There have been an unprecedented number of M&A transactions reported over the past few years. Inexpensive capital and few alternative investment opportunities have driven up the pricing of businesses in most industries. In addition to this, small business owners receive numerous solicitation phone calls and letters from brokers telling them about the demand for small businesses. With so much working in a business owners favour, what makes selling a business so hard?
To clarify, we are not saying there isn’t demand for good businesses, rather we want people to be aware of the challenges they may face and how they can overcome those challenges. A good place to start is to consider the sale in terms of a typical, successful, privately-owned business. To put this in perspective, let’s look at an example: a well-established, 20-year old business with $3 million in sales, $150 thousand in salary and benefits paid to owners and $250 thousand in profit.
A business like this provides a great living for the owners and their family. Of course, there are many people who would be thrilled to earn $400 thousand a year. Unfortunately, the purchase price would exclude most people who either don’t have the money or won’t qualify to borrow it. Typically, the business owner needs to look further afield to try to identify a party that has the money, and will, to complete a transaction – a process, which in our experience, is harder than you think.
Buying and selling a business is a complex process that takes time and expertise. Most established, professional business brokers and M&A advisors are reluctant to take on small business clients for several reasons. Commonly, these include the owner’s unrealistic expectation of the price, the difficulty in finding a qualified purchaser and the lack of preparedness for the sale process. Also, they may think the ultimate pay day is just not worth the work.
In our example, there would likely be a qualified buyer if the owner priced the business appropriately and was prepared to run an effective process on their own. This is not to say advisors should not be involved, but given the scale, the scope of the involvement may be limited.
Ideally, you should start the process several years before you expect to make an exit. Having said that, it is understandable that most people don’t do this. Many don’t even think about selling their business until personal circumstances change. So, let’s assume you have not planned your exit, but you now want, or need, out. What’s next?
Assuming your business is too small to run a full M&A process, there is still a lot that you and your advisors can do to help, including some of the following:
While there are a few exceptions, generally, there are no short-cuts in running a successful divestiture process. Combine this with the stress of potentially walking away from your life’s work and you can imagine how challenging the process might be. We also like to remind small business owners that it is okay to continue to run the business for as long as they can and then wind it down without an ultimate sale. Often, they will be left in the same position as they would have been if they tried to sell it a couple of years earlier.
If you are considering a sale, remember that proper planning and preparation well in advance will ultimately improve the chance of a successful sale.
If you have any questions about this topic or others, please get in touch with one of our trusted transaction advisors to learn how we can help you successfully sell your business.
CPA, CA, CBV
Partner - Advisory Services
Mike has over 25 years of experience providing accounting and business advisory services, with a focus on the Canadian insurance industry.
CPA, CA, CBV
Alex Wong is a partner at Smythe Advisory and is focused on being a trusted business advisor to his clients.
CPA, CA, CBV
Director of Valuation Services
Paul Woodhouse focuses on providing financial advisory and litigation support services to clients.
CPA, CA, CBV
William Tam is a senior manager at Smythe Advisory, and is focused on providing valuation and financial advisory services to his clients.
Gagandeep specializes in M&A advisory engagements, as well as business valuations in the contexts of management buyouts and succession planning.
Arthur’s mandate is to assist Smythe clients in Western Canada in preparing for and executing business divestitures or acquisitions.