Exactly a year ago, I sold the company I had co-founded (Corporate Research Associates Inc., now Narrative Research) to my senior management team on the company’s 40th anniversary. It was the right time and the right decision, but it was the culmination of a nearly decade long process to prepare for the eventual sale of the company.
Four months later, I purchased another company with my brother and my son, not to operate but as an investment, from another owner looking to exit his business.
Canada is in the early stages of an historical transfer of business assets, driven largely by baby boomers like myself that will see nearly $1.5 trillion in business assets transferred to new owners in the next 10 years according the Canadian Federation of Independent Businesses (CFIB). This represents unprecedented opportunity for those seeking to own their own business and for newcomers to Canada with capital to purchase such businesses. I would argue that because there is likely to be many more sellers than buyers due to demographics, the economic stream for immigrants should be enhanced to support the high level of business transfers that are likely to occur over the next decade.
In Canada, small (less than 100 employees) and medium size (at least 100, but less than 500 employees) enterprises (SMEs) dominate the market. This is particularly the case for Atlantic Canada, where more than 90 per cent of all employment in the private sector are with SMEs. In Prince Edward Island, there are 5,963 small businesses and another 94 medium sized businesses according to 2018 Statscan data. There are only 11 large companies (500 or more employees) in the province.
According to a recent 2018 report from CFIB, 47 per cent of the owners of SMEs plan to exit their businesses in the next five years, with a staggering 72 per cent indicating a desire to exit in the next 10 years. This means that on the Island there will be more than 4,000 business owners looking to sell their businesses within the next 10 years. For many very small businesses (1-2 persons), there is likely to be no market to sell their businesses because the value of the business is tied up entirely in the knowledge, expertise and relationships of the owner. These businesses will likely close if no family member is prepared to assume ownership.
Again, according to CFIB, only eight per cent of business owners have a written plan to transfer their businesses to new ownership. Slightly more than half do not have any plan, with the rest having an informal unwritten plan. For those depending on the sale of their businesses as retirement income, it is critical to have a plan in place to secure an acceptable value.
There are several options to consider in selling a business. One is to transfer ownership within the family to the next generation, one is to sell to an outside buyer and another is to do a management buyout.
I personally chose a management buyout as my preferred option after determining that there was no interest within my family in continuing to own the business. While selling to an outside buyer would have likely provided the highest value to the business, I believed that those who helped build the company with me, deserved the opportunity to own the company. In some ways, this is the most challenging option to sell the business, especially in terms of financing the transaction.
For those considering selling their business, there are a number of important steps to take into consideration in preparing a company to sell, starting with understanding the worth of the business. Too many business owners do not understand how to value their businesses and as a consequence overestimate that value rather significantly. This complicates the sale of a business and much like listing a house for sale well above its market value, will extend the process needlessly.
For those depending on the sale of their businesses as retirement income, it is critical to have a plan in place to secure an acceptable value.
The value of a business is largely based on the cash flow it creates. That is the earnings before interest, taxes, depreciation and amortization (EBITDA). Then comes the multiple or the number of years expected to recoup the investment in a purchase. Buyers evaluate value on the basis of how long it takes to recoup their investments. Most multiples are within the four to seven range, although multiples can be both higher and lower depending on the sector. There is usually a range for each type of business. It is critical to have a business valuation completed by a competent professional as you consider the sale of your business. This will make it much easier to sell the business by having a true assessment of the business’s market value.
The next consideration in preparing a business for sale is finding a way for the owner to make themselves redundant to business’s future success. This is especially true in terms of relationships with clients in the business-to-business market, which need to be gradually transferred to others within the company well in advance of a sale. This is done by ensuring a strong team is in place for business continuity. Another consideration, especially with regard to a management buyout, is ensuring that your balance sheet is strong with minimum debt and cash reserves in place to support the sale of business.
Finally, it is important that business owners have good tax advice well in advance of the sale of their businesses to ensure the most tax efficient manner to sell the company. My simple advice to those contemplating the sale of their company, start now. You will need at least a couple years lead time to be successful and achieve your goals.
In the meantime, a year after the sale of my business, I feel completely content with my decision. My former business continues to thrive under the strong management team (and a new name, Narrative Research) that helped build the company to where it is today and I have been re-purposed, engaged in new and interesting activities.
Don Mills is the former owner of Corporate Research Associates and a recognized expert in data trends in Atlantic Canada. After selling his business 12 months ago, he remains passionate about data - and learning the guitar. He can be contacted at [email protected] or on Twitter at @donmillshfx.
