This special Ask Evan post is brought to you by American Express Canada. They have recently launched their Amex for Business Canada Facebook Page where you can access the latest news, information and resources for Canadian entrepreneurs.

I recently got an email from one of my readers about my advice for selling a business. I’ve changed the names of the business and the entrepreneur:

“Good day Evan!

Hoping 2012 has started on the right path and that all is going well!

We seem to be connected through several entrepreneurs on LinkedIn, and I found your website and service to the business community very exciting! So much so that I signed today as an expert author.

Evan, Finance Pro was established in the year 2000 and is a niche staffing organization specializing in the placement of middle to executive level accounting and finance professionals in contract and full time positions with a sister company HR Pro specializing in the placement of Human Resources Professionals. I am contemplating putting Finance Pro up for sale and am looking forward to any tips, suggestions or connections that you may have……

Thanking you in advance Evan, looking forward to connecting with you, have an outstanding day!

Best Personal Regards,

Michaela”

Dear Michaela,

Having sold my first business (a biotech software company) and helped others sell their companies, here’s some quick advice for you:

Set up the business to run without you

The more the business needs you to succeed, the harder it’s going to be to sell (at a good price). Entrepreneur founders are often the visionary leaders who created the business from just an idea and a lot of hard work. Can it continue to flourish without you being there?

Show your potential buyer that you’ve already stepped out of the day to day business and you have a solid team in place who has already taken the reigns and they’re willing to stay on board with the new owners.

Prepare your financials

Any buyer is going to want to see that you’ve got your financial house in order and they can dig deep into your financials for at least the last 3-5 years. When you’re running your business, most entrepreneurs will optimize their companies so they pay as little taxes as possible. This means you’re not showing a high net profit at the end of each year.

Unfortunately having low profits means you won’t get a good price on your business when you sell it. If you can prepare in advance then you can start running your business knowing that you’re going to sell it in a couple of years and show more income. If you show solid income growth over a 3 year period you’ll pay more corporate taxes but you’ll get a better valuation when you go to sell.

If you want to sell right now then you can’t change your previous statements. Just make sure you understand every number on your balance sheets and income statements and be able to show buyers where they can save money without you being in the business (i.e. if you took a high management salary or had other discretionary expenses).

Identify potential buyers

You have a few options  for who buys you: strategic acquisition, private equity firm, or a management buyout.

A strategic acquisition usually yields the highest valuation. Here you’re targeting someone who badly wants to be in the financial staffing industry and see buying you as a faster alternative to starting it from scratch themselves. Think about people you might be already a referral partner or supplier for. They might be looking to expand their businesses and you could be a great fit! Also look to see if anybody close to your industry has recently raised money and is looking to expand.

Private equity firms are investors and managers who look to buy private businesses and run them. They typically either look for distressed businesses that need to be turned around (in which case you don’t get a good valuation) or companies that have consistent cash flow and solid growth opportunities. If you have good numbers you can get a fair price, but don’t expect a great price.

Management buyouts are when you sell your business to your management team. Is there a group of people in place at your company right now who could afford to take over the business? The advantage of this solution is you already have a team in place and there will be little transition for your customers. The disadvantage is that usually employees can’t afford the asking price and it can cause people to worry about their jobs and to looking for other employment if they know the company is for sale.

Will you help finance it?

In addition to thinking about what your valuation will be you should also consider if you want to finance part of the deal or not. Do you want all the cash up front and just walk away or are you willing to take a  percentage up front and the rest over a period of time?

100% cash up front is usually the most ideal option for the entrepreneur but it’s the hardest one to convince a buyer to agree to. They may want to pay you partially in shares of the new business or they may want to spread out how they pay you and tie it to the performance of the business after they take over.

This option is used very frequently in management buyout situations. Your staff can’t afford to pay you all up front so they pay you a % right now and then you continue taking money out each year until they own it completely.

You’re tying how much money you make to someone else’s ability to run your business. Most entrepreneurs don’t like having someone else control their destiny but you don’t always have a choice.

How long do you want to work there?

Another factor to consider is what does the transition period look like? Usually there is a transition period where the entrepreneur agrees to stay on and train the new buyers coming in on how everything works. It could be one year, it could be one day. How much do you want to be involved to help the buyer after you sell?

When I sold my business, for example, my two partners went to California as a part of the deal and stayed on with the company for a couple of years to help them. I was out as of the sale and moved on to other opportunities.

Is the timing right?

Industries usually go in waves. You’ll have a lot of small companies running niche businesses and then they start to get bought up and consolidated into a few big companies. After a while you start to see that the big companies are moving too slowly so new small companies pop up to start new niche businesses… and the cycle continues.

Just like the real estate and stock markets go hot and cold, the market to sell your business can be hot or cold depending on timing. You can always sell but you can get a way better price if you sell at the right time. We sold our business because the market was consolidating and we either had to sell now or wait another 7-10 years for the next round of consolidation to pick up. We chose to sell now.

Putting it all together

There’s a lot that goes into selling a business and each deal will be different. I’d recommend that you have a price in mind and be willing to negotiate depending on the factors I listed above. Some items might be non-negotiable for you so it’s good to know what they are before heading into discussions.

Good luck Michaela – I hope you get everything you ask for!

Readers, what do you think? I’d love to hear your thoughts if you want to leave a comment below! Also don’t forget to check out the Amex for Business Canada Page!

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