Avoid seller’s remorse

According to a recent study conducted by the Canadian Federation of Independent Business (CFIB), 76 per cent of Canada’s business owners are planning an exit within the next decade. That’s equivalent to a staggering $2 trillion worth of business assets that could change hands during this period.

However, the report said that only about one in 10 business owners (9 per cent) have a formal business succession plan in place to help ensure a smooth transition. This is a recipe for disaster.

If you’re one of the lucky ones who has prepared your exit ahead of time, be grateful. Not everyone will have the same pleasant story to tell as you.

In “Succession Tsunami: Preparing for a decade of small business transitions in Canada,” CFIB stated that finding a suitable buyer is the most common obstacle to succession planning (54 per cent), followed by determining a proper valuation (43 per cent). If your succession planning involves your children, you should have those conversations years before your planned retirement, so they are mentally and emotionally prepared for the eventual takeover.

I should add that it’s never a good idea to have your children take over your business if they aren’t willing or able to do so. I see this happen and the outcome is disastrous—they can run the business to the ground and lose the legacy.

Family Matters

You need to formally assess your children’s ability. As an astute business owner, you put systems and processes in place to make sure it runs well. Apply the same thinking to succession planning.

If you’re not hiring a succession planning consultant, you need to create a checklist to assess your children’s interests and desire to take over the business. However, interest and desire do not equal success.

Next on the list, and of equal importance, are their skills and aptitude. Get them involved in the business as early as possible, then fill in the gaps with training and education to adequately prepare them for the challenges ahead.

It’s important to note that your children’s level of accountability only increases if they have skin in the game. Meaning, if ownership is in their future, they should purchase shares in the company with their own money over time. Most business advisers echo this sentiment.

Of course, your business valuation when selling to your children might have some element of leniency compared to the valuation if you’re selling to a third party. The transition process also should be less contentious if you adhere to these prudent and pragmatic steps.

When Selling Fails

Business owners who have had a mediocre liquidity event or failed succession, especially those that sold to a third party, often timidly admit remorse. The three most common admissions are:

1. I Should Have Had a Valuation Done

A valuation is a tool that allows the seller to get a ballpark figure of what the business might sell for before they embark on the sale process.

Every single business is unique, and every industry also has many unique elements, unlike selling commercial or industrial real estate, which have limited variables such as location, size, and financial performance.

Operating businesses have numerous characteristics and complexities that need to be taken into account to determine its true value.

For manufacturing companies, valuation does not mean a straightforward equipment appraisal as some owners commonly think. The price of a business from a buyer’s perspective mostly is based on cash flow.

Generally speaking, the price is equal to earnings before interest, taxes, depreciation, and amortization (EBITDA) multiplied by the prevailing industry “multiple” at the time of the sale. Still, you can enhance this valuation by highlighting any intangible elements, including the company’s customer base, long-term contracts, intellectual properties (patents and proprietary manufacturing processes), trademarks, and other factors that separate you from your competition.

Without a proper valuation, you potentially leave money on the table, and worse, only realize it after the sale has transpired.

2. I Should Have Hired an Adviser

This admission is tied to No. 1 because an experienced and highly skilled adviser brings value to the table that will far exceed the fees you pay by hiring them.

They help alleviate the time commitment and emotional stress that go with selling. They also understand the market dynamics of each industry and have significant access to a wide buyer universe.

While your target buyers might be limited only to those people you know in your industry, advisers often have contacts in the U.S. and globally, and they also know many private equity firms. They expertly navigate the world of strategic buyers. To maximize your sale price, advisers can conduct a wide or limited auction, or a highly targeted auction depending on your criteria and price expectation.

You don’t need to accept an unsolicited offer from a competitor thinking that’s the only option you have.

3. I Shouldn’t Have Rushed Into It

Selling a business is a marathon, not a sprint. Whether you hire an adviser or you do it on your own, do not rush for the exit.

Careful planning helps prevent extenuating circumstances and personal events that force you to sell. Without planning, the temptation to take what is seemingly reasonable becomes the default.

My advice: Do your homework at least two to three years ahead of your planned exit date.

Alma Johns is president of Bench Capital Advisory Inc., alma.johns@benchcapital.ca, 647-295-2562, benchcapital.ca.