To a successful exit
Advice from Andy Saharov
Tax PlanningWhen selling a business, informed individuals consider their personal and/or holding company’s tax implications in order to maximize the net proceeds of the sale and ensure optimal tax treatment. Business owners should consult a tax planner at least two years before contemplating their exit to ensure favorable tax treatment.
Qualified Small Business Corporations benefit from a significant capital gains exemption (over $800,000); as a result, business owners often prefer to sell their shares. We have excellent relationships with several professionals in this field. From a buyer’s perspective, purchasing the Sellers assets can reduce risk as, when purchasing shares, the buyer can become liable for previous legal and tax issues.
Getting Financially and Emotionally Ready to Sell
Once an owner has established the appropriate structure for tax treatment, the transition and/or succession plan can begin. It is important to note that determinants such as health, shareholder issues, employee satisfaction, competition, and other factors may have an impact on the company’s value. We recommend that Sellers validate their price expectations and consult their investment advisors to ensure financial readiness.It is recommended that sellers consider and evaluate the emotional component of their exit strategy before embarking on the journey to sell their company. In order to be sufficiently prepared to make an optimal sale and exit strategy, one must be fully committed to the decision of selling a business.
Buyers often require a transition period, where the seller is actively involved, in order to maximize a successful acquisition and transition. Business owners contemplating an exit from their businesses should ensure that their company is able to function adequately without them. Letting go can be very difficult for some.
When the owner is financially and emotionally prepared to exit the business, he or she must consider what would be the best transition plan.
For those who would prefer a quick exit, key individuals within the organization must be trained appropriately to operate the business. When the seller is pivotal to the success of the business, the buyer’s inherent risk increases. Entrepreneurs rarely make good employees; well-prepared, well-executed, transitions typically yield better results.
Sellers have to be honest with themselves and be prepared to “move out of their comfort zones”. Ultimately, a new majority investment partner or buyer will have their own management style, business outlook and preferred operating procedures. The seller will have to be prepared to accept change to ensure a smooth transition.
Sound Business Practices
Solid business practices are at the foundation of ensuring a successful exit.
Good practices include training programs, documented standard operating procedures that are supported with appropriate Information Technology (IT), Enterprise Resource Planning (ERP) and other management systems.
In a mature business where processes are in place, the company’s market share within its industry is a known quantity. Historical financial and operational information help owners navigate the day-to-day operation and plan for the future with greater confidence. Successful strategic planning and execution are at the foundation of what drives the value of a company in the eyes of a potential buyer.
“Valuating” your Business
Evaluating your business is one of the most difficult parts of the process. Depending on the size and scope of your business, it is recommended that you seek the advice of a Chartered Business Valuator (CBV), your accountant or an experienced Mergers and Acquisitions professional. Before considering selling your business, it is imperative that you have an idea of what to expect.
A “rule of thumb” calculation for many businesses is a multiple of EBITDA - where EBITDA is defined as earnings before interest, taxes, depreciation and amortization. In general the EBITDA is the cash flow generated by the company’s operations.
What to Expect
There are several reasons why an individual or group would be interested in purchasing a business including:
- Growing their business
- As an add-on to their existing service offering
- As a silent partner/investor who would engage a management team
- Becoming a business owner
At the onset of discussions with a potential buyer it is important that a non-disclosure agreement be signed by the parties. A non-disclosure agreement outlines the responsibilities of both parties to keep all exchanged information confidential; this agreement is critical in the event that the transaction does not occur.