The pandemic’s worn down older entrepreneurs
The headaches of running a business during the pandemic — and the isolation of working remotely — may have been the push these owners needed to decide to sell, but demographics also play an important role, says Groulx.
Many of his Boomer clients had no interest in retiring in their 50s and 60s, but now are finally slowing down.
Fortunately, potential sellers are being met with eager buyers. Anecdotally, Groulx says, his industry is facing record volume, fuelled in part by historically low interest rates, which are creating lower financing costs for buyers.
Traditionally, companies in the same industries have bought each other: One trucking company would buy another trucking company to expand market share.
Now, in addition to private equity, Groulx is seeing more “search fund” investors — groups of younger entrepreneurs who pool capital to buy businesses with the intention of taking on day-to-day leadership and operations.
Even with buyers abounding, the sale of a business is still time-consuming, complicated and often tedious. Here are five ways to smooth the process.
1. Start tax planning — early
If you’re even thinking about selling, talk to your accountant about tax efficiencies, says Groulx. “If you’re going to get a big cheque, you don’t want to give half of it to the government,” he says. There are lots of tax implications involved in the sale of a business, and some require plenty of advance notice.
The most significant of these is the Small Business Capital Gains Tax Exemption, which currently applies to the first $892,219 of proceeds resulting from the sale of shares of the business.
That’s close to $1 million of tax-free money — and it applies to every eligible shareholder. That might include the business owner’s spouse, kids, other minority shareholders, perhaps even a loyal business manager who’s been part of the company for decades and who owns shares.
To take advantage of the exemption, beneficiaries must have been company shareholders for at least two years, and meet other qualifying tests. That’s why it’s important to plan ahead, even if you’re not quite ready to sell.
2. Prioritize maximizing revenue over minimizing taxes
Business owners can fall into a pattern of minimizing their taxes — often by running large, personal expenses through the business — rather than maximizing the business’s profits.
Besides being questionable from a tax point of view, says Groulx, this behaviour can disadvantage owners as they prepare to sell.
“You want to sell a business that is growing,” he says. “And profitability is the biggest driver for valuation.”
He advises you to clean up any personal expenses from the books in order to maximize profits. Generally, any increase in taxes will be more than offset by the positive effects on the company’s sale price.
3. Build a management team that doesn’t depend on the owner
“It’s surprising how many, even reasonably sized, businesses are quite dependent upon the boss,” says Groulx.
That’s a liability when it comes to selling: If the business hinges on the inside knowledge of only a couple of people, its value will decrease — and will be much more difficult to run — when those people leave after a sale.
Buyers, he points out, are more attracted to a business with a strong, nimble management team that can run the company even when the owners aren’t around, and who can navigate the firm through a transition.
Owners thinking about selling should start to back away to make sure their business can continue to operate smoothly without them.
“I tell people that they should be able to go to Florida for two months in the winter, get their reports sent to them by email, and that the company should be able to run without them being there,” notes Groulx. “That literally increases the value of their business.”
4. Build information systems
The more a company can automate its systems, the better.
“You should be able to run your business from your laptop,” Groulx says, adding he recommends investing in enterprise resource planning and customer relationship management software and systems.
He’s also a fan of job-costing systems, and other tools that make it possible to easily collect, access, aggregate and analyze data.
“People pay for automation, and for good information systems,” he adds.
5. Hire an advisor
Selling a business is a staggering amount of work.
“People don’t just write cheques for ten, twenty, thirty million dollars with a handshake,” says Groulx.
A business sale requires hundreds, if not thousands, of hours of due diligence, preparation, information assembly, technical analysis and negotiation.
It’s enough work, he says, to keep several people working full time. And that work needs to be done — often in confidence — while continuing to run the business’ day-to-day operations.
For all these reasons, says Groulx, it makes sense for business owners to hire a professional advisor to deal with the details, and find the best buyer and the most favourable terms for a company.