Thinking about selling your business to an external buyer? Make the right moves to maximize its value.
Selling a business isn’t something to be done on the fly. To attract potential buyers and sell at the best price possible, Eric Lemay, Senior Vice-President and Director of Corporate Finance at PwC, suggests starting by getting your books, minutes, contracts, legal and tax structures, etc. in order. Otherwise, he says, you risk finding yourself in a vulnerable position.
For Brian King, Associate Professor in the Department of Entrepreneurship at HEC, “It’s the entrepreneur’s responsibility to make sure that their company is always in order.” That way, if you’re unexpectedly forced to quickly sell the business, you’ll have an easier time getting a fair price. On the flip side, he warns, “If it’s not in order, you may end up having to sell at a discount.”
Preparing to sell a business can take years. Especially when there’s a strong emotional component involved. “As an entrepreneur, you need to be at peace with your decision to sell,” maintains Eric Lemay.
The best time to sell? When market dynamics are in your favour. “If you operate in a cyclical industry and it’s in a depression,” he continues, “wait for it to bounce back before selling.”
When you’re an entrepreneur, it’s easy to let yourself get swept up in putting out fires. Get into the habit of asking yourself every day if what you’re working on is important or urgent, advises Brian King. “Try to set aside part of your day to work on what’s important, because that’s what will allow your business to grow in value.”
Even if you’ve made the decision to sell, you should still continue to invest in innovation and improvements. Otherwise, the value of your business could suffer.
Selling a business is a complex process. “The legal, accounting and regulatory aspects are getting more and more burdensome,” observes Eric Lemay of PcW. “A transaction is like a highway covered with orange cones, yellow lights, red lights, traffic. There are lots of pitfalls to avoid. The majority of entrepreneurs who travel this road tell us they never imagined it would be so complicated.” That’s why it’s a good idea to seek out support and advice from the experts.
This precaution also tells potential buyers that you’re serious, according to François Fauteux, Founder and Managing Partner of Phoenix Partners, a private investment company that acquires controlling interests in Quebec businesses. “It shows that the business-owner has thought things through.”
Relying on external guidance will also help you stay focused on doing business. “It’s a mistake to think that you can manage both your business, and the sale of your business, well,” affirms François Fauteux. Especially since finding a buyer and closing the sale can take several months. During this period, creating value needs to remain a priority. “You need to run the business as though you were planning to keep it, in other words, do what’s best for the business long-term,” advises Éric Lemay. And don’t forget that until the deal is closed, “there’s always the possibility that something could derail the transaction,” he adds.
When the Cirque du Soleil started taking steps to find a buyer, its president and CEO Daniel Lamarre told his team, “Only two people will be involved in the process and negotiations, the head of finance and me. No one else should be thinking about it. Concentrate on your work, and maintain the value of the company.”
So that activities can continue normally, include as few people in the sales process as possible, according to him. Of course, that doesn’t mean you shouldn’t be well-supported. The Cirque was supported by countless external advisors while it was being sold to the U.S. investment firm TPG Capital in 2015.
There are three objective methods to determine the value of a company. It can be evaluated on the basis of its assets, the sale price of comparable companies or its cash flow. However, there’s always an element of subjectivity in any transaction. “The value of a company is the price a buyer is prepared to pay,” says François Fauteux of Phoenix Partners. “There’s an understanding that it’s relatively nebulous and very subjective. It takes future cash flow into account, but also the intangible value that comes with a competitive advantage. It’s also a question of perception, supply and demand, negotiation.”
As a seller, you might have a tendency to overestimate the value of your business because of the emotional ties you have to it. Being aware of that bias will allow you to better manage your expectations so you can more easily come to an agreement that satisfies both parties.
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