Your Money: The process of selling your business — Part 1
By Medicine Hat News on September 1, 2018.
If you are not planning to transfer your business to family members or working with your employees to structure a sale to them, one of your options for business succession may be to sell your business to a third party. This column will explore some of the steps involved in the sale process should you engage a professional intermediary (investment banker or business broker) to sell your business to third party. A professional intermediary will act as an agent, assisting you in the sale of your business. There are several advantages to employing an intermediary: It allows the seller to maintain confidentiality; provides access to industry-specific contacts; and saves time by dealing only with qualified buyers. Step 1- Engaging the Intermediary. During the initial meeting, the business intermediary will explain the services they can provide to help you sell your business as well as provide details regarding their compensation model. Once you have decided to engage a business intermediary, you will normally be asked to enter into a formal agreement whereby the intermediary will be engaged to represent you in the sale process. Provisions of an “Engagement Agreement” can vary but typical terms of the engagement will include the following: A definition of the scope of the engagement; a list of general responsibilities; a confidentiality and non-disclosure clause; a termination of representation paragraph; and details of the compensation model (upfront fee, percentage of completion basis or when the transaction is completed). Step 2 — Establishing a Value for the Business. A business valuation will be done either by the intermediary as part of their consulting work or by an independent third party business valuator or by your own accountant. It is important to determine the estimated fair value of the business to understand what amount of proceeds can be expected from the sale. This information is critical to the development of suitable financial and retirement plans. Some business owners may be prepared to accept the best offer on the market and choose to bypass the valuation. This decision could affect their ability to negotiate with potential buyers and possibly result in less than optimal value being received for their business. Step 3 — Preparing the Corporate Memorandum. You will be asked to furnish information about your company so that the professional intermediary can complete a Confidential Information Memorandum (CIM). This document will include the following corporate highlights: Marketing plan; operations plan; financial data; and potentially a growth plan. The Confidential Information Memorandum will also include corporate financial statements for the past 3-5 years (income statements and balance sheets) as well as pro forma projections for the next 3-5 years. The document can vary in length from 20-100 pages depending on a variety of factors. This step can take anywhere from six weeks to three months and can run concurrently with Step 2. However, your decision to move forward may change depending on the results of the business valuation. This is meant to be a very general overview of a process that is very detailed and complex. The whole process from beginning to end can take anywhere from 6 months to 3 years depending on the market conditions and the price the business owner is seeking. For many business owners, their business is their most significant asset and they should exercise care and patience in going through a proper process to sell their business. Using an intermediary to sell your business may not be necessary in all third party sales but it should definitely be considered. For a further discussion around your investment and estate planning issues, contact Neil Mardian, M.Sc. (Mgmt) CFP at 403-504-3026 or neil.mardian@td.com 10-9
