Five Ways to Maximize Value on the Sale of Your Business

Are you considering selling your business? Recent economic conditions in Canada have impacted M&A transactions in 2023. Rising interest rates have placed downward pressure on valuation multiples, and lingering impacts of COVID-19 are being scrutinized as purchasers dig deeply to understand how the global pandemic affected businesses. Transferring a business to a child has become more attractive with Bill C-208 and potential significant tax savings, but the trend of fewer intergenerational transfers is still prevalent.

Despite these challenges, there is good news. There are still plenty of purchasers for your business in the market. However, these purchasers are seeking prime opportunities and businesses that are well-positioned for a successful sale. So, if you are thinking of selling your business, our years of experience have proven that these are 5 ways to reliably maximize value on the sale of your business:

1. Ensure a healthy cash flow – Typically, a potential purchaser will be utilizing an income approach as their primary valuation methodology. This method involves the potential purchaser deriving the value of your business by reviewing the historical and forecasted financial information available for the organization. This is to assess the maintainable cash flow on a go-forward basis. In short, more cash flow is key as it translates into more value for your business. To maximize the cash flow presented, you should be (1) eliminating all discretionary, non-business expenses, (2) streamlining operations by looking for leaner processes and (3) recording all sales. Businesses that have stronger levels of cash flow sell for higher prices. It is that simple.

2. Build a strong management team – A well-established management team is essential for purchasers acquiring your business. The first question that we get asked by purchasers is “Does the owner have a strong management team in place?”. Essentially, prudent purchasers want to ensure that there are capable people in place who can operate the business smoothly and successfully aside from you. Prior to a sale, you need to think about taking a step back, altering job responsibilities, and mentoring key staff, so you can transfer your personal goodwill into commercial goodwill. Transactions involving well-established management teams are less risky, which increases your business value for the following reasons:

Smooth transition between ownership;

Management has a strong understanding of the business;

Cash flows are not directly associated with the owner; and

Purchaser does not have to be directly involved in the day-to-day operations of the business, which increases the types of potential buyers for the organization.

3. Practice good financial reporting/accounting – As they say, “you never get a second chance to make a first impression.” It is critical that the financial reporting/accounting for your business is sound and up to date, including tax and financial statements, or other compliance filings. Potential purchasers will be relying on this information to make an investment decision or offer for your business. Furthermore, having timely and accurate financial statements is imperative for you to make informed business decisions that will impact the valuation of your business. There is nothing that raises concern more for purchasers than a business that does not have its financial house in order.

4. Lock in contracts – Having secure lucrative long-term contracts in place with customers, suppliers, and key employees is very attractive for a potential purchaser. Long-term contracts with customers provide a purchaser with confidence that the underlying cash flows of the business will be generated in the future. Long-term contracts with suppliers provide a purchaser with some cost certainty in future operations. Finally, long term contracts or incentives with employees give a purchaser comfort that the key people involved in running the business are invested for the future after a transition occurs.

5. Develop a good working relationship with the purchaser – Ultimately, you decide who you sell your business to. However, at some point in the process, you will be required to reveal more detailed information in due diligence with an exclusive purchaser. This is always challenging for business owners. As a purchaser is learning more about your business throughout the process, you need to do the same. You need to have a good relationship with the purchaser and to trust that you can safely disclose the information they require. Also, our experience has shown us that the more difficult you make the process for a purchaser, the less likely it is that a deal will close at a higher value. In that regard, a good working relationship with the purchaser is paramount and can help immensely in bringing your transaction to a successful completion.

We highly recommend using an advisor when you are selling your business. An advisor can execute on many critical tasks, including helping you understand the value of your business, connecting you with the best buyers in your market, developing an exit strategy, and maximizing the terms of a negotiation so that you get the very best outcome possible. In addition, selling your business is a long and emotional process. Having an advisor can help ensure you keep your hands on the steering wheel running the day-to-day operations of your business during the sale process.

Please contact Steve Bragg, FCPA, CA, CBV or Garrett Vincent, CPA, CBV of our Transaction Advisory Services Team at MC Advisory to discuss this topic or other Transaction Advisory Service opportunities.

MC Advisory has prepared this document for information only; it is not intended to be business advice. You should consult MC Advisory about your unique circumstances before acting on this information.

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