Selling Your Family Business
Selling a Family business is a major decision that some might be considering as the economy transitions from recession to recovery.
It’s a choice that involves valuing your business’s tangible and intangible assets, your employees, possible liabilities and tax issues. And it’s important that the sale price you set for your business matches the expectations of the marketplace. Reasons for selling a Family usually centre on retirement, the long hours; loss of skilled employees and very high capital expenditures.
Your next step is to prioritize objectives and consider exit alternatives from your business. You can choose to work with your accountant and then bring in professionals. A business valuation can be done informally, some brokers will do it for free, which will help keep down costs.
If you choose to work with a mergers & acquisitions broker ask for references from their clients who sold businesses similar to yours in terms of size, assets, customers additional and number of employees.
It may take a year to put best practices in place, explaining that this involves ensuring tax planning has been done, to reduce liabilities. First you have to understand your objectives for making the sale and allow market exposure time in the hopes of exiting at the highest price.
If the business is sold to a family member to ensure family harmony and to minimize tax liability for all parties involved, an accountant should be consulted prior to the sale. A plan should be in place if the seller remains involved financially with the business, such as through a retiring allowance. A professional mergers & acquisitions professional can co-ordinate this whole process.
Planning for a retirement savings plan (RSP) and to find out if the seller qualifies for an $800,000 capital gains tax exemption is also important.
The typical buyer is a strategic buyer who knows their business and knows what they are buying, such as the process, the equipment, and the supplies. They are the logical choice [for a seller]. The second most common is the private equity buyer, and the least preferred is the individual buyer. There are many methods to value a business. Your professionals should provide this advice.
The valuation by financial statement method will base value on your company’s financial statements, examining the cash on hand, equipment, real estate, debts and investments, and obligations. The liabilities will be subtracted from the total assets to establish the business’s theoretical value.
This method may not take into consideration the current values of assets and instead assign them their costs at the time they were acquired. These are the historic costs. Another disadvantage is that intangible assets such as your brand, trademarks, copyright, trade secrets such as recipes, customer lists, and employees and their contracts, and lease agreements are not considered. They are only considered if they were purchased from another business and thus appear on the business’s financial statement at their historic cost.
A second method called valuation using multiples or comparable company analysis looks at what public companies similar to your own are being traded for. This method for valuing businesses is best applied to larger businesses, rather than smaller owner-manager businesses.
The disadvantage here is that no two companies are completely alike in terms of products, size and growth potential. If your business produces a specialized product or service, it can also make comparisons difficult.
This method is an approximation of the similarities between businesses and affects the business valuation’s accuracy; thus, two sub-methods can be used. The first is the price-to-earnings ratio (P/E).
This sub-method requires that the price of a share of the business’s stock be divided by the business’s earnings for a share. The second sub-method uses the enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA). Enterprise value (EV), refers to the business operations, and does not include debt, excess cash and redundant assets.
EBITDA represents the business’s cash flow (before required capital expenditures) that would be paid out to shareholders. When applying an EV/EBITDA multiple, “the art of it is in choosing the right variables, earnings level and multiple.”
Another available method is the comparable transaction method, which looks at recent sales and purchases of similar but privately owned businesses. The business valuator will determine which businesses are appropriate to use as a comparison to yours and will apply valuation methods such as P/E or EV/EBITDA to determine your company’s value. Due to the differences between your business’s characteristics and those of the business to which it is compared, the valuation might be affected.
Creating a projection of what cash the business can produce at a future date is another possible valuation method. The broker will create this projection with the assistance of the business owner.
Discounted cash flow analysis is a fourth method that can be applied. As the value of the cash received in the present is not the same as cash received at that future date, the cash flow must be discounted to assess the cash’s current value. This is a complicated process and is best applied by an experienced valuator. It involves estimates such as how much your company will grow and what are the costs and profits that can be expected over the next few years, and related risks.
The sale of your business will also affect your employees and possibly your legal obligation to them.
When a purchaser is simply buying the assets of a business, there are not necessarily any obligations to the employees unless the purchaser offers employment to those employees. He says that if employees are offered employment, they can accept or decline. If they accept, you, as the purchaser, assume their years of service. If there is a share deal the purchaser steps into the shoes of the vendor and this means buying the corporation with all of its warts and obligations. A seller of a business is obligated to disclose employee contracts to a potential buyer in most transactions.
In an asset sale, the seller will be liable for the severance costs associated with employees who decline, or are not offered, employment with the purchaser. These costs will depend on many factors, such as whether or not the employees have written employment agreements which specify their entitlements on termination.
Employees might be entitled to claim more than the minimum notice and severance pay provided for under employment standards legislation. There may be costs associated with providing incentives to retain key employees pending a sale. Purchasers, she advises, should keep in mind that any collective agreement associated with the business may become binding on the purchaser following the sale.”
Selling your business is more than just a sale of machinery. It also means a change in lifestyle, identity and relationships with employees and customers. Working with your accountant, business valuator or corporate lawyer will bring a needed element of objectivity into what can be an emotional process.
Mark Borkowski is president of Mercantile Mergers & Acquisitions Corp. Mercantile has been selling mid-market companies for over 34 years.