottom Line: Smart Planning will get you:
  • a strong balance sheet 
  • a company that will not be hurt or destroyed because of tax
  • happy shareholders 
  • a happy estate
  • satisfied CRA
  • Everybody wins!

Smart planning starts with us. Contact us now.

TIME IS NOT YOUR FRIEND – WE HAVE WAYS TO HELP
By Robert Hughes, Astra Business Corporation President 22 Jan, 2016

Astra, with their associates, have developed exit strategies using major banks and insurance companies to transfer ownership of your company in a manner similar to a department store ‘lay-a-way’ plan. There are two programs to choose from - MiniMax and SuperMax.

These programs offer a customized succession plans, which enable business owners to hand the reins of their business to a new generation or investor, while securing a TAX FREE retirement income stream, reducing risk, eliminating volatility and creating an estate legacy.

This is a strategy that has a stated time frame to transition the operation, and eventually, the ownership of the business. This succession plan maximizes the net cash flows for the remaining lives of the owner and spouse and if possible, creates a legacy for the surviving family members or investors.

Whereas you are looking to obtain a sale price of up to 4 to 5 times multiple, buyers have been reluctant to provide you with an acceptable purchase price with terms satisfactory to you. These alternate programs will provide you with an acceptable exit strategy with a financial benefit of  many times over what you had originally wanted  and while you are young enough to enjoy your retirement income.

I trust this is of interest. If so please advise and we will introduce you to our associate and start the process with a conference call where an in-depth detailed discussion will reveal how this program works.

Looking forward to working with you.

Click here for more information.

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