Professionals of all stripes have clients that own businesses. Among all the diverse advice provided by most professionals are not sure how to advise a client on selling or not selling the business. Most do not have a prepared response to the question “Is this the right time to sell our business”?
Here is a primer on issues you can raise with your client. You might even be able to bill for this good counsel.
With the economy expanding in Canada, many owners are wondering if 2023 is the time to sell the business. In most of the major regions of Canada, there are five specific reasons why it would make sense to sell sooner than later.
There are many factors that determine the best timing for selling a business — the financial condition of the company, valuation, growth cycle, profit history, and the current market. Usually, the best time to obtain the highest price occurs when sales and earnings are good and trending upward with a history of good performance. This gives buyers more confidence in projected future earnings.
The value of the business is dynamic and proper timing makes a big difference in the prices paid for business acquisitions. External factors such as the economy, industry trends, stock market volatility, competition, investor confidence, interest rates, and geopolitical considerations are cycles of constant change that impact value. Most companies are sold on a multiple of Earnings before Interest, Taxes, and Amortization (depreciation) – EBITDA.
Determining value is not as complicated as many profess.
It starts with doing a “Normalization of Income”. This involves looking at the business and adding and taking back expenses and obligations not related to the business.
See attached a simple Normalization of Income spreadsheet –
https://www.mercantilemergersacquisitions.com/business-valuations/ebit-ebitda-worksheet.html
Internal conditions within a company also change. Often in combination with external factors, sometimes independent of those factors.
So how should you determine if 2023 would be the right time for you to sell the business? The following are five factors for Canadian business owners to consider.
Unless there is some formal or legal reason, there is little need to pay for a business valuation.
Any group that can do their own “normalization” can reach out to professionals in the M&A business to give them an expression of value. For qualified clients, we can do this at no cost in about three hours in real-time.
To proceed, we need to be on the same wavelength. No point in going to market and exposing the company if the valuation model does not meet the current market. Most owners have an inflated view of value.
Secondly, understand that the current status of the mid-market business marketplace is hot. International strategic and Private Equity investors are combing the country seeking good organizations to invest in and acquire. Lots of money and very little to acquire. The only major issue to advise clients is to stay clear of highly leveraged buyers. They acquire companies with lots of debt, earnouts, and seller notes. Since there is over $2 Trillion+ of dry powder, having a professional M&A professional search the world for the ideal buyer is a strong recommendation.
Just because somebody showed up at your client’s doorstep does not make them the ideal suitor.
As a third point: Buyers in every category are looking for alternatives to traditional investment avenues. They are looking for stability, better predictability, and control. Business acquisitions offer all of these and can also offer a better return than traditional investment opportunities. It is estimated that there are over 100+ buyers for every business. The key is to send out a large private no-names “teaser letter” to 500+ qualified investors. Focusing on the ideal buyers is acquired through databases like Pitchbook, Capital IQ, and Prequin.
Fourth, The ideal transaction is a Share Transaction. Owners can use the “Small business capital exemption”. Each shareholder receives the first $850,000 tax-free. With proper tax and estate planning, owners can pay little tax. Current tax rates make it a good time to sell.
A fifth point, and most importantly, even in our current economy, buyers exceed sellers and we have a robust small business exit market for now. The time will come when the flood of baby-boomer business owners ready to sell will outweigh the ready buyers.
Fueling the market are the different categories of buyers looking to put their money to work by acquiring profitable businesses in areas with a good economic future:
•Early baby-boomer corporate retirees
•Management-level refugees who have suffered a downsize typically have severance pay or pension funds to invest and are looking to go into business for themselves. The stock market, or putting money in the bank, does not look attractive to these corporate refugees at this time in their lives
•Foreign buyers see Canadians. businesses as investment opportunities while the dollar is valued lower against their own currency. The Private Equity firms are hunting. There are over 5,330 PE firms with over a Billion dollars of captive capital in their funds seeking acquisitions in Canada.
•30-something up-and-comers aggressively buying and building.
•Strategic Buyers, both public and privately held companies, are actively acquiring smaller firms as part of their strategy for quick growth and innovation.
•Investment Buyers, such as Private equity groups, “are going down-market” and are seeking add-on acquisitions in the lower middle market for their investment portfolios
• Blue-collar workers who have been laid off are also looking to “buy a job.” Some buy smaller businesses. Do not underestimate their ability to pay.
If internal conditions, both business and personal, are right, 2023 is the time to consider selling a privately-held enterprise. We realize that the decision to sell is neither purely tax-driven nor even a purely financial consideration. Business sales are usually motivated by personal factors.
However, because it can take anywhere from six to twelve months on average to sell a private company, we suggest that business owners considering a sale prepare now so they can take advantage of this exceptional, impermanent window of opportunity. The right buyer pays the highest value and puts forth the best terms and conditions. The key is to seek out the real suitors and not the dreamers.
With all categories of buyers in play, historic low-interest rates with the government working to make credit more readily available, the capital gains tax rate the most favorable in 30 years, and the positive future outlook of the Texas economy, it appears to be an excellent time for business owners in Texas to explore their opportunities for exit.
Mark Borkowski
Mark is president of Mercantile Mergers & Acquisitions Corp. Mercantile is a 35-year M&A intermediary based in Toronto, www.mercantilemergersacquisitions.com
This article is a “re-print” from https://acquisitionaficionado.com/