How To Sell A Business FAQs
What Do I Need To Know Before I Buy or Sell A Business?
There are plenty of questions that come up when you’re looking to buy or sell a business. So the team at Flagship wanted to help answer some of the most common questions that come up when an owner starts this process. If you are in the process of business succession planning, or looking into businesses for sale in Alberta, please check our current listings or reach out to our team for any business questions you may have.
Generally speaking, you want to be well organized well in advance of approaching the sale of the business. In the course of running operating a business a lot of the time organization, governance, and shareholder matters may not be up to date. In some cases, you may have accounting matters. The single best thing that you can do is to position the business for sale way in advance of approaching potential purchasers or any professional services that would require you to have those materials prepared.
From our side, we look for a well-organized minute book. It’s the first thing we ask for as it is the mind of the corporation – articles of incorporation, resolutions, shareholder certificates, directors and officers registers, and some additional items. It allows us to look at what is happening with the corporation and to see who is involved. Essentially it is a 360 view of what the business is. A well-prepared minute book allows us to move quickly through and see how smooth the sale transaction will be.
Most businesses are incorporated, so when we are at the purchase or sale of a business, again, looking through the minute book is typically our first step. It may just be one sole director and shareholder, but there is a corporate entity there and we want to see that the corporate governance and history are reflected accurately in the materials.
From the buy-side, a business broker is like a real estate agent or professional services company and brings a couple of advantages. A good business broker has a good sense of the local market, probably some history of the listed businesses, as they may be familiar with them. They should have a sense of whether buying is even an appropriate action at this time. A good broker will know where to look and should be able to present several businesses (depending on the market) for you to select from.
On the sell-side, there is a range in the acumen of business owners with respect to exiting a business. Some entrepreneurs build up a business over a couple of years, sell it, and repeat the process. Others may have operated a single business for decades and are now experiencing the selling process for the first time. For these individuals, brokers are helpful for giving them advice for what they need to do and when, what is appropriate, and shepherding the client through the process tends to make it run smoother. When we tend to work with brokers who broker a lot of small/medium size enterprise sales and purchases, we tend to find that those brokers get a deal over the line more smoothly and faster than if the client was unrepresented.
If you have two savvy parties, purchasers and sellers, who have gone through this process before, and have come to an agreement, have financing in place and just need to transact the deal, then a broker may not be appropriate. Having said that, you never know what could go wrong midway through a transaction. In a case where two closely-held parties are involved, a broker may not be required. Typically, what we see is that one party requires that advice and guidance, and the other party who maybe doesn’t. It comes down to the seller or purchaser being honest with themselves about their level of acumen.
For example, in buying your house you may hire an inspector to make sure that the house is of the quality being represented. Or, when buying an expensive vehicle you may have a mechanic give it a pre-purchase inspection to make sure that the car is in good shape. The role of a business broker is very similar. If the deal is closely held, then the broker is the last check. In general, a broker’s services tend to be advantageous in executing a deal smoothly, however it does depend on the circumstances involved.
Like any other professional service, there is a wide range of quality. Preferably, the broker has an existing reputation for getting deals done for purchasers and sellers. A broker should understand that their role is not just to introduce the parties, but to ensure a smooth transaction and that both parties have all they require to transact. Part of the role is to interact with legal, tax, accounting and make sure everyone is working in concert smoothly. There have been cases in the past where brokers will introduce parties and then just sit back waiting for the transaction to complete.
Make sure that the broker has a good level of detail on the transaction side, knowing who needs what, and specifically when. This means that they will be proactive in working with you to get materials together to send over to legal, tax, accounting, etc., or in the case of a debt facility or financing to the lender. The broker should be well versed in the entire life cycle of the transaction on both sides.
Depending on the size of the business, some businesses will engage the services of a certified business evaluator. This is an individual who will go through the financials of the corporation, and based on the history, line of business, and other factors, come to a dollar amount that they think is appropriate, usually a net multiple on what the business has done in terms of performance. Some smaller businesses will look to their accountants to present their financials in a positive light. It really comes down to both parties agreeing what is appropriate and coming to an agreed-upon purchase price.
Some factors do change this slightly. In some circumstances where there is seller based financing, where the seller is effectively financing the purchase, you will see higher multiples due to the higher risk from the point of view of the seller. Typically, however, once you’ve gone through the financials and looked at what is appropriate in the lane, you can come to an agreement in a range of value and applying the facts of the transaction to come to an agreement. At the end of the day, however, the price is going to be whatever someone is willing to pay for it.
Depends on the relationship with the lender, the business case presented to the lender, and if you’re able to leverage other assets or collateral. Some lenders will ask for personal guarantees and other assurances even on a business transaction. There are some alternative financing routes, such as a leveraged buyout or seller financing, which come with a separate set of questions and decisions to be made. This is why we mentioned earlier that it’s important that your minute book and documents are in order, to provide the lender assurance and hopefully allow you to access more capital at lower rates that will allow you to transact.
