Often Business Owners struggle with their decision whether to sell their business or not.  The reasons for this are many not least of which is the fact the business owner has spent many of the past years on building their business and as a result the company becomes part of their identity. Even when they are not at work, they are constantly working, thinking and planning. The business is part of the fabric of their lives and if they sell, they feel that they are leaving much more than a job.

Sometimes they ignore advice, as well as personal and practical situations and/or market dynamics that are staring them in the face that foretell difficult times ahead. What many are not aware of is that these difficult times can often result in a significant drop in the value of the business.

Nevertheless there are signs that business owners must be aware of which might indicate that it is time for them to seriously consider a plan to exit their business, below I have mentioned some of the more common ones:

Their kids are not interested or are not capable of running the business. Oftentimes an Owners’ children may not be interested or capable of running the business in the same way that the father/mother have done.  They simply do not have the same drive, ambition or interest.  In this case perhaps a better legacy that an Owner can leave to their kids is to convert their company into a diversified portfolio of financial assets that may be far less risky than turning the company over to inexperienced managers.

Owner is faced with the need to make a major capital investment into the business late in their working life in order for the company to maintain its competitive position. Maybe this should be a time that they should be thinking about diversifying assets, not concentrating them even further in the business.  In terms of a simple payback analysis, does the payback extend beyond an expected exit date? Maybe it is time to bring in an equity partner, an industry buyer with the management depth, infrastructure, or distribution network to protect that investment. Let a new owner amortize the investment.

The Owner’s enthusiasm to compete and grow the business is not burning as brightly as it once did. If businesses are not growing, they are most likely contracting. A downward sales trend makes the task of selling a business much more difficult as potential buyers fear that this is a sign that the viability of the business itself is under question.

They lose a major client or a key employee. That can be a real blow to a business. The owner, by nature, is optimistic and believes that the lost business will soon be replaced but if he does not immediately reduce expenses to match this new sales level it can lead to problems and if they do cut it may not be fast enough or deep enough. Therefore maybe it is time to seek a buyer before the company’s value is impaired as profits erode.

A large competitor is taking market share away from them at an accelerating pace. The news is not likely to get better and is a trend that is difficult to reverse.  This should be a wake up call to the Owner to get out.

Their legacy systems, production capabilities, or competitive advantage has been “leap-frogged” by a smaller, nimble, entrepreneurial firm. This happens often and can cause an erosion of their customer base. Inertia may sustain them for a while, but eventually they will begin to experience customer defections. They can restructure, acquire or sell. If they decide to sell, they should do so before losing too many clients.

A major company in a related industry just acquired a direct competitor. Watch out, they did not make this acquisition to maintain status quo. They want to grow their market share. They will be coming after all potential clients. The good news is that as a defensive measure, one or more of their competitors may be compelled to make a similar acquisition. It may be best to be aggressively ahead of the curve and get acquired.

They have a health scare and have decided to focus on family or doing all the things that time devoted to the business has prevented them from doing. They are thinking of all the sacrifices they have made. Their list of goals is changing from financial in nature to family, friends, travel, experiences etc. They might want to listen to their heart at this time.

The market to sell is hot and they decide to take some chips off the table for asset diversification. They may be thinking of retiring in four years, but a consolidation is occurring in their industry and valuations are up 20%. Why not sell at the top and sign a four-year employment or consulting contract.

They want to exit in an orderly fashion and from a position of strength as they have always intended. They should be reminded of the competitive forces in the market and the relative strength or weakness in valuation multiples. They need to know how to prepare their business to be attractive to a strategic buyer. They need to hire a good Intermediary firm to present them confidentially to the most likely buyers. When several recognize their value and show interest, they need help in getting a little competitive bidding going. If done right, their transaction value will rise and their terms will improve. When they pull the trigger and complete the sale…they will be able to say with confidence “Mission Accomplished”.

Seller financing has always been and continues to be an important part of any business sale transaction.  A large percentage of Buyers do not have the capital necessary to make all cash offers, or are unable to borrow the money, or are reluctant to use up all of their capital (they want to have some in reserve to cover any cash flow shortages).  Banks also take time to make any lending decisions and often want the Buyer to put up their homes as collateral (something some Buyers are reluctant to do).  Buyers also feel that a business should pay for itself and are wary of a Seller who wants all cash.

If you look at statistics, it’s apparent that Sellers receive a much higher purchase price if they accept terms. Studies show that, on average, a Seller who sells for all cash receives only 70 percent of the asking price.  Sellers who are willing to accept terms receive, on average, 86 percent of the asking price - a 16 percent difference.  On a business listed for $250,000, the Seller who is willing to accept terms will receive about $40,000 more than the Seller who is asking all cash. This is a compelling reason for a Seller to accept terms.

For the Seller the primary reason that they are reluctant to offer financing terms is their fear that the buyer will be unsuccessful.  If he or she should stop making payments, the Seller will be forced to either take back the business or forfeit the balance of the note.  Another reason is that Sellers feel that they can do more with cash than with the receipt of monthly payments and that selling their business may be the only time that they can get a “lump payment of cash.”  However, we as Business Brokers try to alleviate these fears by pointing out some of the ways sellers can protect their investment, and some of the advantages of carrying the balance of the purchase price.  Equally important to this equation is how the deal itself is structured.

