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7 characteristics of successful exporters

There may never be a better time to take your business abroad and tap into new markets. While scaling up to go global does present unique challenges for smaller businesses, the ones that are willing to navigate those challenges are likely to be rewarded with new growth opportunities in these markets.

  1. Their products and/or services are successful domestically
  2. They have a solid domestic business plan with proven effectiveness
  3. They have specific advantages over the competition
  4. Their products and/or services are unique in one or more ways
  5. Their products and/or services are competitively priced
  6. They are willing to invest resources of time, people and capital without return for a period of time. Entry into new markets may require two or three years of effort before showing a profit
  7. They are sensitive to and aware of the cultural differences of doing business in other countries

IRAP

The Industrial Research and Assistance Program (IRAP) is a federal grant program administered by National Research Council (NRC). IRAP funds a wide variety of activities including first-time Canadian patents, new technology development, prototypes, market feasibility studies as well as many others. The program can be a significant source of funding for Canadian companies that are attempting to develop and commercialize new technologies, products, and processes.

Applying for an IRAP grant can be a daunting task due to the amount of planning, documentation and preparation that is required. Looking to get IRAP just once, in the majority of cases, simply is not worth the undertaking. On the other hand, IRAP can provide funding for projects year after year for as long as the participant can demonstrate organizational growth in terms of revenue, Canadian employment etc.

OIDMTC

The Ontario Interactive Digital Media Tax Credit (OIDMTC) is a refundable tax credit available to corporations producing interactive digital media products in their Ontario offices. Qualifying products have to be addressed to the general public and should educate or entertain its users.

Under the OIDMTC program, eligible corporations can claim back up to 40% of qualifying product development costs incurred within three years immediately preceding the product release date. The first $100,000 of product marketing and distribution expenditures may also qualify for OIDMTC. There is no cap on the product development expenditures and the applicant corporation does not have to be Canadian owned to qualify. Compared to SR&ED tax credit, OIDMTC covers a wider array of expenses, and many costs not eligible under SR&ED are eligible under OIDMTC. Many of our clients claim both OIDMTC and SR&ED and take full advantage of both programs.

Canadian Government Funding for Export Expansion

To fuel export expansion efforts, Canadian business grants are available to help improve Canadian businesses’ export presence, including coverage for the following projects:

  • Product certifications and industry standards;
  • International trade shows and related expenses;
  • Outbound and inbound trade missions;
  • Translation of marketing materials;
  • Market research and competitive analysis;
  • Purchase and implementation of capital equipment to support increased exporting and
  • Hiring of employees related to international market development.

SR&ED – Up to 65% cash reimbursements on R&D expenditures

The Canadian SR&ED program offers significant funding for Scientific Research & Experimental Development activities carried out in the course of your business. For small Canadian-controlled private corporations (CCPCs) that meet the eligibility criteria, the SR&ED Tax Credit Program acts like a government grant—offering cash reimbursements of up to $1,000,00 for eligible expenditures on an annual basis at rates ranging between 28% to 64%, depending on the province in which you file a claim. Large, foreign-controlled or public companies, as well as individuals and partnerships, that are not eligible for the federal refundable tax credit can qualify for a 15% non-refundable federal SR&ED tax credit.

Eligible Companies

The SR&ED program is available to any business operating and carrying out R&D in Canada. Certain expenditures for SR&ED performed outside Canada are also permitted.

Any business that is involved in basic or applied research, or in advancing technology in order to improve or develop new materials, devices, products or processes may be eligible under the SR&ED program.

The businesses that are eligible under the SR&ED program fall into three groups:

1. Canadian-controlled private corporations;

2. Other corporations; and

3. Proprietorships (individuals), partnerships and trusts.

1. Canadian-controlled private corporations (CCPCs)

If you are a CCPC, you may receive a refundable investment tax credit (ITC) on your qualified SR&ED expenditures. You must first apply these ITCs against taxes payable in the year of the claim. The balance may be refunded.

The rate of refundability is based on your taxable income and taxable capital in the previous year and an expenditure limit.

2. Other corporations

For other corporations, the ITC is 20% of qualified current and capital SR&ED expenditures. The ITC may be applied to taxes payable and is not refundable.

