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Commercial Property Insider

Business Sales: How to Stop Avoiding it and Start Getting Clarity

5 Minute Read

After investing years or potentially decades into growing your business, it is not uncommon that your identity or worth can get intertwined with it. 

For some people, selling a business is a welcome change, offering the chance to pass on a legacy, pursue new ventures, and enjoy financial rewards. Others may face challenges like diminishing financial returns, market fluctuations, or personal issues, making the sale a necessary consideration.

Whatever the reason that got us here today, it is ok! You are the ultimate person who controls the decision if selling is the right choice for you. 

1. Factors to Consider in a Business Sale

In our experience, many business owners do not put adequate thought into their exit strategy. 

A business exit strategy is a business owners plan for they will sell or transfer ownership to another entity, or worst-case scenario dissolve a business and liquidate its assets. Having a well thought out goal of what success looks such as will help you preserve the value of your business, and reduce the stress associated with a change of ownership, and this all starts with having clarity on what is important to you. 

Once you know your ultimate objective you can start to develop a plan for how to achieve it. This is an important and often overlooked step as it shapes your timeline, valuation strategy, the type of buyer you want to sell to, and it may even have potential tax implications.

Pro Tip:

Involve your accountant early on in the planning process. Your accountant may be able to recommend you liquidate certain assets during different tax years or recommend tax-effective strategies such as a deferred payment schedule to reduce your overall tax burden.

2. How to Prepare Your Business for Sale

Effective preparation not just increases the likelihood of a successful sale but eases the transition for both the seller and the buyer in the business sale process. 

Financial Performance

One key component in preparing your business for sale is having an accurate understanding of your businesses financial performance which includes scrutinizing aspects such as revenue, profit margins, and consistency of net operating income. A prospective buyer will typically look at your net operating income over the past three years to understand the trends in business performance. 

Pro Tip:

A buyer may also inspect the value of your long-term assets and liabilities, such as equipment that will stay with the business and intangible assets such as goodwill. We suggest that you compile a detailed list of assets along with their approximate current market value to give them a detailed account of the assets that would be included in their purchase. 

Valuation Methods

There are a variety of valuation methods used by business valuators to determine the asking price for your business. 

The most common types of business valuation techniques are an earning multiple technique, such as using an industry multiple based on net operating income, or profitability ratios based on a multiple-year horizon after being adjusted for management wages. This is a common method for companies with consistent profitability.  

Determining the appropriate asking or list price and forecasting the ultimate sales price will involve performing a financial analysis on your company, and doing a market comparison report researching recent sales of similar businesses in your industry. The current trending business multiplier based on recent sales may heavily impact your business’s valuation and pricing strategy.

Another common valuation technique is an asset valuation technique. This is commonly used when there is  a period of negative earnings where the value of the company is primarily held in the value of the assets, or otherwise recommended by an accountant or lawyer for a reduction of potential liability purposes.

Pro Tip:

Help to set a good impression by being well organized, and have your accountant or bookkeeper prepare financial statements in advance. Have these documents available electronically to be emailed over to trusted prospective buyers to facilitate an efficient consideration process.  

Timing and Market Conditions

It may be difficult to determine when is a good time, or the right time to sell. Both the local economy and the greater macroeconomic conditions, industry wide trends, and your business’s financial performance all impact the best time to sell. For a more in-depth understanding, explore the related insights in our article, Who Wants to Understand the Real Estate Market?

However waiting only for the peak of the market before selling, or inadvertently being force to sell when your company has had a string of unprofitable years could negatively impact the value or success of a sale. 

A question that we encourage owners to consider is the opportunity cost of holding onto the business. There are emotional and relationship considerations to hanging onto a business when it is past its time to sell. 

At times, selling during a compressed market can allow a business owner to transfer their capital into a more profitable venture, so we encourage owners to consider the holistic returns or personal impacts when determining the right time to sell specific to their circumstances.

3. Who to Consult When Selling a Business

Involving professionals in the decision making process and actual sale of your business can help ensure a streamline experience. Experts to consider include:

Accountants

Accountants can help ensure that your financial documentation is in order, provide tax-effective strategies to preserve your after-tax capital or recommend a sale type that will reduce your legal liabilities.

Business Brokers

Business brokers can assist with market research, connect you with prospective qualified buyers, help to prevent potential downside to a sale through missing important disclosures and can help in the negotiation process. The best brokers are experts in business sales.

Lawyers

Commercial lawyers help to ensure that all legal aspects of the sale are properly addressed. They help to explain and protect your potential downside through missing important disclosures or clauses to protect your interests. Things to consider include non-compete agreements, structure of a sale (asset vs share sale) and other critical environmental disclosures or legal considerations.

Family

Perspectives of family members can play a role in the consideration process, however this often plays an insignificant role, as a business owner’s family is often well acquainted with the prospective ups and downsides of running a business. 

In our experience, many times a family member will be supportive of your decision to sell, especially if you’ve invested years of your life into managing the business and it is no longer making you as happy as it once was.

4. Navigating the Sales Process

After working with some of the above professionals and reaching a decision to sell your business, here are the additional factors for you or your representative to consider when positioning your business in the market:

Identifying a compelling angle that will appeal to your ideal buyer

One of our best recommendations is to identify who your ideal buyer is for your business and tailor your presentation accordingly.  

Effective marketing will showcase your business’s unique selling points (USPs), and this clear articulation of why a buyer should consider your business.

Potential things to consider highlighting include: consistent financial performance or high revenue figures, future growth potential, existing key relationships with vendors or clients, an extensive number years in business ,and other factors specific to your industry.

Due Diligence

Preparation and transparency during this due diligence is instrumental in building trust and significantly enhance the likelihood of a successful sale. Prudent buyers will conduct due diligence to confirm the accuracy of the information provided to them, assess the viability of the purchase and confirm the overall fit of the potential opportunity. 

Common due diligence items:

☐ Financial statements that an accountant or bookkeeper prepared
☐ Detailed long term asset lists including market value estimate
☐ customer list arranged in order of annual revenue
☐ Key suppliers list including copies of any significant contracts that locked in a certain price discount or obligation
☐ Property tax statements (if applicable, if you own the building)
☐ Lease agreements (if applicable)
☐ Work done on the roof (if applicable, if you own the building)
☐ Copies of any significant financial liabilities, such as equipment leases
☐ e also suggest having copies of any permits to share as a new owner may request them when preparing their working drawings

Conclusion

The decision to sell a company can be as crucial as the decision to start a business. Understanding the process, consulting the right experts, and thorough preparation will empower you to proceed with clarity and confidence.

About City Commercial: Although we don’t sell businesses ourselves, many of our clients are faced with this decision, so we’ve prepared this article to assist in this decision-making process. 

We specialize in industrial real estate sales and leasing in Edmonton, Alberta, with the goal of one day of serving business owners across Canada. If you need assistance in locating a skilled commercial real estate agent who can help you get where you are going faster, reach out to us at [email protected]. We’ll leverage our databases and our knowledge to find some of the best agents near you that we’d recommend.

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