Is this the Right Time to Consider Selling a Business?

December 3, 2019

By Mark Borkowski

With the economy expanding in Canada, many owners are wondering if this is the year to consider selling their 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.

Value 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.

Internal conditions within a company also change. Often in combination with external factors, sometimes independent of those factors. At this time, there are many groups seeking company acquisitions like never before. Not all of these buyers are qualified.

So how should you determine if 2020 would be the right time for you to sell your business? The following are five factors for Canadian business owners to consider.

First, get a business valuation to determine what your business is worth in the current market. This is an initial step in determining if a sale would meet your objectives. Our group provides this as a courtesy. Most advisors will not and will charge a fee.

Secondly, understand that the current status of the mid-market business market place, in provinces like Ontario, is one of the best in Canada and policies are in place for continued prosperity and growth. We are going to pop up on a lot of radar screens as a place to relocate or expand for businesses. Ontario gained more residents than any other Province as the recession deepened in 2008 and early 2009, and as job seekers migrated to one of the nation’s strongest labor markets. The Toronto GTA area enjoyed the second largest population growth than any other city in 2018.

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, Ontario is a prime target because of future economic expectations and long-term outlook. However, the market could change on a dime.

The fourth item is that the capital gains tax rate is presently at historic lows at 15%. However, effective March 2021, this rate will increase, possibly by as much as three times. Signals from the Canadian government is that the Small Business Capital Gains Exemption is going to be reduced or possibly scrapped. The US has already happened.

Effective January 1, 2019, the lifetime small business capital gains exemption increased to $866,912. As a result, every Canadian resident individual who disposes of qualifying small business corporation shares in 2019 can shelter up to $866,912 in capital gains on those shares from tax. The first $866,912 for each shareholder is tax-free.

Therefore, business owners considering a sale should sell by March 2021, in order to keep more of their proceeds. Tax-free transactions are common for company sellers at this time.

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, who 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 seeing Canadian and U.S. businesses as investment opportunities while the dollar is valued lower against their own currency.
  • 30-something up-and-comers aggressively buying and building. Banks and investors are prepared to provide capital and support them.
  • Strategic Buyers, both public and privately-held companies, are actively acquiring smaller firms as part of their strategy for quick growth and innovation. (Merrill Data – Sept 2019)
  • Investment Buyers, such as private equity groups, “are going down-market” (Merrill Data– Sept. 2019) 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.”

If internal conditions, both personal and business, are right, 2020 might be the right time to consider selling a privately-held business. 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 6 to 12 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.

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. Time to think about selling your business.

Mark Borkowski
Mark is president of Toronto based Mercantile Mergers & Acquisitions Corp. Mercantile specializes in the sale of mid-market companies sold to strategic buyers or private equity firms. He can be contacted in confidence at mark@mercantilema.com or (416) 368-8466 ext. 232 or www.mercantilemergersacquisitions.com

photo credit: mohamed_hassan via pixabay

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