Hugh Livingstone: Managing director, MacKay LLP's Vancouver office
The price: There are many factors that affect a company's value, including earnings history, projected future earnings, asset base, goodwill, competition, management depth, employees, customer base and the extent to which contracts are in place.
Often a business owner will want to have a chartered business valuator (CBV) perform a valuation resulting in a formal valuation report. This can be used to benchmark a third-party offer or as an independent assessment for a sale from one shareholder to another.
What is being sold? Are you selling the shares of the company or the net assets of a business? Generally, sellers like to sell shares and buyers like to buy assets to avoid unknown skeletons that remain with the company after the sale.
Income tax considerations: Sellers can sell shares and claim the $750,000 lifetime capital gains deduction (perhaps for each selling family member). Certain tests must be met – e.g., a Canadian private company with sufficient active business assets held for two years prior to and at the time of sale. A buyer might prefer to buy assets to get a larger write off of depreciable assets. HST might also be an issue.
Legal advice: Seek it. When negotiating with a buyer, how much are you going to disclose about your products, customers, suppliers and employees when the deal may collapse? Confidentiality agreements and non-compete agreements are important. What about severance? What security will be provided for any vendor take-back note? Many risks can be mitigated by the appropriate representations and warranties in the purchase and sale agreement.
Don Sihota: Partner, Clark Wilson
First, ensure that all ownership interests (i.e., shareholdings) are properly documented so there is no ambiguity about who owns the business. I'm amazed at how often problems arise with the legal documentation on ownership. If there are minority shareholders, you need a shareholders' agreement with a drag-along provision, which will prevent the minority from holding up the sale. If this is not in place prior to the sale, ask your lawyer to provide you with one.
A review of critical legal agreements (such as those with major suppliers or customers) is also important to ensure there are no weaknesses that a buyer will exploit. A lawyer with experience in buying and selling businesses will help get your house in order and ensure that your business is attractive to buyers. However, the value of your business also depends on its stability, customer base, potential for growth, ability to generate profits and cash flow, effective management information systems, strategic market position or proprietary assets.
It's also important to consider the income tax you will pay on the sale. Getting qualified tax advice in advance can save you tens of thousands of dollars. Based on my experience, you will need to consider a corporate reorganization to maximize tax savings on the sale.
Finally, you should consider engaging a proficient mergers and acquisitions (M&A) adviser who can identify multiple qualified buyers and help you to get the best price and terms possible.
Choosing your advisers is critical. Your team of professionals should consist of a lawyer, an M&A adviser and a tax adviser. You need to ask each of them how often they do this type of work in order to determine whether they have the experience necessary in the field of buying and selling businesses.
Basil Peters: M&A adviser, exit coach and angel investor
The first step is to develop a clear exit strategy. At a summary level, it's pretty simple. There are only two essential elements: the target date and the exit valuation.
Here's a real-life example from the Parasun case study (available online): "Our core purpose is to sell the company for more than $10 million by late 2006 or early 2007."
This exit strategy was a key part of Parasun's successful exit.
The second essential step is to develop full alignment around the exit strategy with all of the principal stakeholders. My recommendation is to start with everyone signing a hard copy. This often happens at the successful conclusion of a two-day offsite strategic planning session.
I used to believe it was sufficient to review and sign the exit strategy about once each year. More recently, some of my investor friends at the Ohio Tech Angels have been doing the alignment check at the beginning of every board meeting. Increasingly, I have been leaning toward considering this a new best practice.
The exit strategy must be realistic. One of the worst things a CEO can do is to build alignment around a timeline or valuation that is not achievable. This can lead to a failed transaction and will almost certainly have a negative impact on corporate morale.
Dozens of CEOs have told me that once they had a clear exit strategy, it affected business decisions made inside the company every week. Alignment on a well-developed exit strategy also significantly improves the probability of completing a successful exit.
