Home November 2018 Planning Makes Perfect

Planning Makes Perfect

An entrepreneur’s business is always for sale

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The good, bad and ugly – Jeff Cook has seen it all. Yet one case stands out for the partner of Calgary-based professional chartered accounting firm Cook & Company as to why entrepreneurs always need to plan for the future.

In this case, Cook’s clients were aging. Over the years, they’d spark the occasional conversation about putting the business up for sale or turning it over to their children. Yet times were good and the children were not interested in running the business, so the clients didn’t see any urgency in selling.

When the economic downturn hit, the business was impacted hard. The clients were eventually forced to surrender their assets and client lists for next to nothing.

“If we had paid it a bit more attention four or five years ago, we might have avoided that from happening,” Cook says. “Entrepreneurs need to be aware that it takes years of planning to maximize the value of their businesses. It’s not a quick process, and it’ll need constant improvement, constant maximization and maintaining of value, and constant years of preparation.”

Making a business attractive for sale at any stage is a lengthy process, says the experts. Are owners looking to hand the business down to a successor? Are they looking for a full sale because it’s a time in their life to move on? Do they want to stay involved in the business through a partial sale? Are they looking for an avenue to access capital to drive forward the business?

“Business goals could also be related to whether they have planning concerns around group benefits for employees, employee retention or what corporate structure is in place,” says Wayne De Boer, wealth and estate planner with Three60 Wealth & Estate Solutions, a company that specializes in working with business families on wealth and succession planning.

While seemingly obvious, planning is a piece of the puzzle that experts say most owners today are missing until it’s often too late.

“They think someday someone is just going to walk in and offer them a bunch of money for their business. That usually doesn’t happen,” adds Jason Nagel, director of advanced planning with Three60 Wealth & Estate Solutions. “And even if it does happen, owners might be leaving money on the table unless they’ve taken the proper steps to ensure the highest evaluation for the business.”

Grant Brown, a Calgary-based partner with KPMG, says an easy way to think about an evaluation is through capitalization and earnings, which is business earnings multiplied by evaluation multiples.

The real task of achieving this is balancing each of these factors. On the one hand, you want to optimize the earnings of the business at a given time, but on the other hand, you want to ensure the robustness of those earnings and that there’s tangible growth going forward.

“It’s really the stability of earnings and growth of those earnings that drive higher evaluation multiples,” says Brown.

In addition to having up-to-date three-year financial histories, income statements with cash flows and current balance sheets, Brown says business owners should pay special attention to unsustainable costs. For example, any one-off costs that are not ongoing, yet can devalue a business’ evaluation. The same goes for the salaries of owners or stakeholders, which are typically higher than market value and, therefore, can skew overall costs.

Depending on how an owner is using the assets in their business, they may have tremendous opportunity to increase the value of their offering prior to retirement, says De Boer.

“They just need to know if they have redundant assets that they need to get rid of,” he says. “Do the assets that I currently have generate any goodwill for me that I can get on the sale?”

Also, what is the company’s growth plan? Are there any low-hanging fruit that can be put into practice prior to the sale that increases the evaluation? Brown says for businesses at any stage, there are often things that can be incorporated to increase the value of future initiatives.

And don’t neglect to maximize after-tax proceeds. Brown urges owners to invest in a structure that maximizes their tax position ahead of any sales process.

Another step experts urge owners to take is to make themselves redundant. While seemingly counter-intuitive, owners should be able to walk away and still have the proper structures, procedures and staff in place to continue the business’ success.

Purchasers don’t want the value walking away with the vendor, says Cook.

“It’s the largest challenge facing business owners – making themselves redundant. They’re very proud they built these businesses, and it’s usually because of them they’ve been successful. To tell them they need to make themselves redundant is a tough sell,” he says.

Nagel adds if a business can run smoothly once the owner steps away, then the market for sellers also increases.

“They don’t have to be an expert in what that business does,” he says. “But if the owner is vital in that business, when the next person comes in, they’re going to have to be an expert in that particular industry.”

Often, the problem is being able to walk away at all. Nagel says it’s a question he asks all his clients: are you ready to sell your business?

“Sure, one factor is going to be the market. But another factor is your readiness to sell. Are you ready to walk away from your baby?” asks Nagel. “And even if that’s the case, do you have the assets put aside to do so?”

Some owners may want to sell their businesses, but retain the building if they own it. Because of Calgary’s depressed commercial real estate market, many entrepreneurs are creating arm’s-length market-based rental arrangements and becoming landlords until prices pick up again, says Brown.

“We often see owners who want a continued income stream from their real estate properties,” he says.

One thing most experts in the field agree on is Calgary’s business landscape is poised to change once again. Cook points to a generation of retiring baby boomers who are already creating an overflow of “For Sale” signs on the lawns of local businesses.

“There’s a population bump with the boomers, and they are all very close to retirement age if not already there. So, yes, there’s a glut. Take the chartered accountant industry as an example. There are a lot of businesses for sale,” he says, noting, however, it’s not yet having a downward effect on asking prices.

His final piece of advice: “An entrepreneur’s business is always for sale. There might not be a sign up saying that, but you always have to be mindful of growing value and maintaining it in advance of a sale, whether that’s 10 years down the road or next week.”

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