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
- 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.