3. Proprietorships, partnerships and trusts

For proprietorships, partnerships and trusts, the ITC rate is 20% of qualified current and capital SR&ED expenditures. After applying the ITCs against taxes payable, you may receive a cash refund on 40% of the balance of the ITCs earned in the tax year.

Why Do Corporate Buyers Buy instead of Build?

Market Share Increase market share faster & with less risk to be the leader.

Management Top quality people with creativity, experience & know-how.

New Market Penetrate new markets faster & ahead of the competition.

New Product It may be faster, cheaper and less risky to acquire than develop.

Channel Immediate access to established distribution channels.

Competition Eliminate your competition before they eliminate you.

Synergy Overhead, Capacity Utilization, Marketing, R&D & Purchasing.

Investment Maximize return on excess capital by making sound acquisitions.

Customer Base Expand to increase revenue and diversify risk.

Diversification Increase competitiveness (one stop service) and reduce risk.

New Technology Faster, cheaper and less risky in capturing new technology.

Capacity Reduce seasonal impact and maximize capacity utilization

Checklist on Selling a Business

Commitment Verification

Selling a business is an emotional and tedious process for most people. You poured your heart and soul into your business for so many years and yet no one seems to view the value as you do. Backing out in the middle of the process can hurt your business.

Are you sure you (including your spouse/partners/family/shareholders) are totally committed to selling your business? Who should be on the negotiating team and how will the decisions be made when shareholders or partners can’t agree?

Do you really need to sell or are you trying to solve another problem by selling?

Timing

Is it the right time to sell? Have you been preparing to sell? Could you get better price and terms by making some changes? How is the market?

How long does it take to sell a business? Do you know that some businesses have been on the market for more than 2-3 years and have gone through 2-3 different advisors?

Properly planned, prepared and priced business should take about 6-18 months to sell.

Valuation

Can a cardio surgeon successfully perform a heart surgery without a thorough diagnosis?

Getting a professional valuation done before deciding to sell may save you lots of time, money and grief because the market may not be willing to pay what you expected. Privately held companies are valued much lower than publicly traded companies, mainly due to higher risk and lower liquidity.

What are the advantages and disadvantages of using multiples of historical Revenue, EBITDA or Earnings? What are the advantages and disadvantages in using the Discounted Future Cash Flow method? What are the impacts of qualities of revenues, cash flow, customer relationships, tangible assets, brand equity, intellectual properties, employee base, channel relationships and other variables on the multiples or capitalization/discount rates applied in valuation?

The valuation may uncover hidden values and provide useful negotiating tools. The valuator can identify weaknesses to be improved and identify the value drivers that will maximize the sale value. The better-prepared party with more comprehensive information will have an edge over the less-prepared party in negotiation.

Tax Matters

How much do you get to keep after tax? Would it help to know what your tax position is so that you don’t sign an agreement that is disadvantageous to your net proceeds? Should you sell shares or assets? Do you qualify for the enhanced capital gains deduction? Could you “purify” your company to be eligible as a qualified small business corporation? Does it matter whether the buyer is a publicly traded company? What about the GST/HST, Land Transfer Tax and Sales Tax, etc.?

Legal Matters

Are there any restrictions on selling, such as shareholders’ approval or first right of refusal? Do you need to address the issues of employee benefits, employee share options and severance arrangements? Do you have any contracts that require third party consent on sale or change of control (e.g. landlord or bank)? Will there be any regulatory requirements under the Securities Act, Investment Canada Act or Competition Act? Have you consulted your lawyer on what representations and warranties you are prepared to give? Do all shareholders or partners agree on the representations and warranties?

Employees

What will happen to employees after the sale? When should you tell them? What if key employees leave before the sale? Will the leak damage employee morale and customer loyalty? What are your options when a buyer requests certain employees be terminated before the closing? What are the implications?

Liabilities

Are there any issues that may kill the deal at the last minute? Have you reviewed your environmental, litigation, tax and product warranty obligations, etc.?

Capital Expenditures

What has to be done to maintain the business and what can be deferred? Will any of the capital expenditures pay off in time?

