“My partner and I have previously started and sold a successful small business by advertising in trade publications and relentlessly following up on our leads. We were eventually very happy with the result.
“A few years ago, we started another business and it has grown to be very profitable and successful. In fact, its very success prices it above where we are able to use our own contacts to sell this business. We believe the value would be in excess of $5 or $6 million. Our business has grown to the point where we as entrepreneurs are busy simply managing the growth and the process — not our strengths. At this stage in the business we believe a larger corporation would be able to better maximize its value. We are interested in selling the business, but dealing with the Yahoo’s, AT&T’s or AOL’s of the world is out of our league. Can you recommend a course of action or perhaps a business broker that has proven to be reputable and successful?”
Some recommended options (course of actions) could include:
- You may not need to hold out for the Yahoo’s, AT&Ts or AOLs, but possibly contact some venture-capital firms that may be interested in buying some, or all of your shares. You believe the value is in excess of $5 or $6 million, but it may be worth more, especially if you are very profitable. A five-year Financial Forecast (that can be shown to investors, bankers, potential strategic partners who wish to invest, etc.) of where the company could go, could provide you with a better figure for the value of your business, instead of “pulling a number out of the air”, which many business owners do.
- You may wish to bring on some value-added management team members [who] could be responsible for certain parts of your business which are not your strengths. You could back out of the areas you are not strong in, yet still retain some or all of the common shares. Some of the management team may be willing to work on a fees / shares basis.
- You mentioned “…managing the growth and the process — not our strengths.” Day-to-day processes, in a growing business, can be stressful to many business owners. You may wish to look at which processes you find stressful and time consuming, and possibly some, or all, of them can be completed on software such as http://www.oraclesmallbusiness.com. This business software takes normal business and accounting processes and allows for efficient and effective use of resources, all via a web-based, highly secure, real-time system, which is accessible anytime, anywhere.
Anonymous, Western Canada
I offer the following thoughts to the current question posed by your reader:
Ahhh… the challenge of success!! In business there are often the two different stages of an company, the initial being the “planting of the seed” by the creative entrepreneurs, and if that seed is grown properly, the later requirement for ongoing management of a successful corporation. Often these two stages require different managerial expertise, or at least different management interests. Often the experienced business leader is weak at the “creation” stage, and the start-up entrepreneurs lack the passion to run a company when processes and ongoing reporting are key requirements.
Your reader should not be dismayed by the situation they now find themselves in, but rather proud of what they have accomplished. Well done.
They note that they are now interested in selling the business, as it has grown to a stage where they are no longer able to apply their own strengths. In fact, they have two options they should consider.
They should first think about bringing in a professional manager who is well positioned to continue to grow their company to the next level. They could retain ownership, sharing some ownership with the new management team, and even maintain key roles in the organization and Board. To remain involved with the business during the next stage of growth might prove to be very rewarding, both financially and personally. This evolution is a very natural next phase for a successful startup, with many companies employing this approach as they grow beyond the natural strengths of the current management team. It is an option the current owners should seriously consider, especially since any sale of their business might require them to remain for a period of time in any case.
The second option is what they are currently considering: selling the business to an interested party. The challenge here is to identify potential targets and maximize the value of the transaction through the negotiation process. Without doubt there is a skill required here that they already recognize may be beyond their experience. Good for them to acknowledge this. A business broker is one path, but my experience would suggest that working for a short period with an experienced manager who has been involved in an operating business and M&A’s — and has the rolodex of business contacts in the business segment — can bring more value to the end transaction. Accountants and lawyers will be needed at a later phase, but first it is important to set the strategy, target companies and prepare the company for selling. Preparing the company for selling is an important task for maximizing value. The existing business needs to be well-articulated, 2-3 year financials provided, a competitive analysis tabled and a valuation established. Then initial contacts with senior officials of potential acquiring companies can be made, followed by initial presentations. Again, my experience suggests that this phase is often best completed by working with industry-experienced managers, as many of the deliberations and preparation requirements are in fact business-operations related.
The owners must decide on what they want going forward. Do they really want to stay involved with their business but are concerned that they lack the skills to bring it to the next level? If so, hiring a senior company leader may be their best route, as noted above. If they do want to sell, are they willing to stay involved with the company for a period of 12 – 18 months to aid the transition — as might be required by the acquiring company? If not, what are they willing to trade off? Do they want cash, or are they willing to take a share deal?
Like any company strategy, it must start with clearly identifying the desired end goal, then working on the tactical approaches that will likely lead to that desired outcome.
