When contemplating how to sell your business, there are numerous details to consider. As an owner, you have dedicated the time and effort to watch it grow. There have certainly been ups and downs, and in that time, your role has likely become part of the company’s mission. Determining when and who to sell to can be some of the most challenging decisions to make once you have chosen to go through this process.
Throughout this post, we will explore some of the most important touchpoints and discuss the steps you’ll encounter during this process. For more information regarding this topic, we recommend you download our free resource, Insider Tips on Selling a Business in Canada. It can provide you with further details in addition to this post.
Table of Contents
- Key Takeaways
- Prior to the Sale
- During The Sale
- After the Sale
- Other Factors to Consider When Selling Your Business
- The Bottom Line
There are plenty of essential pieces that facilitate the smooth sale of a business. Some of the most important ones include the following:
- Ensure you have thorough documentation of your financials, processes, and systems. Address operations, marketing, sales, recruiting, customer support, training, accounting systems, billing, and credit procedures. This will save you time and energy throughout the process.
- Work with professionals who understand the ins and outs of these kinds of sales. Your broker is invaluable and can connect you with the professionals you need to know.
- Be patient, and be prepared to put in the effort. Sales don’t happen overnight; rushing them can come at the cost of key details that will cause a deal to flounder and fail.
Prior to the Sale
Before embarking on the process of selling your business, you should ask yourself one question: Are you sure you want to sell? This will help you understand the details that led you to this decision and ultimately provide insights on the next steps that can help things go smoothly. If your answer is still yes, how to sell your business becomes much more straightforward.
Determine the Reason for the Sale
There are many reasons for selling a business, including retirement, relocation, burnout, and health or family issues. Going through the selling process is time-consuming and requires a lot of work on your part. Many business owners decide to part ways, although they are not ready for the next phase in their life. Take the time to discover the real reason for the sale, and ensure that you are emotionally prepared for it.
Consider Your Timeline
Rushing the sale process can cause important details to be missed, not to mention cause frustration on both sides of the deal. If you have any litigation or pending legal issues, it is best to resolve them before selling, which could take time. In addition, consider what you plan to do after the sale. Often, you are required to stay on long enough to train the new owner and ensure a smooth transition. That said, a sale could take between three and 18 months to complete, excluding training time. It’s best to prepare early and be patient.
Determine the Value of Your Business
Most companies determine their value through revenue and profits. Small businesses can run various discretionary expenses through their organization. However, recasting these expenses may cause a buyer to have serious doubts. Look at how you can reduce these expenses and increase revenue and profits.
Loyal and reliable staff are other components that add to your business’s value. Before selling, review the structure to ensure you have the right people in the right positions. Are their employment agreements and non-compete clauses in effect? A legal professional can help you determine this. In addition, review contracts and contract staff. Ultimately, if you have the right people for the job, you’ll want to ensure they are there when someone else takes over.
A Comprehensive Valuation
Suppose you are working with a business broker. In that case, they can do a proper business valuation for you and eliminate the guesswork needed to know what your company is worth before going to market and how you can potentially increase that value.
Are You Using a Broker?
Brokers help business sales move forward. They have numerous resources at their disposal and can eliminate many of the hassles and frustrations of selling. Their expertise ensures that you will get maximum value for your business while allowing you to do the tax planning so you end up with the best structure for your sale. A broker will properly document and market your business, resulting in a sale to a great buyer on terms that work for both of you. Their value truly exceeds their commission.
Prepare Your Documents and Finances
Financials and legal documentation are among the most important pieces regarding how to sell your business. These will likely be reviewed the most heavily by potential buyers, their lawyers, and their accountants. Typically, five years of statements are required, along with an up-to-date minute book, proof of ownership, registration of intellectual property, and copies of any leases or contracts with clients and suppliers.
Well-done statements can help ensure a smooth sale process. This documentation should also include copies of licenses, permits, and proof of payment for government remittances. Your broker will produce a blind profile and detailed marketing packages at this stage. Review them for accuracy before moving forward.
Finding a Buyer
Confidentiality is a key factor in nearly all business sales. If word gets out, staff may start looking for another job, landlords may get nervous, and competitors could use this information against you. Your broker can secure the marketing of this business in a way that does not impede your confidentiality while also weeding out inexperienced and unqualified buyers. Trust their process and provide your insights when necessary.
Take a Look at the Reviews
If you’re struggling to find a buyer, review your business’ reputation online. Google is a great resource that can show you reviews and ratings that aren’t always available to you. If there is bad press, try to minimize or eliminate it and encourage more positive ones.
Evaluate the State of Your Facility
Ensure all of the touchpoints of your business are in order, in addition to documentation. This includes your facilities. If you have been looking at the same space for years, a set of fresh eyes can give you perspective on what could change to make the business more appealing to a potential buyer who wants a walkthrough.
Covering All of Your Bases
Beyond a broker, you’ll want an experienced team beside you and helpful resources to minimize risk and maximize your sale’s potential value. A lawyer familiar with these transactions is invaluable and can provide services to cover most of your needs.
