By: Ron Coleman, Coleman Management ServicesIn this three-part article, we are exploring three key areas of building your exit plan.
In part 1 we talked about having the right corporate structure. When you sell your business it’s less about what you sell it for and more about how much of the sale price you get to keep after tax. We also looked at how important it was to protect yourself to ensure you get your future payments as you are very unlikely to get an all-cash offer. You also need to secure any amounts you leave in the company.
In part 2 we showed you how to prepare your business for sale. Not only does this make the business more saleable and saleable for a higher price, it also allows you to take more time off. There are many good reasons for making your business more attractive to a potential buyer and one of the side benefits is you will now have the option of not selling because with a better structure in place you can take more time off and earn passive income.
In part 3 we will take it to the next level. You have cleaned up your corporate structure; you have worked yourself out of the day-to-day routines and put a more professional structure in place so now it’s time to find out if there is a willing buyer out there. But first get a handle on the sale price, whether you sell assets or shares, and how committed you will be over the transition period. Remember, you need to look at the after-tax implications of the sale. This will require an in-depth review with your financial advisors. Sale of shares can net up to $1.5 million tax-free to a husband and wife team.
The first place most owners look is within their family. Provided the family members have the business smarts and the interest in ownership this can be very successful. Make sure they are willing buyers and not getting forced into a deal. Without their determination to succeed you may find that the business flounders. Following part 1 of this article, one young man wrote to me saying his dad wanted him to take over his HVAC business and he really felt he wasn’t the right person for the job. Big quandary. An important factor to remember in selling within the family is that the business is part of your estate and if you give some siblings an advantage because they buy the business you may alienate other siblings. Avoid this by treating each sibling fairly.
The second place most owners consider is selling to employees. Again, the same caveats apply. If they don’t have the business acumen then you could end up losing your equity in the business.
Also it is likely that the family members and the employees won’t have much money to invest in the business and that increases the risk significantly.
If the employees don’t have some money to invest and lack the entrepreneurial skills to run the business, don’t take that approach. You will not be doing anyone any favours.
Both these options will likely require you to provide ongoing mentorship. Is that in your plans?
If these two options aren’t suitable then you need to find an outside third party. My first choice for a third party would be a competitor or complementary business. The economies of scale of combining two businesses into one are significant. They can be enhanced by cross-fertilization. By this I mean two non-competing businesses that can offer their services to the customers of both businesses. Examples would be combining any of the following: plumbing, HVAC, controls, water treatment, and electrical. Any combination there would be advantageous to the buyers. Another example would be two businesses doing the same work but in different geographical areas. It is often recommended for plumbing and HVAC contractors to focus on a customer base within 10 km of their base to minimize travel and non-productive time. Having a satellite operation could prove very profitable with the administration being run from one location.
A dilemma occurs when you decide to move forward. Are you concerned about the impact on your customers, employees, and competitors when word gets out that you are trying to sell? If so, you need a front to help keep your intentions confidential. Often the best way of doing this is to use your accountant or lawyer to screen potential buyers and to get them to sign a confidentiality agreement before divulging the name of your company or use a business broker who can help you with the process; if you go that route, do find one who has experience in your industry.
Your front person can contact the various trade associations and send out letters to them with details of the business that is for sale without disclosing the identity of the company.
Also asking key suppliers for information on who might be in a buying mode is another good source for finding the right prospects. They usually know who is close to retirement and whether or not they have replacement management in place.
Whatever process you use, you need to stay in control of it. Don’t leave it in the hands of your advisors. Get regular reports from them on what actions they are taking and what results they are getting.
When moving forward with potential buyers, do get them to sign a confidentiality agreement before disclosing any important information to them. Get them to sign a Letter of Intent as early as possible. The letter of intent should address:
- How long you will stay on
- What the purchase price is
- Whether it is an asset or share acquisition
- The terms of payment
Once a letter of intent is signed by both parties, the purchaser starts his due diligence process. At this stage your employees are definitely going to find out the business is for sale. Make sure you have a process for ensuring they will be onside with the purchaser. It is usually very important for the purchaser to retain both your employees and customers.
The process for selling your business is very stressful and ultimately comes down to a “leap of faith” decision. You will never be 100 per cent sure you made the right decision. If you know what you would like to do after you have sold your business, you will be a lot more motivated to move forward. I recently facilitated the sale of a HVAC business in Ontario and the seller can’t wait to get in his boat and head south. He was a motivated seller.
Ron Coleman helps make the ownership transition of trade and specialty contracting companies more successful. He ensures that businesses are attractive to buyers so that both seller and buyer enjoy a win-win situation.
His book “Becoming Contractor of the Year” will show you techniques you can use to make more money, have more fun, and make your business more saleable.
His book “Building Your Legacy” has more than 40 great ideas for helping you work smarter, not harder, and create a legacy of which you can be very proud.
Ron is a professional accountant, a certified management consultant, and a professional member of the Canadian Association of Professional Speakers.
Need a speaker for your next conference? Give Ron a call. Visit Ron at www.ronaldcoleman.ca and review his other publications and resource materials for contractors.