Keeping It Up

Can you keep up the business while spending time on the sale process? What can you do to make sure your sales and gross margin do not decline? Do you expect to lose any major customers in the near future? Declining sales will put a damper on selling your business and losing a major customer will kill a deal.

Professionals

Do you have the time and the know-how to sell on your own or should you hire professionals? Do you know which professionals are needed and when? Many sellers bring in their advisors too late. What roles do a valuator, lawyer and tax accountant play? What are the costs of each professional? The fees may be fixed, contingency based, hourly based or a combination. Most professional firms require a retainer.

Value Enhancement

How much will fine-tuning and upgrading your business increase the value? Do you have a management information system (MIS) that generates timely, accurate and useful information? Do you have an accurate costing system that tracks profitability by product line and by customer? Do you have capable managers that will stay and work with new ownership? Do you have any redundant assets that do not contribute to value? Do you need to remove shareholder payables, personal properties and non-operating payables?

Housekeeping

Is your corporate house in order? Is your business in tip-top shape – physical appearance, information, documentation and regulatory compliance? Does your business give the impression of a well-run business? Do you have deficiencies that a buyer might use to negotiate? Could you dispose excess or obsolete inventories? Could you collect accounts receivables and keep them current? Could you lower the working capital requirement?

Normalization (Adjusting for Unusual/Unnecessary Items)

Do you have excessive salaries, bonuses, perks and one-time expenditures etc. that should be adjusted for? Can you justify all adjustment items in your normalized statements?

Expectation & Pricing

The final price will vary depending on the number of buyers, buyer motivation, buyer type, vendor financing, earn-out, management contract, representations and warranties. Is your expectation in line with the market? What would you do if no one submits an offer that is anywhere close to your expectation?

Asking Price

Should you quote an asking price or not? How do you avoid over pricing or under pricing? Can you get someone to submit an offer without an asking price? What would you do if the market conditions and company circumstances change (e.g. substantial increase/decrease in sales)?

Sale Process

Will the auction approach be better? How do you get multiple offers to have buyers compete against each other? What if no one bids?

Packaging

What should be included in the information package – History, Industry, Market, Economy, Products, Customers, Management, Facilities, Financials and Future Outlook? When should the sensitive/competitive (customer names or intellectual property) information be released?

Buyers

Who would be the logical buyers and why? What are the differences between the strategic buyer, synergistic buyer, financial buyer and job buyer? How should you approach them? Is there some strategic fit, synergy or growth opportunity? Do you know the buyer’s position and motivation? Can you quantify the synergy effect to estimate the buyer’s price? Can the buyer take advantage of weaknesses in your business?

Qualifying

How do you screen out the tire-kickers? Did you know that 90% of inquiries are from unqualified prospects? Do they have sufficient cash or have financing in place? Do they have a focused acquisition plan? Do they have the background or capability to operate the business? Have they bought a business in the past? Why do they want to buy your business?

Confidentiality

How do you let the right buyer know you are selling while protecting confidentiality? Have you got everyone to sign a Confidentiality Agreement before releasing information? Does the agreement contain all provisions that prevent prospects from damaging your business? Have you creatively sanitized or camouflaged your marketing material? Are you keeping track of all the packages given out and details of all people that received information? Are you ensuring the return of all information if they abort? When should you release sensitive/competitive information?

Integrity

Are you being clear and straightforward about the business and reasons for selling? Is the buyer being same? Credibility can be lost quickly after a couple of surprises. Have you developed mutual respect and trust with the buyer that will be fundamental in completing the deal?

Being Current

Do you know what’s going on in your industry and can you present your business in a positive light? Can you defend the negatives that the buyer will try to use for negotiation?

Practice

Have you prepared for buyers’ questions – past performance in sales, gross margins, wages, expenses, capital expenditures, sales breakdowns, obsolete inventory and monthly operating variances, etc.?

LOILetter of Intent

Should you consult your lawyer and tax specialist before signing back on the LOI? Do you think you can reopen the discussion on terms already agreed in your LOI if you find out later that you made a mistake? Do you know if it is truly non-binding? Should you ask for a deposit? How much? Should you ask for a break fee? Should you address the price allocation if it is an asset sale? How much detail should you address at this stage?

