Business transfers: What to consider before selling your business

After spending so much time building your business, you might be thinking about retiring or starting a new venture. Selling a business is much more than just a career move – it can feel like losing a part of your identity. That’s why it’s important to carefully consider your decision and ensure you’re passing the torch the right way. The transfer of your business should be the result of a thoughtful and planned process rather than a sense of urgency.

Making the decision to sell is only half of the battle. For a profitable transaction, the circumstances also have to be right. You can ask yourself the following questions to decide if it's the right time:

• Is the market favourable?
• Is your business’ value stagnating or growing?
• Will you get a better price in a few years?
• Have you made the necessary preparations, both personally and financially, to proceed with the transfer of your business?
• Has the transfer been planned far enough in advance to ensure its success?

Transferring a business is a time-consuming process. It’s in your best interest to start early and focus on thorough planning, as it can take three to five years to maximize a business’ value. Allow at least six to nine months to prepare for the sale and a transition period of one to two years once you’ve found a successor. Ideally, you should begin this process two to five years before retiring.

Do you want to sell your business within the next year? It’s still possible. However, you’ll want to enlist the help of specialists to speed up the process.

Several factors can influence the success of the transaction, the smoothness of the transition, and the long-term viability of your business. Here are five areas you should prioritize:

Are your company’s finances in order? If the answer is yes, you need to be able to prove it. If not, take the time to get organized.

In any case, you’ll need to provide a clear picture of your finances to potential buyers. To do this, make sure your financial statements are up to date and ensure you can provide financial projections – ideally for the next five years. A retrospective analysis of your company’s performance could also be helpful. 

Don’t have financial projections or performance analysis? It’s never too late to create them. These documents will help you identify your company’s growth drivers and demonstrate its value to potential investors.

Without revealing any confidential information, feel free to share which customer segments have driven your company’s growth. If you can specify which products or services are the most popular, that’s even better.

You’ll need to provide documentation regarding your staff, procedures, operations, company infrastructure, and purchases made from suppliers. 

Do you regularly survey your teams to gauge their satisfaction levels? Include these results and any other relevant information in the files you’ll present to your potential successor. 

Gather all documents related to your business’s incorporation as well as any contracts, licenses, and insurance policies that the buyer might need. 

Have you faced a legal issue or dispute in the past? It can happen to anyone. Make sure to resolve it in time, so it doesn’t jeopardize the transaction, and above all, don’t hide it. It’s best to be transparent with your successor – your honesty could help gain their trust. 

Whether you use certain platforms for online sales, payroll, or any other purpose, make sure you can provide the source code and security protocols upon request. The goal? To demonstrate the reliability of your IT systems.

When preparing for a potential transfer, you can increase the value of your business by following these steps, which may take several years to complete. Is your business already in good shape? This process can help keep it healthy.

What factors enable a business to grow in value?

Your successor will want to ensure that your business is viable in the long term before they consider buying your business. This means presenting them with growth objectives and the strategies needed to achieve them.

If you own any infrastructure, make sure it’s well-maintained and in good condition. Even a minor oversight in this area could be a deterrent.

Make sure your current infrastructure can support your growth plans. If your successor needs to invest in additional buildings or equipment, these expenses could be deducted from the purchase price of your business.

For a smooth transition, it’s best to have managers who can support your company’s growth while keeping your team motivated. That’s why it’s important to choose your executives carefully, even if the hiring process takes time.

It’s also important to develop an employee retention plan to keep top talent and help them advance within your company.

Data is essential in business. It should be possible to get a clear picture of your business at a glance. That’s why it’s necessary to invest in financial and operational systems capable of producing accurate, relevant, and, above all, easy-to-analyze data.

Do you have a system that allows you to track your operations accurately? If not, consider implementing one. It could streamline the sales process, since you’ll have access to all the information your successor will need.

It’s also important to keep and organize all your legal and tax documents. They’ll help you assess the tax implications of your business transfer.