As mentioned before, positioning the sale of the business accurately but attractively. Making sure the books are in order, making sure the minute book is organized. If there are key employees, you may want to have initial discussions with them to let them know that the business is being listed for sale. If the owner is outside of the business and the operators run the business, you want these conversations in advance because they will happen eventually. Especially in the case where the purchaser is looking for a turnkey business where those key staff are essential in the operation of the business, as they will want assurances that the staff will be on for the transition period of appropriate length, if not the long run.
A leveraged buyout (LBO) is typically when you have known parties (competitors, some degree of familiarity) and what you’re doing is minimizing the amount of cash associated with the transaction allowing you to buy the business with a lower amount of cash using debt from a creditor or lender. If you have a business worth $1 million, you might put down $200,000 as a down payment and your bank will finance the rest of the transaction. Ideally, you would have an attractive interest rate that allows you to make the acquisition with a lower level in terms of cash layout.
This used to be common and has been making a resurgence in the last few years as capital firms and individuals are looking to acquire small to medium enterprises. It’s a good tool in the kit for purchasers and vendors, which we are seeing more commonly along with other transaction methods such as earn-outs. The main benefit is that you are able to acquire a business with less cash, while the seller still receives an attractive purchase price for their business.
These are really the only two transactions possible. A share sale is a purchase of the corporation itself and typically involves all issued and outstanding shares. With that purchase, you are purchasing the entire history of the corporation at the time of sale. With an asset purchase, the seller doesn’t want to buy the corporation but wants to buy the assets inside it. Any pending matters such as litigation or debt is avoided in an asset sale but would be assumed in a share purchase. Therefore a lot of purchasers will prefer an asset sale, especially when there are distressed assets that have value for them.
On the other hand, if a business has a lot of goodwill (branding, intellectual property) and is being purchased to be operated in perpetuity, it may make sense to do a share purchase. You can mitigate risk by having lawyers go through and check for any pending litigation against the corporation. We highly recommend that in the purchase agreement that there are representations and warranties saying that nothing is being hidden from the purchaser and that no issues will pop up n the next few years.
You have your lawyer draft a share purchase agreement, which typically is not very complicated in these scenarios, but you want them drafted by someone well versed in share purchase agreements to ensure that they will know to include the representations and warranties that should be attached to the document. It’s a typical document if you’re acquiring full control over the company, but you may want other documents included. For example, any directors, officers, or shareholders that are exiting will require releases.
All of these required documents will be gathered into what is called a closing agenda, which is essentially a checklist of all the items required to close the transaction. This is something that you should ask for your lawyer to provide upon retaining their services.
A lot of business sales are to competitors. You want to make sure that as you get closer to having real conversations with them, send a letter of intent that outlines what is appropriate to exchange between parties and what conversations, if any, will be had with employees. Make sure that you are legally protected especially if you are the vendor, as the competitor could potentially look to poach your employees or some of your business. Ensure appropriate paperwork is in place and make sure that you are being mindful of your own interests as you speak with a competitor to ensure that it goes smoothly. However, quite often when we work with a seller, we do find out that they have spoken to competitors in the past who have told the seller to give them a call in the case of a sale.
There isn’t really an industry standard and is generally a hybrid approach between different types of compensations. If a broker is assisting in the sale of the business, they may charge a modest retainer to cover some of their time and expenses in listing the business and reaching out to purchasers. Typically, the majority of business broker compensation comes from a success fee attached to the gross proceeds of the sale. Even in that case, there is a large range. Typically the fee starts at 10% and goes up from there, depending on the market you’re selling in. Based on the valuation of the business, it may go up to a ratcheted percentage based on that. For example, it may look like something like 10% on the first million, 12% on the second, etc. In general, we suggest shopping around to get a sense of what the industry in your area averages and their effective compensation, as some charge more on up front end or vice versa. If you have a good sense of what your business can transact for, you can come to a hard number and then decide with which broker your confidence lies. It some cases it might make sense to work with the most expensive broker for better representation, whereas in other cases the lowest bid may be advantageous. Keep the cost in mind but take a look at the brokerage itself and make sure that it will add value to the process.
The role of succession planning for a broker is not actually typically appropriate. Usually, a business owner will have an accountant or wealth manager that will advise on succession planning. A broker may enter the conversation is when it comes to organizing the business affairs with respect to being sellable (financials, documents, etc.). Essentially, the broker will take a look at what needs to be cleaned up in order to look attractive to purchasers. Typically these brokers work closely with accounting to ensure there are no personal items or inappropriate expenses still running through the business.
How do you sell a business quickly? Many brokers do a long-term lockup and aren’t proactive about selling the business. How do you avoid this?
Accountability is a large focus. One of our main pieces of advice is to get a sense of what the broker’s plan is for marketing or sourcing a business for purchase or sale that isn’t just listing the business on a website. Are they going to reach out to private equity? Competitors that may be interested? You should feel that the broker will be actively partnering with you and will push this transaction forward.
