Everyone knows it takes years to build a profitable business, but not everyone realizes it can take years to sell one, too.
Obviously, there’s no one ideal time frame for the sale of a business, says Yannick Archambault, partner and national leader, family office, with KPMG. “For most business owners, this is a once-in-a-lifetime transaction, so they really get one chance to get it right.”
As much as five years’ lead time may be required to prep some companies for sale, he says. But “two to three years is probably what most business owners pencil in as their time frame. For the transaction itself, usually six to 12 months would be the fastest.”
Many factors are at play. For instance, it matters where the company is in its growth curve, says Sunil Mistry, audit partner, enterprise and TMT (technology, media and telecommunications) with KPMG. “The easiest example is a Canadian family-owned business that only does business in Canada and has been audited – that process may be a year. We’ve seen some transactions close very quickly.
“A lot of this is outside the hands of the family; the buyer will dictate how fast they want to close the deal.”
Regulatory constraints also affect the timing, says Robert Bezede, director of corporate finance with Norton McMullen Corporate Finance Inc., a boutique investment-banking firm that works primarily with private businesses ranging between $1 million and $10 million in value.
“If you’ve moved shares into a trust, you can’t just sell them; you have to wait for them to vest or cure,” he says.
Due diligence can unearth surprises
Also, many entrepreneurs have condos or other investment properties in their holding companies. “So you have this mix of personal and core-business investment. Some [buyers] will want to buy one but not others, so you have to move some of those out of the trust.”
Archambault enumerates a laundry list of items to be documented: the audited financial statement, contracts, financials, supply chain, real-estate papers, governance structure, intellectual property, digital strategy and relationships with key employees and stakeholders.
The buyer will likely also examine “quality of earnings” to ensure that the salary being paid to the chief financial officer, who is also a family member, for instance, is commensurate with other professionals with equivalent expertise.
“Depending on the size of the company and the jurisdictions you’re operating in, it can get more complicated,” says Mistry. Due diligence on the buyer’s part may unearth unpleasant surprises, such as taxes owing in other provinces or countries. Even if the outstanding amounts may not be significant compared to the total cost of the sale, this type of oversight undermines buyer confidence.
At WarrenBDC Inc., “we work with the owner to help them figure out what they truly want to achieve – and often it’s not what they think they can,” says CEO Eric Gilboord. “Understanding that it’s 80 per cent what’s in the owner’s head and 20 per cent about the business, that’s the crucial thing – getting what’s between the owner’s ears.”
Few owners have a real understanding of what their options are in selling their business, he says.
Seller didn’t know her options
Gilboord gives the example of an Ontario-based craft-supplies business whose owner retained his services to sell it.
“She had a retail operation in a small town and a national wholesale operation online, and she had a creative aspect: making videos and teaching classes. She didn’t realize she could separate the retail from the wholesale; she was thrilled because she did not realize that that was an option.”
She had backed out of one potential sale when COVID-19 struck because she was uncertain of being able to predict receivables. However, says Gilboord, “we sold the business in March for 60 per cent more than she was going to get a year before, because she focused on the wholesale side and she grew the business. She kept back some of the payment over the next three years that she could take in shares, because we anticipate that it’s going to grow by three or four times.”
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In the long run, these shares could be worth far more than the original selling price. The icing on the cake? “They gave her a role as creative director over the next three to four years,” he says. “If you had asked her prior, ‘Do you think you could have this kind of a deal?’ she wouldn’t have known what you were talking about.”
Individuals and families also have to be mentally ready, Archambault says. It’s easy to underestimate the scope of the adjustment that the owner and their family will have to make – even those who are not directly involved in the daily business operations.
Sellers also worry about preserving the culture of the business, says Bezede. “That can be quite an emotional toll on the seller, especially if there’s a year or so when they are still around to consult. It’s very common because, funny enough, in about 50 per cent of our deals, owners are staying on; part of the reason an owner wants to sell is to monetize their net worth, but they love what they do. Retirement for them equals death.”
Gilboord says, “There’s a certain amount of naivete among sellers; 80 per cent of companies don’t sell because they are not ready to sell or they are not profitable.” He offers a series of online courses to help sellers prepare themselves. “If they’re smart and they start by removing themselves from the day-to-day [operations], then that makes the whole exercise easier.”
“Selling a business can be an emotional stress,” says Mistry. “This is your baby; you’ve been building this for many years. it’s normal to have anxiety; it’s normal to feel stress. The longer the runway, the more you can integrate and deal with these non-financial issues.”