How to increase value, and other tips for selling your company
Three experts offer advice to enterprising families looking to sell a business
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Deciding to sell the business your family founded, or merge with another company, can be a considerable and perhaps daunting decision for an enterprising family.
Here, three experts share advice, including how to increase the value of a company before a sale, inverted due diligence and not exposing your business and operations unnecessarily to others.
Wojtek Baraniak, (B.A., LL.B), partner in the Mergers & Acquisitions and Private Equity and Private Client Services Groups, Fasken law firm, Toronto
How does your role interact with family enterprises?
“I regularly provide counsel to private entrepreneurs and private family offices and enterprises (FEs) on governance issues, reorganizations, recapitalization transactions, dispositions, and acquisitions.
I also regularly collaborate with strategic acquirers that routinely purchase family-owned enterprises, so I have the advantage of having sat at both sides of the table.”
What are some of the first things a family should discuss if they are about to be acquired?
“Consider your overall structure and your FE’s estate planning.
Through proper estate planning, lawyers can assist in the orderly transfer of wealth to family members, the creation of a business succession plan and its transfer to family members, employees or other persons or assist in executing philanthropic goals.
Investment holding structures also need to consider liability shielding and tax consideration as part of a FE’s larger strategy, with the addition of the following:
Inverted due diligence: When considering a sale, an FE should undertake a due diligence exercise with the help of tax, accounting and legal advisors to identify and rectify or mitigate any potential issues that could be identified by a potential acquirer and that might adversely impact the value of a business and the likelihood of a sale.
From the legal perspective, an FE should confirm that all employment agreements are in writing and are enforceable, with proper protections in place for a company’s intellectual property and confidential information and with restrictive covenants such as non-solicits and non-competes. Consideration should also be given to having customer agreements with the necessary protections, such as clear payment terms and limitations of liability, as may be appropriate for a business and that also allow for a seamless integration of a business with new owners.
Maintaining reasonably detailed corporate and accounting records is also a key issue for purchaser due diligence and integration. It may sound trivial, but properly documenting your employment and customer relationships and cleaning up your corporate and accounting records goes a long way in letting potential acquirers know that you mean business and are ready for a sale.
It’s not uncommon to see a transaction get bogged down and fail because of a lack of organization and documentation, which ultimately leads to issues that could have been avoided or mitigated with some basic diligence.”
What are some details important for the seller to consider?
“The devil is in the details. Requiring a potential purchaser to sign a well drafted non-disclosure agreement is the main starting point of any sale process. However, one of the most overlooked agreements is the FE’s engagement letter with a banking firm that will manage a sale process.
We highly recommend engaging legal counsel to review and explain the terms of any sell-side engagement agreement with a banking firm. There are many elements to successful engagements that are not commonly known and can be negotiated, and a skilled lawyer will be able to identify the areas where a seller can push back. These agreements can be complex and can result in some surprises unless the terms are understood.
People are the most important aspect of any acquisition and the retention and support of certain members of the existing business team should be mandatory. This is not only important for maintaining your FE’s legacy, but it’s also a strategic decision that you can make early on to help motivate your team and thank them for their contributions to an FE’s success.
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In a recent competitive bid where we acted, key employee compensation and retention was a very important factor in our client’s choice for acquiror. We were surprised to see how many top acquisition proposals overlooked the issue of key employee compensation and retention and completely missed the mark. Retention bonuses, equity plans, and various other long-term incentive arrangements should be strongly considered for any business that is up for sale.
Pick a counsel who will get the deal done. The most important roles for sell-side counsel are to mitigate transaction risk (i.e., get the deal to completion) by facilitating creative solutions to problems, negotiate minimal conditions to closing and maximize the proceeds to be paid to the FE at closing. I’ve seen countless FE exits where their counsel is focussed on the wrong issues, putting the transaction in peril.”
What steps can the family take to feel secure during this perhaps daunting process?
