If you’re planning to sell your business in the near future, it may pay to profile potential buyers now.
As your business grows, you may feel the right time to sell your small business isn’t far off. But are you prepared to sell it in a saturated market?
According to Canada's Urban Futures Institute, by 2020 approximately 425,000 Canadians will be retiring each year. Part of that wave includes entrepreneurs, with half of all Canadian business owners planning to retire by the end of this decade. That means a lot of small businesses will flood the market, and many of them won’t sell, or the owner won’t receive their preferred price.
Anything you can now do to give your selling strategy an advantage will certainly help you to avoid such unpleasant scenarios.
Start by making a list of potential buyers for your business. There are four typical categories of business buyers.
1. Family member
If you’ve identified a family member who is interested in buying your business, you’ll have saved yourself the hassle of finding an unknown buyer.
Selling to family is a popular objective for entrepreneurs who want to leave a legacy for the next generation. You’ll likely enjoy mentoring your successor(s) when it’s time to hand things over. And, you can negotiate to stay involved with the business (as little or as much as you like) during and after the sale.
Family may not have the money
On the downside, a family member may be interested in buying the business, but could lack the financial means or aptitude to run it. And that could put a dent in your retirement plans if you’ve anticipated using some of the proceeds from the sale of the business.
Have a conversation with your family members sooner rather than later about their interest (and ability) to assume the helm. If there’s no suitable family candidate, you’ll want to know now so you can move on to other prospects.
2. Partners
A business or practice partner is a logical choice to acquire your share of the organization. On the plus side, your partner is already a qualified buyer because they have an interest in seeing the operation continue. On the downside, as a part owner of the business, your partner has a strong bargaining position and may not agree to your preferred selling price.
Know the value of the business
Consult your original partnership or shareholder agreement for buy-sell provisions. If no such agreement exists, you’ll want to work with a qualified legal advisor to produce terms agreeable to all parties. That process may include working with a Chartered Business Valuator to assess the value of your operation.
3. Investors
Companies buy other companies for two main reasons: to enjoy a strategic advantage or a financial gain.
A strategic buyer may be a competitor that wants your share of the market. Or, a vendor or customer who sees your company as a natural extension to what they do. A financial acquirer wants to make your assets, profits, or cash flow their own. The more value you create in your business, the higher the price a financial acquirer will likely pay.
Selling to an investor means the buy-sell process will be an orderly procedure as both parties conduct their due diligence, settle on a price, and discuss transition strategies. On the downside, an astute investor will want a good deal, and you might end up accepting a purchase amount lower than you expected.
It can be a challenge to find an investor willing to pay what you want within your preferred timeline. Work with a qualified business broker or mergers and acquisitions firm to prepare a plan.
4. Employees
This type of business sale can be a real win-win for all parties. Your business will enjoy continuity throughout the transition and you can reward your employees for their hard work and loyalty.
If maintaining your brand and corporate culture is important to you, along with leaving a legacy, selling to employees should comfort you knowing your company is in good hands.
However, coming up with sufficient capital to buy the business can be tricky for employees. Work with legal and banking experts who possess experience with management buyout transactions.
Knowing who is most likely to be interested in buying your company will allow you and your team to begin the process of planning for ownership transition and give you time to groom the business for a higher sale price.