Continuity

How long are you willing to stay after the sale? How important is your stay, after the closing, to the business? What if you can’t get along with new owners?

Consideration

Buyers seldom pay all cash in private company transactions. Are you prepared for offers with vendor financing, earn-out, a consulting fee, management/employment contracts, common shares, preferred shares and other combinations? What should be your remuneration if you decide to stay on? What are the tax implications?

Earn-out

Earn-out is a form of consideration based on future performance of the business. Should you agree to an earn-out? Should it be based on the sale, gross margin or something else? Should it be three years or longer? What are the tax implications? The earn-out provision usually takes time to be negotiated, can be subject to disputes after the closing and thus needs to be carefully crafted.

Vendor Financing

Will any one buy without vendor financing? How much are you willing to finance and at what terms? What kind of security or collateral should you ask for?

Exclusivity

Should you give any prospective buyer an exclusive period that forbids you from marketing the business or accepting another offer?

Negotiation

Are you clear on what’s being sold? What are the excluded assets and liabilities? What should you concede on and what should you be firm on? Have you read and understood every detail of the agreement, especially the representations and warranties? Have you calculated the risks and potential consequences of representations and warranties?

Insurance

What happens if the buyer dies or becomes disabled before paying off your note? How do you protect yourself from these possible events?

Final Agreement

Some of the issues to be addressed are: collection of receivables, undisclosed liabilities, minimum level of equity and working capital at closing, audited statements, costs, covenants, representations, warranties and indemnities.

Representations & Warranties

“Reps & Warranties” is about disclosing information and risk allocation. Without certain representations and warranties, buyers will not buy your business. But many representations and warranties are up for negotiation and qualification and a competent transaction lawyer will be valuable in making those decisions. What’s the difference between “to my knowledge” and “to the best of my knowledge”? What should be the time limit (e.g. 3 years after closing)?

Other Agreements

What should be considered in non-compete agreements, real estate lease agreement, employment/consulting contracts and vendor financing agreements?

Government Grants

  • Business Expansion
  • Technology Adoption
  • Hiring & Training
  • Research & Development

The Canadian government grants available to your business depends on your industry, region, and the projects that you’re looking to carry out. Industrial and technology-based firms have the most robust selection of funding programs for business expansion, technology adoption, hiring & training and research & development.

We can help you apply for business grants and loans that will accelerate your business growth. You will simplify the entire funding process, from research to writing, submission, and reporting. Here is one sample from over 100 grant programs.

The Southwestern Ontario Development Fund (SWODF) offers funding for business development and the expansion of SMEs located in the southwestern Ontario region, with a focus on creating jobs, attracting new investments and facilitating new business initiatives. Funding can be used to support projects that involve investing in new capital equipment, developing skills, enhancing productivity, and developing new infrastructure.

Amount:

  • Up to 15% of eligible expenses and up to a maximum of $1.5 million in non-repayable grant funding for projects with budgets up to $10 million.
  • Projects with budgets that exceed this amount may be eligible to receive a repayable government loan of up to $5 million.
  • Up to 1.5M of the loan and interest can be forgiven if project performance targets are hit.

Eligibility:

  • Applicants must have been established for at least 3 years, have 10 or more full-time employees and located in southwestern Ontario.
  • Be incorporated and have at least three years of financial statements. Projects must be completed within a 2-4 years timeline and create at least 10 new full-time positions depending upon project size and company size.
  • Invest at least $500,000.

Eligible Industries:

  • Advanced Manufacturing (automotive, aerospace, plastics, clean technologies)
  • Life Sciences
  • Processing (primary and secondary)
  • Information and Communications Technology
  • Tourism and Cultural Industries.

Geographic Areas:

  • Brant, Bruce, Chatham-Kent, Dufferin, Elgin, Essex, Grey, Haldimand, Huron, Lambton, Middlesex, Niagara, Norfolk, Oxford, Perth, Simcoe, Waterloo & Wellington.

