Preparing Your Company for Sale

Despite the fact that selling your company might be the biggest financial transaction an owner does in his or her lifetime, my experience is few owners really plan their exits in advance and those that do don’t do it far enough in advance. This is particularly true with owners of smaller companies.

There is no question that taking planning your exit far enough in advance can not only increase your purchase price but also your take home pay.

Here are the important steps to take in planning for a sale and when you to do them

• Determine whether this is the right time to sell- I get asked all the time what is the market like these days. Is this a good time to sell? In reality the biggest factor in determining whether this is a good time to sell is not what the outside market is like but rather how is your own business doing? How do your financials look? Have you had at least 2 years with good financial results? How does the next year look financially? Have you cleansed your income statement of any unnecessary expenses? Can someone run your business in your absence? All this requires planning ahead maybe as much as 2 years.
• Do the necessary tax planning. Most owners of small and medium sized companies want to sell their shares to take advantage of their one- time capital gains exemption of approx. $1.2 million/owner for the sale of shares of privately controlled Canadian corporation. But in order to be able to use this exemption, your business has to “qualify”. Your accountant can tell you the details of how to make sure your business qualifies. Mainly it involves getting rid of passive assets on your balance sheet like too much cash. Secondly if your company is bigger and could attract a purchase price of $2 million or above, you may want to make sure that the shares of the company are in more than one family member’s hands so their exemptions can be used also- again to avoid tax.

Both any adjustments required to make sure your company qualifies process and any share splitting have to should be done 2 years ahead of selling.

• Getting a valuation done before you sell- Many sellers enter the selling process not really having a clue what they are worth. This means they are flying blind when they start to look for offers. While a properly constructed valuation cannot give you an exact purchase price, it should give you a ball park and should also give you a good idea as to how a buyer might go about valuing your company and arriving at a purchase price.

When I get a call from owner who is talking about selling, I almost always suggest that they get a valuation done first if they have not had one done in the last 3 years. Many of the issues that a buyer will uncover in due diligence can be uncovered in doing a valuation first

• Getting your financials in order: Most owners I find do have 2-3 years of financials and tax returns ready to show a buyer. But there may be adjustments necessary to make to these financials now that you are selling. For example, isolating personal expenses that are currently in the books, adjusting owner salaries to what a 3rd party general manager would make or identifying large non-recurring expenses.

As an owner you need to be ready to explain what is in your accounts such intercompany loans or good will on your balance sheet and explain items like management or owner’s salaries, rent or subcontractor expense. A buyer can tell whether an owner is on top of his business just by the time it takes and the clarity he gives on answers about his financials.

• Digging down deeper, the owner needs to make sure his or her customer accounts are in order.

Moreover, regardless of whether you are selling alarm, guard or fire accounts when you sell you need to have them in order. The buyer for sure will want to see a list of these accounts and what revenue they are generating because they are probably the largest source of the value of your company. So, impress the buyer have this list ready. For most owners that is not the case.

If it is alarm accounts you are selling, make sure the vast majority on signed contracts, have test signals being sent at least once per month and can be shown to paying their bills. If it fire inspection accounts you are selling again the buyer will want a list and will want to know what the yearly inspection charge is and what month the inspection is planned for. With guard accounts, it definitely helps to have signed contracts with your clients wherever possible.

• Establishing a team to help you sell – Finally, you need a team to help you sell your business! Most owners do not think about this in advance. Your team should at the very least include your accountant, your lawyer (assuming he or she has deal experience) done deals) and I would also suggest a broker who ideally has done deals in your industry.

If an owner has addressed all these points well in advance of selling not only they likely attract a higher price but they will close a sale so much faster and easier.

Victor Harding

Harding Security Services Inc

victor@hardingsecurity.ca