“Sale processes can take six or more months to complete so it’s important to keep your family team and staff motivated and focussed on completion. Deal fatigue is very common, but you can keep your team motivated by putting in place the right financial incentives in the form of success fees and retention plans.”
If the company being acquired is a family business, what protections should they put in place?
“Protective provisions: The structure of a transaction will influence what protections a selling FE needs to put in place. Your legal counsel should explain the implications of deal provisions such as purchase price adjustments, vendor take-back financing, deferred compensation arrangements (such as earn outs), equity rollovers and indemnification covenants, and recommend protective covenants and an agreement that helps mitigate against adverse outcomes.
Expectations on transition: Having a new boss when you were your own boss can be a difficult transition for FE sellers to the extent that they are expected to help manage a transition or execute a business plan post-closing. I have seen several investments fail or come close to failure on account of key people not being satisfied with a post-closing world. A lawyer can help set expectations and explain the potential stress of transition periods and help mitigate against potential adverse outcomes stemming from early employment termination events.”
Sabrina Fitzgerald, National Private Client leader, PwC Canada
How does your role interact with family enterprises?
“I’m a CPA, CA and FEA (Family Enterprise advisor) working with both private clients and family enterprise clients. With family businesses, we are seeing a lot of demands in wealth continuity, succession and continuity planning.
I work with our clients in multigenerational wealth transfers, helping them assess current and future structures, the right governance needed, as well as their overall ambition around purpose, values and impact investing.”
If the seller is a family business, what sorts of protections should they put in place before closing the deal?
“Insurance on reps and warranties, if of interest.
Transaction bonuses payable at closing for some key employees the family feels are required to help with the execution of the transaction, if any.
Governance on how the important decisions are going to be made within the family and who will be representing the family in the discussions and negotiations.
Clarity on the role and depth of involvement of any family members staying with the buyer post-transaction or being asked to make a transition.
What are the key messages they want to communicate to their employees, clients and suppliers once the transaction is announced and have the collaboration of the buyers on those.
Finally, surround yourself with advisors you trust, as this could very well be the biggest transaction of your life.”
Dale C. Tinkham, Managing Partner, Toronto-based Tinkham LLP accounting firm
How does your role interact with family enterprises?
“I am an FCPA, FCA and CMC, and am the managing partner of a boutique CPA firm, providing business advisory, tax and assurance services to all types of family businesses.
I typically advise family businesses to make the sell decision at least three years in advance of the sale transaction. Make use of that time to normalize company transactions, including eliminating related party transactions, cutting discretionary expenses, building up revenue streams and maximizing cash flows.
Get the company ready for sale. A clean, well-run company generating solid cash flows may fetch a higher price, streamline purchasers’ due diligence, and be easier to negotiate a transaction. Accountants can help identify those opportunities.
Accountants provide business investment advice and perspective on potential transactions from the initial buy or sell decision all the way to the closing. We provide forward-looking tax planning, due diligence, financing and general business advice throughout the transaction process.
Our role is one of trusted confidant and skilled advisor providing our professional advice on an hourly fee basis only, not commission, so our professional independence is never a concern.
What are things to think about in terms of the selling family’s legacy?
“It is never too early to plan for tax implications of a sale. It is also never too early to start thinking about what you will do with the funds post-sale.
Many private business owners who have devoted their years to building their enterprise worry that this is the end of their working career, however when exiting, it is really the start of a new way of looking at your legacy. How will what you’ve built continue to generate funds from generation to generation? How will your legacy survive, who will be the stewards of this?”
If the seller is a family business, what sorts of protections should they put in place before closing the deal?
“Non-Disclosure Agreements, Letter of Intent, and staging the financial disclosures until you are certain of the prospective purchaser’s genuine interest and their financial capacity to close the deal.
Listing a company for sale is not for exposing your business and operations unnecessarily to others. Accountants can assemble the information to be disclosed and assist controlling the outflow of financial information, and counsel will be of great assistance protecting the company.”
Responses have been lightly edited for clarity and length.
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