A flood of small business owners are ready to sell. Most are not prepared. The good news!
From Globe & Mail January 2019
If you’re planning to sell a business in the next few years, you’re not alone. And that’s not good news for you. As Canada’s baby boomer-dominated small-business owners age into retirement, the market is becoming uncomfortably crowded.
According to a 2017 report by the Business Development Bank of Canada, nearly half of Canadian entrepreneurs plan to exit their business within five years. Add another five years, and that number will grow to three-quarters, according to the Canadian Federation of Independent Business (CFIB).
That buyer’s market is already having an impact.
“Between 2012 and 2018, the number of businesses who just planned to close outright, rather than sell, tripled, from five per cent to 15 per cent,” says Corinne Pohlmann, senior vice-president of national affairs at CFIB. “What worries us is that they’re not finding buyers, and then their only option may be to shut down.”
Additionally, most entrepreneurs tend to put their businesses on the market long before they are ready – for example, without first bolstering lacklustre financial statements or securing relationships with long-time clients in writing. Few have formal succession plans, Ms. Pohlmann says, and many also tend to let their revenue slip in the years before a sale.
So, in that field of under-prepared businesses, it can be easier to stand out if an entrepreneur has the patience to proceed with the months – or years – of preparation needed beforehand.
Colin Ruskin learned that lesson in 2005, when he went in search of buyers for Markham, Ont.-based Microdea Inc., a document imaging company he had spent more than a decade building. He quickly realized that his experience founding and operating a successful business hadn’t prepared him to exit it, in large part because he had given little thought to how the company would operate without him, or if it could.
“It was like a lot of small businesses, where the founder does everything,” says Mr. Ruskin. “A lot of business owners take pride in their personal relationships with customers and suppliers." But, he says,what a buyer really wants to see are customer relationships that can survive the owner’s departure. "That experience really opened my eyes.”
That’s a lesson the former owners of Fulcrum Media preach as well. In 2013, owners Russell Hoffman and Alan Fogel decided to put most of the 18-year-old, Toronto-based family business’s assets – including B2B magazines and trade shows – up for sale.
“We built a really good team and delegated responsibility,” says Mr. Hoffman, “so when it was time to sell, we weren’t involved in the day-to-day.”
They had also identified a likely buyer: another family-owned B2B publisher, based in the United States, which they hoped would protect the business’s legacy, brands and nearly 50 employees. But even then, striking the deal took more than a year, as the buyers combed through Fulcrum’s financials, history, customers and market position.
”It was very much a marathon, not a sprint,” says Mr. Hoffman. “You need that patience as the other side is doing its due diligence.”
Mr. Ruskin says sellers should be prepared to be asked "a lot of painful questions. Everything is on the table – the quality of receivables, customers, patents, longevity of staff, IP [intellectual property]. Everything is an opportunity to go down another rabbit hole.”
At Fulcrum, that meant keeping sales representatives working hard and solidifying relationships with clients and suppliers – in writing. Says Mr. Hoffman: “Buyers want to see re-signed annual contracts and committed revenue.”
Mr. Hoffman and his partners kept the news of their transition confined to a small circle. They also developed a divide-and-conquer strategy, assembling a “deal team” of advisors and accountants who handled most negotiations. They credit that external expertise with much of their success.
“During the sale, the business is still operating,” says Alexander Shteriev, a business broker with Toronto’s Beacon Mergers and Acquisitions, and one of Fulcrum’s advisors. “Some assets were outperforming, some under-performing, so we were keeping both parties well aware of everything that could affect the deal.”
Ultimately, Fulcrum’s accountants drew up a formula whereby the company’s working capital would be tracked. If by the end of negotiations it fell outside a certain range, there would be an adjustment at the deal’s closing. “We’d never have managed that deal on our own,” says Mr. Hoffman.
Fulcrum’s owners went out of their way to ensure they had found the right buyer. But more sellers have begun looking inside their own companies for the right successor, Ms. Pohlmann says.
That’s the option that Norm Kellert, founder of Edmonton-based Rebel Heart Trucking, took in 2013.
Josh Laczko was able to take over Rebel Heart Trucking through a leveraged buyout, quarterbacked in part by advisors from MNP LLP, an accounting and advisory firm in Calgary.
The previous year, Mr. Kellert had hired Josh Laczko as a part-time worker and was impressed with his reliability, knowledge and overall competence. Mr. Laczko built relationships with staff and clients and gained experience throughout the business, allowing Mr. Kellert to slowly step back.
Just as with Microdea and Fulcrum, negotiations took longer that anticipated: Alberta’s economic downturn took its toll, the pair disagreed over how to value the business, and they had to determine how Mr. Laczko, who had little wealth of his own, could pay for it.
The answer was a leveraged buyout, quarterbacked in part by advisors from MNP LLP, an accounting and advisory firm in Calgary. Rebel Heart’s assets were put up as collateral for a loan to Mr. Laczko, and the pair agreed on a vendor take-back agreement, in which Mr. Kellert would get the business back in the case of a default.
“It involved a lot of risk on my part," Mr. Kellert says, "and I had to believe in my company, and that Josh was the right guy.”
That kind of gut feeling has a role to play in those decisions, says Mr. Ruskin, who sold Microdea in 2013 and today helps other entrepreneurs with their own transition planning. But it’s not a substitute for step-by-step planning.
“A home buyer is emotional,” he says. “A business buyer is not – they’re rigorous, diligent and prepared.
"Selling your company is probably the biggest single deal you’ll ever make, and it’s amazing that the opportunity to do it right is so often under-appreciated until it’s too late.”