The recession has thrown many business owners off track, leaving them unsure and unequipped, akin to driving in an unfamiliar area without a GPS or map or navigating the wilderness without a compass.
For many who've lost 25% to 50% of their savings in the market, the paved road to retirement is now full of potholes. Do they keep on course, or take a detour?
Business owners want to know: should I wait a few years before I sell my business or should I go ahead and sell my business now? If you own a business, maybe it's a question you've been asking as well.
If you can afford to retire with the proceeds of the sale now, do it now:
- There is a good market for quality businesses. Businesses that are currently performing well are selling at the same multiples as before the recession. Those that are under performing are selling at lower multiples than they would have prior to the recession.
- There are many more buyers chasing fewer businesses. It's true that buyers have also lost part of their savings in the markets, leaving them with less cash for a down payment. However, with downsizing, rightsizing, plant closures and layoffs, there are more individuals actively seeking out other means to support themselves and their families.
- You may have to finance a bit more of the transaction than a couple of years ago but if the business is performing well, you will get top dollar. Vendor financing can add as much as 30% to the price of your business and you get the interest on the financing on top of that. Most small business sales in Canada are financed 50% by the seller, with a note that runs three to five years . They can also be financed in part through the Canada Small Business Financing (CSBF) program or a loan from the Business Development Bank of Canada (BDC), with the seller providing a note for 20% of the transaction.
Waiting a few years is risky and may result in a much lower price
Maybe you've landed in one of those potholes. You don't have enough to retire on and selling your business will still leave you short. You're stuck managing your business a few more years to make up the losses. It's your only choice. You need to understand the consequences of that decision, though.
A few years from now, you'll have to share the road with many more sellers:
- With the convergence of business owners deciding to wait before selling and the very large number of baby boomers then starting to retire, we believe there will be many more businesses available than there are qualified buyers. This will lower prices and make it much more difficult to sell.
- Both the Canadian Imperial Bank of Commerce (CIBC )and the Canadian Federation of Independent Business (CFIB) have predicted a mass exodus of business owners over the next seven years. Delayed by the recession, this is creating pent up demand. The number of retirements from business ownership starting three years from now will create the largest transfer of wealth ever seen in our country. It will also create a great glut in the market for the sale of businesses.
If you can't sell and retire on the proceeds now, you might want to consider the following options:
- selling and staying on as a contract employee for a few years ;
- merging with a larger firm and staying on for a few years managing the current operation;
- selling to a Private Equity Group and staying on as the CEO for three to five years. There are many such groups with significant funds to invest. They typically look for businesses with $10M plus in revenue and $1.5 million in earnings before interest, taxes, depreciation and amortization (EBITDA) . An EBITDA as low as $500,000 may be considered if they plan to add the purchased business to a similar existing operation.
An experienced Certified Business Intermediary (CBI) or a qualified Mergers and Acquisitions Master Intermediary (M&AMI) can assist you in these decisions. It is important to think about it now and not put off the investigation and initial steps.
Start by knowing what your business is worth
You need to know what you are likely to get for your business before deciding to sell. A professional Business Valuation will accurately reflect market conditions and help you decide whether this is the right time or not.
A valuation has additional value.
In many cases the Business Valuation identifies what you have to do over the next couple of years to make the business worth what you want to get for it. It is also useful for your structuring and tax planning decisions, some of which can take two years to implement.
Protect your wealth
After completing the Business Valuation (step 1), discuss the various options with your Business Broker and involve your accountant or tax lawyer and wealth planner. You need to understand the tax implications of these options and the various investment strategies and products to determine if a sale now can achieve your personal goals. Do not be fooled into thinking that the market for businesses is going to be better a few years from now. Your business may be better but unless it is a lot better that does not mean you will get more for it.
Your Business Broker should be able to identify the changes and improvements you could make to quickly add value to your business. With your accountant or tax lawyer and your Business Broker you can also address the longer-term changes that would not only make your business better but would result in your keeping more of the proceeds of a sale.
The decisions facing business owners considering retirement are significant and only you, the business owner, can make them. You need to be asking the right questions and taking the appropriate actions now, before the mass exodus starts.