Value & Price Drivers of a Business

There are numerous factors that influence the value of a business and the ultimate price negotiated. Some are internal and some are external. Some are controllable and some are uncontrollable. Knowing these factors and the underlying drivers can help you highlight the business opportunity and negotiate the best price and terms.

Performance History

Many buyers focus on the historical financial statements because of the accustomed comfort in dealing with visible scorecards.

  • Quality of Earnings & Consistent Profitability
  • Growth Rates Higher than Industry norm
  • Gross Margins Higher than Industry norm
  • Consistency in Historical Margin, Pricing and Sales
  • Strong Balance Sheet
  • Healthy Financial Ratios: Liquidity, Turnovers & Return on Sales/Assets/Equity
  • Above Average Industry Metrics: Rev/User, Sales/Sq. Ft., Sales/Employee

Attractive Characteristics

These characteristics are also the end products of capable management that are not directly reflected on the financial statements.

  • Trendy or Socially Appealing
  • Balance in Variety and Focus of Products
  • Direct Relationship to End Customers & Diversified Customer Base
  • Good Labour/Employee Relations
  • Low Working Capital & Low Capital Investment Requirement
  • Facility & Equipment in Good Shape
  • Personal Goodwill Transferability

Industry Attractiveness

The attractiveness of the industry should be highlighted to prospective buyers if they fail to see the positive characteristics of the subject industry structure.

  • High Entry Barriers for New Entrants
  • High Mobility Barriers for Competitors
  • Weak Bargaining Power of Suppliers and/or Buyers
  • Weak Substitutes and/or Weak Competitors

Competitive Assets

Many of the qualitative assets may not be reflected on the financial statements, some of the assets may be in the process of being built and some of these assets may be quickly realized through a merger or acquisition. Management is the most important asset because it is Management that made the choices of assets to be built/acquired and that carried out the execution. It is important to highlight these assets to prospective buyers.

  • Leadership & Management
  • Brand
  • Installed Customer Base with High Switching Costs
  • Good Customer Relationships & Long-Term Contracts
  • Marketing Channels & Relationship Strengths
  • Talent: Marketing, Engineering, Sales, Finance & Operations
  • Technology
  • Facilities & Infrastructure
  • Size & Economies of Scale
  • Integrated Value Chain/Network
  • Access to Raw Material
  • Location & Real Estate

Competitive Capabilities

In order to have superior financial returns, an enterprise needs to present a set of offerings that is most desirable to some set of customers. The enterprises compete on price, quality, speed, performance, image, design and service – the offerings to customers. Low price, high quality or fast delivery in itself is not the competitive advantage. The key is whether an enterprise has the capabilities to offer lower price for the same quality or higher quality/image for the same cost. The competitive assets by themselves do not offer competitive advantage either but it is the ability to combine and use those assets that generates competitive advantage. The types of assets acquired determine the array of competitive capabilities, which in turn are the engines that drive offerings. For example, superior marketing and R&D talents will be capable of a faster introduction of a superior quality product at lower cost. To be successful, Management has to make the right choice on which position to take or capabilities to build because it is hard to be good at everything.

  • Marketing Intelligence
  • Lower Cost Infrastructure: Raw Material, Production, Delivery, Financing & Service etc.
  • Pricing Power & Flexibility
  • Speed of Customer Acquisition, Production, Delivery & Product Development etc.
  • Seamless Customer Experience System
  • New Products Development & Launch
  • New Designs
  • Production Flexibility
  • Logistics Reach
  • Supply Chain Integration
  • Information Systems

Prevailing Market Conditions & Outlook

  • Timing: Peak or Bottom of a Cycle
  • Geographic Risks
  • Financing Availability
  • Demographic Trends
  • Government Regulation

Types of Buyer

Different buyers have different objectives, criteria, cost of capital, hurdle rate of return, cash availability, valuation approach, preference of deal structure, risk tolerance and negotiation approach. All of these factors influence the ultimate price.

The Strategic Buyer is looking to buy for one or more of these reasons: additional capacity, new product line, new technology, talent, geographic expansion, vertical integration, industry consolidation and cost reduction synergy. The Investor/Financial Buyer is buying because it is a good long-term investment or a “flip” opportunity. The Entrepreneur/Job Buyer is looking to run the business himself/herself, perhaps with family members.

