Selling your business is a life-changing decision. Whether you’re doing it to capitalize on favourable market conditions, as a result of health or family issues, or potential bankruptcy, it’s always a considerable undertaking for a business owner.
The process can also be complex and time-consuming. In the past, it was possible to sell a business with a handshake. But those transactions resulted in a lot of litigation after the fact, which is why the process today involves so much more legal due diligence and regulation.
To ensure you’re set up for success in selling your business, Caravel’s Peter Torn has provided us with five key tips to help you close the deal with confidence.
- Conduct a financial audit
Before you get started with selling your business, you’ll want to have a clean set of books to show prospective buyers.
An audit will help ensure you have current financial statements, properly filed taxes, up-to-date minute books, and valid and effective contracts.
You’ll also want to make sure any debt is properly papered. This includes family debt, long-term promissory notes, debt between incorporations, mortgages, etc.
It’s critical that all your reporting with the CRA is up-to-date and complete as well. No one wants to purchase a business if there’s a risk they’ll owe money to the government after the sale has closed.
- Determine the true value of your business
To a business owner, their company is invaluable. They think about all the time and effort they’ve put into growing their business and equate this amount of personal labour with an actual valuation of their business. Business owners also often overestimate the value of certain aspects of their business, including goodwill with customers and their intellectual property (IP) and trademarks.
But basing the value of your business on your ego is detrimental to its actual value and, in many cases, can delay selling the company.
That’s why it’s so crucial to get a professional valuation of the business from an industry-specific evaluator. Using your financial records, market data and the sale price of comparable businesses, financial modelling will be used to arrive at an accurate figure for the worth of your company.
One important aspect an audit will look at is whether you actually own what you’re trying to sell. For example, if you own software, is it a joint venture? If so, who owns the intellectual property (IP)? If you’re selling specialized hardware, is it tied to an engineer who builds the product? If so, do they come with the sale? If there’s property involved, is it jointly owned by a partner or spouse?
Oftentimes these questions aren’t considered but have a significant impact on the valuation of a business. That’s why it’s much easier to sell a business with a formal valuation than one based on an owner’s gut instinct.
- Be prepared for a long, complex, and expensive sales process
Many business owners are surprised by how long it takes to sell their business. Today’s sales process, with corporate and securities laws, requires a great deal of due diligence and external parties’ reviews in order to complete the sale of a company. Selling a public company also involves following the requirements set out by the TSX-V and TSX. Business owners should be prepared for the process to take 3 to 6 months.
But for many, what’s more surprising than the administrative time required to sell a company is the external costs that must be incurred. Once you get a valuation of your company, be prepared to spend between 3 – 5% of the company value on fees and expenses, including business evaluators, lawyers, accountants, auditors, payouts to employees, and break fees to agents.
If you have a totally unique and high-value offering (like a game-changing piece of software), an eager buyer may offer to cover those costs, but it’s extremely unlikely.
- Weed out buyers that aren’t serious
The sale process is long enough – so don’t waste time with tire kickers.
To do this, require all interested parties to sign a non-disclosure agreement (NDA) early on in your discussion. This will weed out those who are simply phishing for info on your business operations, data, employees, market share, etc.
The second step is to have interested parties sign a letter of intent with a material break fee (usually between 3 – 5% of the total sale price). Buyers who are serious about the transaction will put the money on the table.
- Acquire indemnity insurance
All business transactions involve risk – especially when it comes to buying and selling a company and its assets.
To streamline the risk management process, ensure you have the proper indemnity insurance in place to protect both you as a seller and prospective buyers.
For many business owners, selling their business is the culmination of all their hard work and gives them the chance to realize the fruits of their labours after so many years of dedication and sacrifice. But the journey to get there can be challenging if you’re not adequately prepared.
Need help selling your business? If you’re looking for expert legal support, we can help. Caravel Law is an alternative legal firm with over 80 qualified and experienced lawyers. Get in touch with our team today to find out more.