Thinking About Selling Your Business? How to Prepare Years Before the Sale
Every business owner will eventually leave their business, either by choice or, sometimes, necessity. Selling a business in Canada can be a complex process, yet many owners don't seriously think about business exit planning until they're ready to leave.
By then, it may be too late to get the best result.
In almost 35 years of working with owners of private businesses, I've found that planning the eventual exit is one of the most important strategic discussions we can have as competent Fractional CFO advisors to our clients. When I ask owners about their plans, I often hear, “I'd like to sell in five or ten years.” Then they are ready to move on to the next topic.
My response is usually: then we should start preparing now.
Knowing how to prepare your business for sale means understanding it isn’t something you begin six months before calling an investment banker or business broker. It can take three to five years, or longer, to build the kind of business someone genuinely wants to buy, at a price the owner is likely prepared to accept.
I learned this early in my career as a young CFO. Our major shareholder told me he intended to sell his company in seven years and asked a simple question: What should we do now to prepare?
We developed strategies and worked on them purposefully over those seven years. The result was a successful and financially satisfying business exit, right on schedule.
That experience shaped how I've approached this subject ever since.
What Is Your Business Actually Worth?
Owners frequently ask me, “What do you think my business is worth?”
Business valuation formulas, EBITDA multiples and comparable transactions are all extremely useful. But ultimately, your business is only worth what a credible buyer is prepared to pay for it.
Until a transaction closes, everything else is just an estimate.
So rather than becoming preoccupied with a business valuation number, I always recommend to concentrate on how to increase the value of your business.
What really drives the value of your business? Is revenue recurring, or should it be? Are margins improving over time? Are you overly dependent on one customer, supplier or key employee? Is there a credible opportunity for continued growth?
Further, don't measure performance only by whether you made money last year. Consider the return you're generating on the capital invested in the business. Profit is obviously important, but the bigger question is whether you're an efficient user of your capital within the business, and you are growing the value of the company over time – and the cost of that capital.
Ensure you have timely, accurate financial information and KPIs that allow you to monitor those drivers.
Know your numbers, but more importantly, know what causes your numbers.
Buyers notice businesses that have been purposefully managed this way for years. Trying to manufacture this discipline immediately before a sale is rarely convincing.
Build a Business That Doesn't Need You
This can be one of the most difficult issues for a successful entrepreneur.
Many owners have spent decades making themselves indispensable. Unfortunately, being indispensable can reduce the value of the business they've worked so hard to build.
Ask yourself a difficult question: If I disappeared for six months, how well would this business operate?
A prospective buyer will effectively be asking the same thing.
Develop good people and give them real responsibility. Identify future leaders, nurture them, and retain them. Build processes that don't depend on information residing in the owner's head. Spread important customer and supplier relationships throughout the organization.
One client deliberately began this process a number of years after acquiring his company. We identified talented people within the organization and gradually gave them greater responsibility and opportunities to lead. Today, those people run virtually all of the day-to-day business and are instrumental in developing and executing strategy. The owner is no longer essential to daily operations and is in a position of having many choices within or outside his business that many of his peers do not have. He is now ready sell, should he decide to.
That creates business value.
I've also seen the opposite. One owner remained deeply involved in virtually everything in his business because his management team wasn't strong enough to operate without him. As he approached retirement, he discovered that potential buyers saw exactly the same problem.
Five years later, he is still trying to sell his business while simultaneously attempting to develop a strong management team and transfer responsibilities that should have been addressed years earlier. The process has been difficult, and he is realizing now that his business isn't worth what he once believed it was – and still no sale.
The lesson is straightforward: don't wait until you need to sell to build a business that runs without you.
The Art of the Exit
Eventually, every owner exits. Sometimes it's planned. Sometimes circumstances make the decision for them. But eventually every business will have some sort of liquidity event.
Retirement, health, age, family issues, fatigue, financial considerations or simply wanting to do something different can all trigger the decision.
That is why owners should create choices before they need them.
Who might eventually buy your company? Management? Family? A competitor? A strategic buyer? Private equity? A consolidator?
Buyers aren't simply looking at historical EBITDA or applying a multiple. They want to understand whether today's profitability can continue after ownership changes. They are assessing risk: management depth, customer concentration, contracts, equipment, employee turnover, business succession planning and reliance on key individuals, including the owner.
Those risks should be identified and managed as part of running an ongoing risk management process within the business years before a sale, not hurriedly addressed once a buyer appears.
And what matters to you besides price?
I sometimes call these the owner's “sacred cows” – from the owner's perspective, the things that must be part of a transaction or there is no deal. Non-financial terms should not be overlooked while trying to maximize the selling price. Employees, culture, reputation, community, continued involvement and legacy can all matter enormously.
Think about those issues before an offer is placed on your desk.
I don’t believe that selling a business is an event. I believe it should be viewed as the final step in a process that should have started purposefully years earlier.
Build a profitable, well-managed business with good people, good processes and good financial information: a business capable of prospering without you.
Start early. Work with experienced advisers. Do it with intention.
This is aptly called “Working on your business, not in your business". Speaking from nearly 35 years of experience as a business advisor and Fractional CFO, start today and keep at it so that you create choices for yourself tomorrow.
— Brian McGill
If you're a Calgary-area business owner thinking about your own exit timeline, our Fractional CFO+ services in Calgary are built around exactly this kind of long-term, relationship-based planning. Learn more about our Fractional CFO+ approach here.