Buyer’s Knowledge, Skills & Strengths

  • Buyer Credibility & Financial Strength – Higher Cash portion & less Risk on VTB
  • Reputation & Enhancement Capability – Seller’s comfort on the Earn-out provision
  • Seller & Buyer Degree of Motivation
  • Negotiation Skills
  • Time Pressure – who has less time?
  • Number of Buyers – Does the buyer know how many are competing?

Strategic Buyer’s Motivation

The ultimate objectives for most buyers are basically profit and shareholder value.

The acquisition may provide the competitive assets and capabilities to enhance these objectives. Some of the benefits may be unit cost reduction, pricing flexibility by eliminating a competitor, enhancing product bundling, gaining new talents, accessing better channels, immediate capacity expansion and enhancement of bargaining power.

Quantifying the acquisition benefits or synergy will help the seller in negotiating a deal. The process of quantifying the benefits of immediate access to new customers, products, talent, technologies, processes and distribution channels may not be that easy without knowing the inside operation of the buyer.

Deal Structure

The total net proceed varies substantially depending on how a deal is structured.

  • Share vs. Asset
  • Vendor Financing & Earn-out
  • Management Contract
  • Representations & Warranties

What’s So Hard About Selling a Business?

Commitment & Emotions

Selling a business is an emotional and tedious process for most people. You poured your heart and soul into your business for so many years and yet no one seems to view the value as you do. Be sure about selling because backing out in the middle of the sale process can damage your relationships with employees, customers or suppliers.

Getting all stakeholders (including your spouse/partners/family/shareholders) totally committed to selling is also a difficult process. Deciding who should be on the negotiating team and how the decisions will be made can also be difficult. Our experience tells us that it is quite difficult to achieve consensus.

Finding a Market

Unlike publicly companies or real estate, private companies do not have a ready-market to sell in a short period of time. Owner and his advisor must create a market through strategic thinking, research, promotion and persuasion. It takes lot of expertise, time and effort to sell a private business.

Timing

Timing is critical. It’s quite tough to sell when the economy is down or when you are under time pressure.

It helps to be prepared because the window to sell at the peak period is narrow. You can also get better price and terms by making some changes in advance. It takes time to prepare for a sale and the best time to prepare is when the economy is down, and you are not under pressure. It’s easier said than done.

Selling a business is not like selling real estate – it is much more complicated, and deals fall apart much more than the real estate transactions. Some businesses stay on the market for more than 2-3 years and go through 2-3 different intermediaries.

Properly planned, prepared and priced business should take about 6-18 months to sell.

Valuation

Can a cardio surgeon successfully perform a heart surgery without a thorough diagnosis?

Getting a professional valuation done before deciding to sell may save you lots of time, money and grief because the market may not be willing to pay what you expected. Privately held companies are valued much lower than publicly traded companies, mainly due to higher risk and lower liquidity.

There are advantages and disadvantages of using different valuation methods. Asset approach, capitalization (multiples) of historical revenue/EBITDA/EBIT/earnings/cash flow approach, and discounting future cash flow approach are most common. Selecting an appropriate multiple or discount rate is not simple and requires market insight and experience. A combination of the qualities of revenues, cash flow, customer relationships, tangible assets, brand equity, intellectual properties, employee base, channel relationships and other variables will have a significant impact on the multiples or discount rates applied in valuation.

The valuation may uncover hidden values and provide useful negotiating tools. The valuator can identify weaknesses to be improved and identify the value drivers that will maximize the sale value. The better-prepared party with more comprehensive information will have an edge over the less-prepared party in negotiation.

Tax Matters

How much do you get to keep after tax? It helps to know what your tax position is so that you don’t sign an agreement that is disadvantageous to your net proceeds. Should you sell shares or assets? It makes a big difference. Do you qualify for the enhanced capital gains deduction? Could you “purify” your company to be eligible as a qualified small business corporation? Would it matter whether the buyer is a publicly traded company? What about the GST, Land Transfer Tax and Sales Tax, etc.? Private company transactions are heavily tax driven and a help of tax specialist is a must.

