Archive for Selling Your Business

When Should You Sell Your Startup?

In a recent article, Tunguz from Redpoint takes a stab at the age-old question of “when should I sell my start-up?” As most of you have already expected, the answer to that question is unique to different situations. To help figure this out, Tunguz invites the readers to think about a more tangible, but related, question–when is value maximized? Specifically, “when is a company’s value maximized, given a declining growth rate?”

A startup’s value is highly correlated to its ability to grow, the linear relationship between its Enterprise Value and its TTM Growth rate is shown below.

The R^2 between growth and ev/ttm

Given this correlation, Tunguz concludes that “Just because the business grows doesn’t mean it increases its value. It has to grow at a certain rate to be worth more.”

Take a look at the three different scenarios of declining growth rate:

Comparison of scenarios for EV of company when growth rates are falling

In the last scenario, the EV of the hypothetical company actually falls despite a 25% increase in revenue.

So to answer the original question– the best time to sell is before it decreases in enterprise value.  Tungus explains further “Startups are valued for their growth. At some point, if the business can’t grow fast enough, its enterprise value will fall year over year.”
Source: TOMASZ TUNGUZ

Posted in: PE/VC News, Selling Your Business

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Four Triggers that Drive the Sale of Your Business

Triggers that drive the sale of your business

Trigger the Value of Your Business

Events or developments, either sudden or creeping drive a Founder’s decision to sell their business. We like to call these the four triggers: Strategic, Operational, Financial, or Regulatory.

A February 2017’s  Nationwide’s latest Small Business Survey found that three in five small businesses do not have a succession plan in place and there is no reason to believe that the percentages are different in Canada.  In the survey, “small business” was defined as having fewer than 300 employees and in Canada, 90.3% of private employees work for companies with less than 499 employees.

Reasons cited for having no succession plan include:  business owners simply not believing a plan is necessary (47 percent); not wanting to give up one’s life work (14 percent); not knowing when to create a plan (11 percent) or who to work with (11 percent); not having time to develop a plan (11 percent) and being overwhelmed with government regulations (8 percent).

Whether you believe that good companies are bought and not sold really doesn’t matter, if you want to maximize the value of the sale of your business you have to plan and prepare, otherwise prepared to be disappointed.

Here are our four triggers.  Which ones are appropriate for your business now or a risk in the future?

Strategic:

-The industry is being consolidated and the Founder does not have the interest, capital or resources to be an acquirer.

-The Founder is approached by a competitor or financial buyer with an unsolicited offer that is attractive and meets with the Founder view on valuation.

-Unforeseen competitors have entered the market with a business model that disrupts the incumbents. Examples of this would be UBER disrupting the taxi industry, Airbnb’s disruption of the accommodation sector or Netflix disrupting the home movie and video game rental business.

-The industry’s largest competitor is spending tens of millions of dollars on state-of-the-art manufacturing equipment positioning themselves to significantly change the cost structure of the industry and your Company is not in a position to respond.

Operational:

-The Founder is looking to retire and as their net worth is almost entirely wrapped up in the business needs to find an acquirer.

-The Founders health is eroding and there is no succession plan in place.

-The Company’s margins are being squeezed by changes in the sources and use of inputs. For example, an IT Services company with large financial sector customers must offshore a percentage of its development work in order to meet RFP requirements or client demands;

-The Company has built its business on enterprise software licenses and has not developed a plan or transition to a SaaS model. Consequently, the entrepreneur is having difficulty attracting the capital required to hire the resources for the transition.

Financial:

-the Company requires investment capital to grow and sources are limited or too expensive.

-e-Commerce initiatives by competitors or suppliers are driving profit margins down. An example could be Amazon’s early entry into the book-selling business, or a Company’s supplier opening an -e-commerce site that now exposes your company’s margin information and sales to your customers.

-The Founder and his wife are divorcing and the family assets must be liquidated.

Regulatory:

-New or changing regulations will change the Company’s growth and profitability opportunities. For example –The US government implements a “Buy American” policy on all new infrastructure projects, severely hampering a Canadian company’s export sales;

-Changes to Cross Border Services Agency (CBSA) regulations or Carbon Tax implementation negatively impact Company profit margins.

 

Posted in: Q1 Blog, Selling Your Business

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10 Initiatives to take to increase the Sale Value of your business: Part 1

It’s never too early to start planning your exit. In fact, early planning and implementation will not only give you time to focus on those areas of the business that can be improved in order to make the company more attractive to prospective buyers, but early planning can also result in a higher valuation.  Additionally, by implementing an early and ongoing process of review, improvement and preparation your company will be in a position to quickly respond to any unsolicited but attractive offers.