What are the advantages to the Seller of financing the sale?

• The chances of the business actually selling are much greater with seller financing.
• The seller will achieve a much higher price for the business with seller financing.
• A good interest rate can increase their actual selling price substantially.
• With interest rates currently fairly low, sellers can get a much higher rate from a buyer than they can get from any financial institution.
• Sellers may also discover that, in many cases, the tax consequences of accepting terms are a lot more advantageous than those on an all-cash sale.
• Financing the sale tells the buyer that the seller has enough confidence that the business will, or can, pay for itself.
• The seller may be able to borrow some cash using the note and security agreement as collateral.

A Business Broker/Intermediary typically drafts the Offer to Purchase (OTP) and any Counter Offers.  When this has been accepted by both Purchaser and Vendor they would both then retain the services of a lawyer.  The Purchaser’s lawyer (PL) prepares a due diligence consent form (which must be signed by the Vendor) and begins the corporate searches, (some of which take some time to get especially the CRA Clearance Certificates.  So it is best to begin these early on in the process).

The PL prepares the definitive agreement. This is perhaps one of the most time consuming parts of the transaction.  They take the OTP and convert into a definitive agreement, they add representations and warranties to the agreement, they determine the closing procedures and documents to be signed and incorporate them into the agreement.

While this is going on the Vendor’s lawyer (VL) will be remediating the corporate minute book.  On average over 90% of those Vendors who have maintained their own minute books end up spending more on a lawyer to fix the deficiencies in it, that they neglected (than if they used a lawyer from the beginning).  Once all Vendor corporate resolutions are in order they become part of the closing documents.

As far as a lease is concerned, if there is one in the transaction, it could be either to PL or VL who negotiates the lease or the assignment of the lease (it all depends on who then landlord is).  This is perhaps the third most time consuming part of a closing.

When buying a business the negotiation of a lease for the premises is a key element in the transaction.  For those of you that want a quick summary of the key terms and definitions read on …..

What are the 3 “nets” in Triple Net? - Building Insurance, Building Maintenance and Property taxes.

Base Rent or Net Base Rent:

This is typically net rent that the landlord receives for allowing a tenant the use of the space and does not include any expenses other than capital expenses that are associated with the use of the property so the base rent would not include taxes, maintenance, insurance, utilities etc.

It should be noted that insurance carried by any landlord is for the building only and not business insurance which the tenant is typically required to carry under a tenancy lease.

Net Lease:

The tenant pays the net base rent to landlord, plus all expenses which are normally associated with ownership, such as utilities, repairs, insurance and taxes. Such a lease is also referred to as a “closed-end lease”.

Single net Lease:

The tenant pays the net base rent to landlord plus the Property taxes.

Double Net lease:

The tenant pays the base net rent to the landlord, plus the property taxes and building insurance expenses. Landlord pays for the maintenance, capital expenditures and other expenses. (These are not very common).

Triple Net Lease:

The Tennant pays base net rent to the landlord plus, the property taxes, building insurance, and building maintenance expenses.

In such a lease, the tenant is responsible for all costs associated with repairs or replacement of the structural building elements of the property

Gross Lease:

The tenant pays a flat amount which includes base net rent to the landlord, property taxes allowance, building insurance allowance, and building maintenance allowance. It is an all inclusive of the “triple net”.

An earn-out is a way for the buyer to pay part of the purchase price on the future performance of the company. The buyer pays a portion of the purchase price upfront, and pays the rest if and when the company meets specified goals. Continue Reading »

In Canada in 2007 the maximum Capital Gains Exemption (CGA) was increased from $500,000 to $750,000.  The rules related to CGA are complex and one should certainly consult tax professionals when considering taking advantage of it.  However, it is definitely one of the best (and last) tax favorable Continue Reading »

The Lease.  Is it assumable?  Need to review the entire (often very lengthy) document and all the different clauses.  Is there a demolition clause?  Some buyers are indifferent to this for others it is a “deal breaker”.  Can purchaser satisfy (credit) requirements Continue Reading »

In the old days retirement used to be the day you turned 65, got a gold watch and headed home to a life of fishing, book reading and relaxing. Continue Reading »

Often we come across business owners that decide not to use an advisor to help them sell their business usually or especially when they are dealing with only one potential buyer.  Usually the buyer has approached the business owner direct and works slowly to get to know them.  At the right time the buyer makes an “offer” to purchase Continue Reading »

Vancouver Business Brokers are a fairly recent phenomenon in British Columbia and even Canada in fact.  In the past when people wanted to sell their businesses they either did it themselves or looked to their accountants or friends for advice.  This changed as business owners began to appreciate the complexity of the issues involved, the associated liabilities, and the time it takes owners away from running the business - or sometimes very insincere buyers, Continue Reading »