Working with an Accountant
After you’ve reviewed the business valuation, discuss tax planning with a reputable and knowledgeable accountant. Your broker may be able to help you find someone who has worked with them before and can provide valuable insights.
Consider having life and crucial illness insurance contingent on the sale. This type of insurance can ensure you still receive the loan should something happen to the new owner. Often, this can be considered a business expense for new owners.
The 5 Deaths of a Business Deal
Take the time to work with the buyer and your business broker to prepare a realistic business plan. The buyer’s lender will want it before closing the deal.
Contracts sometimes fall through for five reasons.
You and the business broker need to ensure they are all working, and that you have substantial assets every step of the way, to push the sale forward.
During The Sale
We’re nearing the final stages now. While this can be exciting, it must be met with just as much patience as the other phases. Your business broker will walk you through what comes next and support you every step of the way to ensure the sale goes through smoothly and you can start your new chapter.
Negotiating the Deal
Meetings with buyers should be arranged through your broker. During that time, be as cooperative as possible but refrain from discussing pricing and terms. Your broker is capable of doing that and knows the first offer may not be the best. Take the time to let them do their work efficiently.
Incorporate a Transition Protocol
Expect the buyer to need a training and transition program, and let your broker build it into the offers. Buyers always ask for more than they need and, in most cases, only use some of what was offered.
Respect Due Diligence
Seller financing is typical in most sales. In fact, it typically falls around 20% of the purchase price. It’s important because not only does it protect the buyer, but it encourages lenders. For this reason, among many others, reviewing documentation, asking questions, and then doing further research can take time.
Allow potential buyers the opportunity to do their diligence and refrain from impeding their process. Your business broker can arrange for details to be ironed out and concerns to be answered, so allow them to do so.
After the Sale
Whether you experienced a process with a few pitfalls or had everything go smoothly, the final result should be the sale of your business. Once that is complete, you can expect to sign the bill of sale, officially transferring it to the buyer or new owner. A lease assignment may also be necessary, and a security agreement which often retains your lien on the business.
There’s the potential for the buyer to also ask for a non-compete agreement, essentially you agreeing not to start a new company that would directly compete with this one for clients or customers.
Diversifying Your Assets
Your net worth has likely been tied up in your business as one asset, but it is now a dollar amount in your bank account where you can diversify and invest. What you do next is entirely up to you, but it doesn’t hurt to start planning with gifting, trusts, and asset protection. A retirement plan should be on the table, and whether you choose to start a new company or not, understanding risks and options are key. Take time and discuss with advisors to secure your finances for the long run.
Other Factors to Consider When Selling Your Business
Moving pieces can often make the sale of a business a more complex endeavour. It is vital to discuss any questions or concerns you may have with your broker so you can have all the information necessary to make a sound decision.
How long does it take to sell a business?
This depends on the business’ size. Finding the right buyer can take months, depending on the industry. Typically, you can expect a timeline of three to nine months from when you go to market. However, this could likely extend to the 12 to 18-month mark for larger businesses.
What are the tax implications?
A few different factors influence this. For example, if you do a share sale, there may be no tax as the sale of shares of an eligible small Canadian Business allows you to use your Lifetime Capital Gain Tax Exemption. However, if you do an asset sale, 50% of the capital gain will be added to your income, and you will be taxed on the additional income. There are strategies possible to avoid this, such as with a sole proprietorship. You can do a rollover just before the sale and use the Lifetime Capital Gain Tax exemption.
How much does it cost to sell a business?
Several fees are associated with selling a business, including valuation, accounting, legal, and brokerage costs. Final amounts will vary depending on the firms you use. In our experience, top brokers will charge a sliding scale starting around 12% for the first million, 10% for the next million, 8% for the following million, and finally sliding down to 2% for everything over $6 million. Your broker can be a great asset to you in addition to the sale of your business by connecting you with reputable and helpful professionals.
Can I sell a business without a broker?
If you wanted to, you could sell a business without a broker. However, we highly advise against this. You will likely be unable to maximize your company’s value and are at an increased risk of missing details that a knowledgeable broker has. In addition, most deals that do not involve a broker end up falling apart.
A small business can do this, but these partnerships or minority investments have associated risks. Selling shares is more common with larger companies where management or the previous owner wants to stay on in an active capacity, and the purchasers are Private Equity Groups of Family Offices.
Can I speed up the selling process?
Yes, you can. You can achieve this by doing all the up-front legwork to have the business ready when you go to market.
An experienced business broker is a common theme throughout this post. There’s a reason for that: they know all parts of the spectrum when selling a business.
At Sunbelt, we are typically dual agents looking after the interests of both buyer and seller and creating a win/win transaction. The benefit of this is that your business broker has an intimate understanding of the concerns of both parties and can find solutions that work for everyone. This results in a very high close rate of approximately 80%, whereas the average is around 50% or lower elsewhere in the industry. In addition, our dual agency also requires us to provide full disclosure to both parties ensuring that the sale is consummated with complete knowledge on both sides and no surprises.
Contact us to learn more about how to sell your business and how we can help with that process.