The Business Advisor: October 2011

This step-by-step advice will help you get the most out of your business, whether you’re a buyer or a seller.

This step-by-step advice will help you get the most out of your business, whether you’re a buyer or a seller.

Whether you are looking to sell your business or make an acquisition, having a true picture of what your business is worth is critical to a successful transaction. The following article will take you through a step-by-step process designed to help you maximize the value of your business.

Maximize your sell
You may find yourself in any number of circumstances prompting the sale of your business. Everything from the lack of a logical successor, a dispute with another shareholder, the need to withdraw built-up cash in the business, an unsolicited offer to buy the business, poor health or simply the wish to retire may initiate the sale process.

It is not uncommon for an owner who is already engaged in the sale process to withdraw when he or she understands the full implications of the sale. Owners have likely nurtured the business into what it is today, and the prospect of letting go may be too much to bear.

Working with a business advisor, you should seek to understand the motivation and rationale for the sale. This understanding allows you to work together to structure a sale that will meet your objectives.

Once you are committed to a sale, the next step is to maximize the value of your business.

A combination of financial and management considerations will go a long way to getting the most for your business. Consider the following:

1. Target the buyers – Knowledge of your industry puts you in the best position to identify logical buyers for the company. Rank potential buyers in order of their likely interest and their ability to actually purchase the business. Consideration should be given to companies that might be willing to pay for strategic advantages, known industry acquirers, previous offers for the business, long-term employees, existing partners and management groups.
2. Identify acceptable forms of consideration – Must it be all cash, or are vendor take-backs, leasing arrangements, preferred stock or earn-outs, or price bridging options?
3. Assess the personal and corporate tax consequences of the sale – Structuring the sale in the most tax advantageous way is critical to maximizing value. Typically, vendors will want to sell the shares of a business as opposed to its assets in order to take advantage of the capital gains exemption that may be available to Qualified Small Business Corporation (QSBC) shareholders. Also assess internal tax minimization strategies prior to a sale.
4. Tidy up and paint a profitable picture – Make sure that your company’s financial information is available, complete and accurate. Consider normalizing the historical financial statements. For example, adjusting for uneconomical management remuneration and salaries paid to non-working family members. A purchaser is buying the prospective future cash flow of the business and a well-thought-out financial forecast will go a long way in providing comfort in the assessment of the business.
5. Diversify management – A business that depends primarily on the personal goodwill of the owner will not be attractive to potential purchasers. Assessing the calibre and diversity of the management team is an important part of any purchaser’s due diligence. Broaden and strengthen the middle management team to maximize the value of a business.
6. Assess if the timing is right – If there is no urgency to sell, perhaps value would be maximized when there are more potential buyers. Alternatively, there could be industry consolidation opportunities that are best taken advantage of with an offer in hand.
7. Recognize that first impressions are extremely important – Whether meeting potential purchasers in person or providing an information memorandum, human nature dictates that the first impression given by the vendor will impact negotiations and ultimately the terms of the deal.

Get the most from your acquisition
A strategic purchaser will assess a company’s value. By reviewing the company’s management and operations, contracts, commitments, the industry, the market and the competitive environment, you will get a good sense of whether the acquisitions makes sense for your existing business.

Once you decide to move ahead with the acquisition, the structure of the deal vand the ongoing strategic plan will need to be developed. The due diligence will include a legal and financial review. Some of the more common issues uncovered during the due diligence process include:

1. An overstatement of inventory value
2. Uncollectible receivables
3. Window dressing of financial statements including the deferral of necessary capital or repairs and maintenance expenditures
4. Weak or disadvantageous contracts
5. Employee turnover or union contract issues
6. Lease issues
7. Restrictive franchise or license agreements
8. Unrecorded liabilities including supplier discounts, employee costs and severance
9. Pending litigation against the company

Determining the right price
The value of a business needs to be viewed in an overall context. Generally, if the demand for a particular business is high, the vendor may not want to disclose an asking price in order to create a competitive bidding situation and drive up the price. If the power is with the purchaser, the vendor may have no choice but to state an asking price.

Historical results of a business are not necessarily a good indication of expected ongoing performance. This can make a valuation assessment particularly tricky and the need for sound valuation, tax and legal expertise imperative.

Get the right advice
Chartered business valuators (CBV) and mergers and acquisition (M&A) advisors may perform various roles in the purchase and sale of a business, from helping structure the deal, to assisting with the due diligence process.

While the sales process may seem daunting, it’s critical that both the vendor and the purchaser have a clear understanding of the business, the industry and the motivation for the sale. Advisors should work with you to assess the value of the business and make informed decisions.

Take-away tips

1. Valuation is tricky as history does not always predict the future.
2. Don’t underestimate the value of doing full due diligence.
3. Fully appreciate the complexity of making a great buy or sale.

Patricia Harris, CA, CBV, is a senior manager of Fuller Landau Valuations Inc., and Jonas Cohen, MBA, CA, is the managing director of Fuller Landau Advisory Services Inc. Fuller Landau provides tax, accounting and business advisory services to owners of growth–oriented, mid-size businesses. www.fullerlandau.com .