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”.

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.

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.

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”.

Why Use an Earn-out?

Many times buyers and sellers cannot agree on a company’s value. The seller will usually point to strong growth trends, and the acquirer will emphasize the uncertainties and risk in the marketplace. If the seller’s representations about future growth and  revenue are correct, then the seller should reap the reward. However, if the company experiences a massive downturn in sales or if key employees leave after the acquisition, then the acquirer will have overpaid. Hence, the earn-out is a mechanism to share the risk so that the seller is rewarded if the company does well and the buyer can mitigate some of his/her risks if sales fail to materialize.  Earn-outs are particularly common for companies where success depends on a small group of key employees, where the assets acquired are a small portion of the transaction, or where the majority of the value is based on future growth.

Consider the following general information:

1. An individual who owns shares in a qualifying business corporation may be able to claim a $750,000 CGA when those shares are sold.  (It is not applicable to a business that is structured as a sole-proprietor).
2. There are two main rules:
   1. One regarding ownership of the shares, and
   2. One regarding the use of the assets of the corporation.
3. In the 24 months immediately preceding the sale and disposition of the shares, the shares must not have been owned by anyone other than the individual (or a related partnership).
4. The shares may be newly-issued and have not been owned for a full 24 months, but they must not have been owned by anyone else in that time.
5. In the 24 months before the disposition of the shares, more than 50% of the fair market value of the assets of the corporation must have been used principally in an active business carried on primarily in Canada.
6. At the time of disposition of the shares all or substantially all (90%) of the fair market value of the assets must have been used in the active business.  (Examples of non-qualifying assets would be stocks, bonds and rental property).

The other things to keep in mind are:  if the shares are sold to a non-resident of Canada or to a public corporation there could be a resulting denial of the capital gains exemption.  This is because the shares are now under the control of a purchaser which is not a qualifying small business

Franchise Agreement.  Is there a transfer fee involved?  Who pays?  What about training?  What is the cost?  Where does it take place?  Sometimes a new franchisee has to go away for two weeks to another part of the country.  Be absolutely clear on all the terms involved.

How do you deal and account for work in progress? This is part of the working capital that gets transferred over at the closing date when the sale of the business includes the operational balance sheet.  How this is accounted for and monitored is very important as it can be a substantial adjustment at closing.

Gift certificates.  How many are outstanding?  How do you monitor them as not all may be redeemed.  When are adjustments made and how will the new owner be compensated once he provides the goods (for which he has not received the payment) - it was a benefit the past owner enjoyed.  The costs are sometimes offset against (vendor) financing mechanisms.

Employee issues. When a new owner takes over a business with existing employees attention must be paid to the employees that are staying.  What obligations will the new owners have to them?  Holiday pay?  Bonuses?.  What happens if a new owner does not get on with the existing employees and decides to let them go?  New owner is obligated to pay for a period of notice.  Be careful about claims for unfair dismissal.

Today that view has changed and people now think of many healthy, active, productive years pursuing activities they love and making valuable contributions to society.  The truth is that if you really want to get the most out of retirement, you don’t really retire.  You simply shift gears and focus on different things. Also, at the end of the day, you must have a plan to deal with the challenges that life will present to you.  How will you deal with issues such as marriage, divorce, disability and death?  The problem for many people is not that events occur (they always will), but rather that they have failed to anticipate and prepare for them.  Events only become problems when they are not anticipated and planned for.  It is you and you alone who is accountable for ensuring that your plan does and what you want it to do.

Many of the common traps we see include:

• Not having any will or living trust.  Having an ill-prepared plan without competent advice.
• Titling too much property in joint tenancy.
• Failing to prepare and implement a business succession plan.
• Failing to plan for disability or critical illness.
• Emphasizing too much on taxation and financial returns without proper regard to asset protection and ensuring that your property will go to who you want, when you want and how you want.

How much money will I need?

For many people, the answer is to save as much as you can and hope that it is enough.

For others, they may have more than they could possible spend in ten lifetimes.  In all cases, however, the first and most important financial concern is ensuring that you and your spouse will have a guaranteed standard of living for as long as each of you shall live.  Therefore before you begin the process of planning the distribution or sharing of your wealth be absolutely certain that your lifestyle is guaranteed and that you and your spouse will be fully provided for to age 100.