Sometimes it’s unclear to the average business who is doing what. Generally, it’s broken down between bookkeeper, accountant, tax advisor, and tax lawyer. A bookkeeper provides the balance sheet and P&Ls, typically in a small business. Often the accountant will do the bookkeeping. As the business grows, we will see tax advisors come in, especially when there could be issues of cross border revenues or complex structures that could trigger certain tax implications on sale. Tax lawyers usually come in on a transaction that is large, we typically don’t see them on small/medium business deals. The cost escalates aggressively as you go up the chain, so it really is up to your advisors to engage the appropriate professionals as necessary.
Apart from a broker to provide intelligence on the purchase/sale side, you need legal, accounting, and typically tax. Depending on the size of the business it may be worthwhile speaking to a tax advisor, even though some business owners are wary of their fees. Sometimes there can be other parties that step in to advise on the transaction side, however the three above are typically sufficient to close the deal.
Selling a franchise is an entirely separate area, and some lawyers specialize in these transactions. Look at your franchise agreement early, and look at the transfer or assignment provisions. Most franchisors will have a modest transfer fee that attaches to any transaction when you go to sell a franchise. Sometimes these fees can be onerous. Look at these agreements before proceeding to discuss purchase price with buyers. These transfer fees typically start at $2000, however, we have had cases of franchisors charging exorbitant sums. If you have a commercial space leased, speak to the landlord because they may have assignment or transfer provisions as well. This way you can work with the purchaser and the landlord to transition the business. These provisions are usually out of your control and will be a factor in your ability to sell the business.
The market for purchase and sales of businesses is large, including everything from a $250,000 nail salon to a fleet of dealerships or car washes. Pragmatically, the real question is, to what extent are they being compensated for the transaction, and is it appropriate? There are brokers who focus on smaller asset purchases and sales under the $500,000 range, however, we tend to find the most brokers in the mid-level $5-$30 million range. It really depends on the brokerage itself. Like real estate agents, some focus on apartment condo units, while others specialize in very large estate homes, which command a higher purchase price, with the compensation reflected because of fewer buyers for those real property assets. You want to make sure that you select a broker appropriate for your business. If a broker is used to transacting the $100 million range and your business is in the $500,000 range, you want to consider whether that broker will be spending time on your file versus someone else’s and that his compensation is appropriate for the size of the business. If you look through some of the deals that they’ve done you’ll get a sense of the size of business they typically deal with, as well as industries they have experience in.
It really depends on each circumstance, which lender is involved, the understanding between parties, amongst other factors. You want enough money coming in cash to be reasonably confident that the transaction will go smoothly and that you’ll get the full amount of the purchase price. Financing structures range from 80% cash to balance payout within 6 months of conditions being met, to fully leveraged buyouts where the clients will step in with very low cash upfront, but payout over a timeline that is appropriate as the buyer gets comfortable with the business. Sometimes it’s an all-cash purchase, however, these are rare, as the purchaser wants some assurance that you still have some skin in the game during the transition period. All of these details will be brought to the table by good representatives (broker, lawyer, accountant) to ensure that the majority of the questions are answered.
Front of mind factors are organization (documents, etc.). Having financing in place – set expectations with your lender for how soon you want to close, because they may have questions or require additional documentation. Access to credit is one of the main reasons that deals are stalled. The purchaser and seller need to work well together, in order for the transaction to go smoothly.
A good way to do this is a very clear, but non-binding, letter of intent (LOI) amongst the parties outlining the proposed purchase price, when you intend to close, any financing conditions, exchange of confidential documents if required (balance sheet, P&Ls, etc.) goes a long way. Spend a little bit of time and energy ensuring that the LOI gets circulated and executed as it reflects everybody’s position well. It does not need to be binding, it can be a hybrid of binding provisions of confidentially as well. This ensures that everyone knows that this is a real transaction and that everyone is working together to get the deal done.
When going to sell a business the cost should be front of mind. You should make sure that you are using professional representatives that understand that even though you are selling a business, there should be cost-efficiency. You want to make sure that you are working with a team that is going to get the deal done for you, whether it’s tax, accounting, or legal, you want to make that that the group works well because there will be communication required amongst them to get the deal done. If you already work closely with a lawyer or accountant, you may want to call them to get a referral on other members to be used as part of the transaction to ensure it goes smoothly.
A certified business valuator or “CBV” is useful when you have two parties that want to transact a business but can’t decide what the business is worth. The CBV will come in and have a look at your financials and line of business and come to a decision on value range as a non-biased third party. Now the transacting parties just need to come to an agreement on the transaction details. CBVs are convenient because you get a much more dialed in value that you can then work from, however, they do come at a cost. Depending on the size of business and organization, the typical cost is $10-$15k for their services. So again, a small business looking with revenues of less than $500,000 may not be able to justify spending the money to hire a CBV. However, a business with a negotiated value in the millions may find value in the greater accuracy provided by a CBV.