→ Check out our article on business turnaround

Certain factors affect not only the actual value of your business but also its perceived value. Here are a few of them.

The macroeconomic environment affects the value of your business. This includes economic outlook, geopolitical stability, interest rates, monetary policy, and more. Is your business performing well despite an economic slowdown? That can certainly work in your favour. 

The better your company performs in terms of revenue, profitability, market share, and operational independence, the higher valuation you can expect. The same applies to your high-value-added products and services. Have you recently developed a product that perfectly meets a new need? Highlight it, even if you don’t yet know its full impact yet. 

The industry in which your company operates is just as important. Is it a promising, growth-oriented sector, or one that’s slowing down? The more promising the industry, the more your company’s value will benefit. This is also true if competitors are having difficulty entering this market. 

Are opportunities limited in your industry? It’s never too late to realign your business with market demands so that your offerings meet a real need.

Someone looking to buy a business will assess its profitability and risk level, its potential for profit growth, the total investment needed, and the capital cost of the acquisition. This is where financial projections can make all the difference.

The more people interested in your business, the more valuable it becomes. Competition – even if it’s only perceived – generally leads to better offers. In short, it’s always better to have several options.

To foster competition and secure a better price for your business, it’s in your best interest to work with specialists. This will give you access to a network of individuals interested in business acquisitions.

The chart below provides an overview of the various stages of the competitive sales process:

Increase the company’s valuation through competition.

The sale price isn’t the only factor you should consider when evaluating an offer. For example, you could receive a smaller amount that’s paid once the deal closes, or a larger overall payout as a trade-off for keeping a financial stake in the business. Here are a few examples of what you should keep in mind:

• Price adjustment clause: A part of the sale price is determined by the company’s performance after the transfer. This mechanism could increase or decrease your profit.
• Sale price balance: If your successor is unable to secure the necessary financing to purchase your business, you might consider extending a multi-year loan to them. This tax strategy can help reduce capital gains tax.
• Equity stake: You could choose to retain a minority stake in the company and thus receive dividends based on its growth.
• Support or non-compete clauses: Your successor may include certain conditions in the contract. For example, an active role during the transition period or a guarantee that you won’t start a business that could compete with theirs.

Take the time to review the various offers and negotiate a deal that aligns with both your financial goals and risk tolerance. Keep in mind that selling a business has tax implications. Make sure that once taxes are paid, you’ll have enough money left for your retirement plans.

→ Check out our retirement guide for business owners

Beyond financial considerations, you need to choose a successor who you trust and who shares your values. Remember that it will be up to this person to carry on your vision and ensure the long-term success of your business.

It’s normal to feel emotional about selling your business. You’re used to being in charge, so it can be difficult to let go and hand over the reins to someone else.

The sale process can stretch out over several months, or even years, during which time you’ll have to work closely with your successor. You may start to feel decision fatigue but make sure it doesn’t harm your relationship. You need to be diplomatic and open-minded, so you don’t sabotage the deal by clinging to certain ways of doing things, for example. 

The transition can also create uncertainty among your teams. You might want to implement certain communication strategies to keep morale high or put confidentiality agreements in place to prevent the news from leaking and harming your business. You should also consider the best way to break the news to your suppliers and partners.

A business transfer consultant can help you gather the necessary documentation, contact potential buyers, and lead discussions and negotiations. This professional will know how to make your business attractive and downplay its less appealing aspects.

Throughout the process, it’s a good idea to consult specialists in tax, law, accounting, business valuation, and even communications. Thanks to their expertise, you’ll reduce financial risks and increase your chances of selling at a price that reflects your efforts over the years.

Whether you’re planning a career change or looking to retire, be sure to plan the sale and transfer of your business carefully. Keep in mind that this process can take several years, so don’t hesitate to reach out for help from experts.

Find out how National Bank can support you in your business transfer.