In Part 1 of our series we are going to briefly outline 10 steps that a founder or entrepreneur can begin to implement today that will enhance the value of their business at time of sale.

 

  1. Identify and meet with the team of professionals that will work with you to help prepare your company.  This team should include your tax accountant, your tax accountant, your lawyer and your investment banker.

 

  1. At least 2 years out you will want to ensure that you have the optimum ownership structure in place in order to minimize taxes on the sale.  Early planning and implementation of certain steps to minimize taxes on sale should take place at least 2 years prior to the actual sale of a business.   Ensure that your sale will qualify for the Qualified Small Business Corporations (“QSBC”)  test by removing all redundant assets from the business if they exceed 10% of total assets.  For example, establishing Family Trusts that hold shares in your corporation would allow the beneficiaries of the Trust to take maximum advantage of the CRA’s lifetime capital gains exemption of up to $824,177. (2016 indexed)

 

  1. Evaluate and if necessary, upgrade management team. Too often, the founder or entrepreneur is the key to customer and supplier relationships, a fact that creates risk and uncertainty for prospective buyers.  Your objective should be to build the strongest management team possible with the objective of ultimately making yourself redundant.  With sufficient lead time, you can make the right decisions to replace and upgrade members of the team so that your firm is operating on all cylinders.  And while you’re at it, if you are planning on selling your company to an arms-length third party you may want take the necessary steps to ensure that your team is not built on nepotism.

 

  1. Understand the key company attributes that buyers look for that will increase the value of your exit:
  • Predictable revenue growth and profitability – year-over-year swings in revenue and profitability will negatively impact your selling price;
  • Quality of revenues and length of contractual agreements – recurring is better than one time revenues and long term contracts increase value;
  • Sources of revenue – product versus services;
  • Reduce customer concentration – no one customer should account for more than 25% or revenues and the top three customers should not exceed 50%;
  • Reduce reliance on a limited number of suppliers – a supplier accounting for 40% or more of product increases risk to the buyer and results in a lower price.

 

  1. Reduce your working capital needs and tax efficiently move excess cash off your Balance Sheet.  You should be looking to lower you AR balances and Days Sales Outstanding, reduce inventory levels and sell off obsolete and increase AP levels to the maximum accepted levels. Acquirers often look for a certain level of operating working capital to be left in the business on close so the lower your net working capital requirements and the longer period that these levels have been in place means more money in your pocket.

 

  1. Put in place a cost control program.  We’re not talking initiatives like reducing R&D expenditures to increase earnings or delaying the purchase of capital assets necessary to generate your revenues but rather a complete review of all expenses, items like company cars, travel expenses, software and hardware purchases.  It’s important to understand that in many cases your Company will be acquired at a multiple of EBITDA, cash flow or net income.  Every dollar that you save can translate into X times that amount on the sale.

 

  1. Depreciate rather than expense:  Companies often have accounting policies whereby they expense capital expenditures below a set limit rather than capitalize the assets and depreciate over time.  From a tax perspective this makes total sense for most business owners but if you are two or three years away from selling your business it may be a good idea to implement a change in accounting policy and begin to capitalize and depreciate a number of these purchases.

 

  1. Identify any contingent liabilities and take steps to address these issues. For example, are you aware of the possibility of a lawsuit related to service or product problems or do you have concerns related to environmental impact issues such as fluid leakage on your property?  Failure to address these will result in a lower price on sale so take proactive action early.   Make a list of all business items of concern, challenges within the business and “skeletons in the closet”.  You want to be able to disclose negative information early on in the process with your buyer but at the same time have logical answers or solutions to these items.  Do not think that these issues can be swept under the rug and hidden from potential buyers.  They will either discover these issues during due diligence whereby trust issues arise between buyer and seller or they will be covered off in  the Representation & Warranties section of the Purchase Agreement and could come back to haunt you in the future.

 

  1. Review, document and contract all Employee matters:  Have all employees signed Employment Agreements and Ensure that you have valid and signed contracts with all employees and contractors who have in ANY way been involved with design, development and engineering of any Company intellectual property.  Are non-competes in place with key employees.  Ensure that you are not mischaracterizing employees as independent contractors.

 

  1. Keep the company running:  There is nothing like a drop in sales or earnings to put a deal on hold and in the business of selling your company, time equals risk. Finding the right buyer at the right price takes time and sometimes for reasons outside of your control transactions don’t take place.  While you are proactively implementing the previous nine steps you must ensure that you do not take near term decisions that could negatively impact the long term growth and profitability of your firm.   It’s easy to get distracted during a deal and few business owners truly understand the time, resources and effort that go into successfully completing a transaction.  Owners should seriously consider hiring an Investment Banker or Agent to prepare the company and manage the sale process while the owner continues to operate the business.