I know a great consultant group that does exactly what Peer-to-Peer is asking: GoToMarketAdvisors
This group of former executives will take a company public, put it down, sell it, or transform it. They know that entrepreneurs are not always the best corporate managers so they come in and put the right people in place so that the entrepreneurs can focus on their strengths, or work with them to transition the company. Ken Killin is the one I’d suggest they contact first… his experience is exceptional.
Please pass this along. I would like to remain anonymous but would love to see another company benefit from GoToMarketAdvisors as I’ve seen in the past.
I am a professional real estate and business broker and was included in PROFIT’s first survey — 1986, I believe (Hants Realty). Regarding selling the business mentioned, I can offer some tips from basically a small-time operator such as myself.
The first thing: be aware of any tax and legal implications. There is, I believe, still a $500,000 capital-gains exemption if you sell shares in a Canadian corporation. With two owners, that could be as much as $1,000,000 that could be tax-exempt.
The first issue to deal with, is it an asset purchase or share purchase. The buyer maybe more inclined to just buy the assets at fair market value for depreciation purposes because with a share purchase the buyer has to accept the assets at book value and would lose the depreciation to offset future tax liabilities. The same thing applies to any real estate that has been depreciated. A meeting with a good tax lawyer would clarify how you should best approach the sale; then compare notes with your accountant.
Next, the terms really make the deal, and legally sheltering as much of your tax liability without risk should be your ultimate goal. It may be possible to structure part of the purchase by being on the company payroll for 5 years, thus spreading a portion of your gain over a 5-year period to lessen the tax liability. This of course depends on the quality of the purchaser. An exchange of shares could be another option or, again depending on the quality of the buyer, you could finance the purchase over a period of time. There are many variations depending on circumstances and the individuals involved. Be careful of any applicable HST and government regulations and approvals that may be required. My experience has taught me [to] sign nothing subject to any government or third party approvals: Get your approvals, then I’ll sign.
Last but not least: when the time comes to sign, make sure any agreement is subject to your accountant’s and lawyer’s approval, and your approval of the opinion you receive. Make sure you know what you will net after taxes, closing costs and repayment of any outstanding debt. Be careful of any payout penalties. With these low interest rates a lender maybe able to charge an interest differential which could be substantial. Be sure and get quotes from any of the professionals you intend to use — remember you are selling your business and you don’t want your last bill for services to be unreasonable or for there to be any misunderstandings. I’m sure you’ll get lots of advice, but this is my 2 cents worth.
Michael Bomersback, KPMG
First of all, I question why you are ‘managing processes and not strengths’. If your company has ‘grown to be very profitable and successful’ then I do not see why you do not have the resources to have the right people manage ‘the process’, allowing you to properly manage your strengths. I am only questioning the reasons you have stated why you want to sell.
Regardless of your reasons, the method you use to sell your business will depend on a few factors. The approach I use in our Corporate Finance Group to sell businesses varies depending on where you are located, the state of your business and what industry you operate in, to name a few.
Key buyers could be financial or strategic. Strategic buyers are those with a strategic interest in your business — for market expansion, industry consolidation, or vertical integration, for example. The source of these targets can be one or several existing clients, one or several suppliers to your business or your financial institution who may have clients in a complementary business. Also, most larger potential acquirers who may be interested parties have merger and acquisition departments. We have cold-called the heads of these groups to see if our client presents an opportunity for them.
Financial acquirers include various players who have strictly a financial (not strategic) interest and include various funds (mutual funds, pension funds, investment funds). These players may have investments in other companies who compete in your industry. A recent deal I was involved with, involved an investment fund in the U.S., whose primary shareholders include most current or former NFL quarterbacks. They made an investment in a company that manufactures a product in the Sports Entertainment industry. So, obviously who they are and their level of interest depend on your company, industry and to a lesser extent, location. In Quebec we have several government-based organizations that are active in financing various deals in many different industries.
Bear in mind that often a key element to an acquisition is the strength of management. An acquirer may consider the value of your business to come from you as key management members and may not be willing consider a deal where you exit the business.
In most cases a financing memorandum is prepared. This is a document that is similar to a business plan and is distributed to interested parties. It describes your business, market, products, its strengths, weaknesses, opportunities and threats (SWOT analysis), historical financial results (5 years) and financial projections (at least 3 years). We also prepare a “teaser”, which is a summary financing memorandum that can be distributed without necessarily having a confidentiality agreement (which should be obtained before providing a detailed financing memorandum).
Have a question for your fellow entrepreneurs? Send it to Peer-to-Peer.
Watch for another Peer-to-Peer Poll in the next PROFIT-Xtra.