The ideal is to create a flexible and dynamic plan while you are healthy and in control. However this is difficult to do alone you should seek out and retain competent advisors.  Tell them clearly what you want and listen to what they have to say.  Give this your full and complete attention, it is one of the most important decisions you will make.  Realize that there will likely be multiple aspects to your plan - legal, accounting, business sale, tax planning etc.  Do not make the mistake of thinking one advisor can completely handle all of this as in this day and age it is difficult to stay on top of one area let alone several.  However, remember at the end of the day you give the direction and leadership.  You hire and fire when required.  It is your plan you will be in charge but look to those people who are expert in their areas.

To get the best price possible a business owner should seek as many interested buyers as possible.  In business brokerage we say “one buyer is no buyers”.  The idea is to create competing interest and bids for the same business.  This not only compels people to move faster but it also quickly determines the seriousness of their intentions.  It gets rid of the time wasters.  It reduces the time to make decisions and get the transaction done, otherwise they can drag on for far too long.

There are also other reasons to use an intermediary:

1. A lot of the background work a business owner would have to do to sell their business is done for them.  We create a Confidential Business Profile that contains all the information a buyer needs to make an informed decision.  A business owner alone may not be sure what information to provide, he may also release sensitive information when it is not necessary.  (I saw one case when the “Buyer” was a rival company and was trying to find a list of the target company’s clients so that they could approach them directly and say “Hey, do you know XYZ Corp. is for sale - where do you plan on getting your “goods/services” from in the future?  We just happen to be in the same business”.  Very nasty).
2. As intermediaries that act for sellers and buyers we also constantly have interested buyers seeking acquisition targets.  We also know where the new buyers are.  We are able because of our training to look objectively at a business tell the owner what he needs to do in order to get the highest price and will go to work marketing the business to as many potential buyers as possible.
3. We also play another role very effectively.  We are able to take a very aggressive approach when negotiating.  We act as the “bad guy” or play dumb so that the relations between the owner and the purchaser always remain on good terms.  I don’t mind being the bad guy to get the owner a better deal.
4. We as business intermediaries act as a catalyst, in finding the buyers, in negotiating and in bringing a transaction to a close.  In business sales some very difficult issues will arise.  It can be costly and time consuming to have lawyers or accountants arguing about these issues.  As a result we often take on the role of mediator by looking at the problem from both sides.  This results in a compromise being reached faster and the transaction being more likely to complete.

As you can see there are many reasons to using an intermediary and at a minimum every business owner should at least have a conversation with one about the process of selling.

What makes a good Business Broker?  We really see our role as fourfold.  The first hat we wear is our “accountant’s” hat - every business must be understood, evaluated and priced in the context of prevailing market conditions.  The second role we play is as “salesmen” where we strive to create interest in our client companies (in a confidential way) and to let the market and synergistic know that a good profitable company is now up for sale.  The third hat is the “negotiator” wherein we bring two parties to an agreement relating to the transfer of ownership, financing and transition terms.  The final element is to be “intermediaries” ensuring that the transaction comes to a successful conclusion and managing the outside advisors that typically get involved at this stage.

I think the attributes that make a broker “good” are an understanding of the client’s personalities (both buyer and seller), creativity, intellect and forthrightness.  On a practical level a broker must also be licensed and qualified.  In the province of British Columbia an individual must be licensed under the Real Estate Act in order to buy and sell businesses on behalf of other individuals.  Often you will find real estate agents that normally specialize in selling residential homes will take on a listing for a business for sale.  This can be asking for trouble as it is outside of their realm of normal practice and they may not be qualified or capable of properly handling the transaction.  Pick a professional that focuses on selling businesses.  Every broker at our firm, for example, is a qualified realtor and is committed to ongoing educational courses put on by industry associations (like the International Business Brokers Association -  http://www.ibba.org/).  Finally, when looking for a broker to act on your behalf check out what their reputation is like.  Try and make sure you are dealing with someone who has high ethical standards.