Posted in: Selling Your Business, Value Creation

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Tips For Selling Your Company

The vast majority of Canadian entrepreneurs will monetize the value of their many years of hard work and sacrifice by selling their company.  Few will be candidates for the public markets, despite what one might hear about the benefits of being public.  Of those that do go public, only a small percentage will ever successfully attract the type of long-term, deep-pocketed, patient investors that make for a successful public company.

We often hear advisors espouse the view that “Good companies are bought, not sold.”  We believe that this view does not fairly portray the impact that a well prepared entrepreneur can have on the ultimate sale value of his or her business.  Sadly, we all too often see business owners who fail to plan and prepare and consequently do not step up and sell the value of their business to a prospective buyer, thus never realizing top dollar for their company.  So the questions you have to ask yourself are: how do you maximize the value of the sale and are you prepared to take the necessary steps to get you there?

Preparation, presentation, and commitment to the process are crucial to maximizing valuation and increasing the probability of success.

Below, we have listed just a few of the decisions that you have to make as you begin the process.

To begin the process you have to first decide if you are going to engage an investment banker to represent you or if you are going to sell the business on your own.  Once that decision has been made a plan must be put in place to drive the process.  If you decided to hire a banker they will lay all of this out for you.  If you decide to go it alone then you probably already know all of the following steps to take.  Just keep the following in mind:

Firstly, CEOs should do what they do best: concentrating on running the business.  The state of the business during the sale process can have an enormous impact on the ultimate agreed-upon sale price of the company.  Slowing or declining sales or profitability that does not meet forecasts or expectations can delay the process, reduce the offer, and even kill the deal.

Secondly, CEOs rarely have the experience to manage a sale process.  It’s not what they do for a living and for many this is the first time they will have sold a business.

Identify and engage key members of the team:

  • Investment Banker
  • Lawyer
  • Accountant
  • Key members of the management team or Board/Advisors

Identify, discuss and agree on the following:

  • Ensure alignment with all key stakeholders
  • Establish time table
  • Determine valuation expectations and enterprise value
  • Complete necessary tax planning (if not already in place)
  • Identify unique factors impacting exit options
  • Establish key milestones that have to be achieved
  • Identify key relationships that have to be solidified
  • Identify key contracts that have to be won or completed

Required Preparation (just a few of the items to think about):

  • Prepare Due Diligence binders
  • Review contracts – (current, signed, identify change of control issues)
  • Review licenses and any open source code compliance
  • Ensure financial information is current – taxes paid, banking relations strong, etc.
  • Review and challenge budget, forecasts, and assumptions
  • Put in place a process to benchmark competitors
  • Gather intelligence on potential buyers
  • Identify key challenges or problems
  • Address concerns around confidentiality
  • Identify and deal with any “skeletons in the closet”

Valuation, Terms & Conditions: At the end of the day, the only number that really matters is what a buyer is willing to pay for your business.  You can look at valuing your company by Discounted Cash Flow, Net Book Value, Liquidation Value, Replacement Value, comparables of recent transactions, public company comparables with multiples of sales, EBITDA, or net income but it all comes down to what someone is willing to pay and then it’s up to you to make the decision.

The value of your business is a moving target.

Valuation is both an art and a science.

What we have attempted to do is put together just a small number of the issues that must be dealt with as you move into a sale process.  Q1 Capital has been successfully meeting the unique M&A and financial advisory needs of private Canadian companies for the past fourteen years.  We are known as straight shooters, honest, persistent, and have an excellent track record for execution.  Give us a call.  We’re always happy to learn about your business and assist you in understanding the value of bringing Q1 Capital on board.

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These are some questions you are going to want to answer if you are thinking of selling your business yourself.

Business owners are often uncertain as to whether they should attempt to sell their business themselves or hire a banker to manage the process.  On one hand, the business owner looks at the process of selling a business and may think that the skills that they have used to build and market their business and products are the same as those necessary to sell the business.  On the other hand, having a banker run and complete the sale sounds expensive.  If you’re wondering where to start in your decision making process, take the time to honestly answer the following questions.  Some of the answers may be easy, some a little harder, but if at the end of the process you have not arrived a clear set of answers then it’s time to meet with a couple of bankers.

  1. What experience do I have in selling a business? It’s important to understand that selling a business is not like selling a house.
  2. What is my business worth and how do I support my view on valuation?
  3. Who is going to acquire my business?
  4. How long will it take to sell my business? Do I fully understand the time and resources it will take for me to sell the business?
  5. Can I operate my business, look for a buyer, and manage the entire sale process at the same time?
  6. Am I a good negotiator?

Posted in: Selling Your Business

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