Legal Matters

There are many legal issues that may reduce your effective sale price or net proceeds. Are there any restrictions on selling, such as shareholders’ approval or first right of refusal? Do you need to address the issues of employee benefits, employee share options and severance arrangements? Do you have any contracts that require third party consent on sale or change of control (e.g. landlord or bank)? Will there be any regulatory requirements under the Securities Act, Investment Canada Act or Competition Act? What representations and warranties are you prepared to give? All these and other legal issues will have impact on your effective sale price.

Employees’ Future

What will happen to employees after the sale? When should you tell them? What if key employees leave before the sale? Will the leak damage employee morale and customer loyalty? What are your options when a buyer requests certain employees be terminated before the closing? What are the implications?

Liabilities

Are there any issues that may kill the deal at the last minute? Have you reviewed your environmental, litigation, tax and product warranty obligations, etc.?

Capital Expenditures

What must be done to maintain the business and what can be deferred? Will any of the capital expenditures pay off in time?

Keeping It Up

Keeping up the business while spending time on the sale process is critical. Declining sales will put a damper on selling your business and losing a major customer will kill a deal.

Professionals

Would you ask your family doctor to perform a heart surgery? Choosing the right professionals to perform right tasks are critical in a successful sale. Asking a real estate broker to sell a business is like asking a pediatrician to perform a heart surgery. Asking a lawyer or accountant to sell your business is like asking neuro-surgeon to perform a heart surgery. Any one can sell a business, but the results will be vastly different. Just like a heart surgeon can’t perform a surgery alone, a professional M&A intermediary will bring in the right experts at the right time to work as a team.

Value Enhancement

How much will fine-tuning and upgrading your business increase the value? Do you have a management information system (MIS) that generates timely, accurate and useful information? Do you have an accurate costing system that tracks profitability by product line and by customer? Do you have capable managers that will stay and work with new ownership? Do you have any redundant assets that do not contribute to value? Do you need to remove shareholder payables, personal properties and non-operating payables?

Housekeeping

Is your corporate house in order? Is your business in tip-top shape – physical appearance, information, documentation and regulatory compliance? Does your business give the impression of a well-run business? Do you have deficiencies that a buyer might use to negotiate? Could you dispose excess or obsolete inventories? Could you collect accounts receivables and keep them current? Could you lower the working capital requirement?

Recasting Financial Statements

Do your statements really reflect the true picture of the business? Statements presented according to accounting principles and tax reporting standards may not be so attractive to prospective buyers. Do you have excessive salaries, bonuses, perks and one-time expenditures etc. that should be adjusted for? Can you justify all adjustment items in your normalized statements?

Expectation & Pricing

The final price will vary depending on the number of buyers, buyer motivation, buyer type, vendor financing, earn-out, management contract, representations and warranties. Is your expectation in line with the market? What would you do if no one submits an offer that is anywhere close to your expectation?

Asking Price

Should you quote an asking price or not? How do you avoid over pricing or under pricing? Can you get someone to submit an offer without an asking price? What would you do if the market conditions and company circumstances change (e.g. substantial increase/decrease in sales)?

Sale Process

Will the auction approach be better? How do you get multiple offers to have buyers compete against each other? What if no one bids?

Information Disclosure

How much information is enough and how much are too much? What should be included in the information package – History, Industry, Market, Economy, Products, Customers, Management, Facilities, Financials and Future Outlook? The sensitive and competitive (customer names or intellectual property) information should be not be released too early where the buyer is not quite fully committed in the transaction.

You need to be careful about what you say about the business and verify accuracy before making statements. You want to put forward positive image of the business but you want to avoid misrepresentation.

Proper disclaimers should be inserted in all appropriate documents and marketing materials.

Buyer’s Motivation Analysis

Who would be the logical buyers and why? What are the differences between the strategic buyer, synergistic buyer, financial buyer and job buyer? How should you approach them? Is there some strategic fit, synergy or growth opportunity? Do you know the buyer’s position and motivation? Can you quantify the synergy effect to estimate the buyer’s price? Can the buyer take advantage of weaknesses in your business?

Market Share – Increase market share faster & with less risk to be the leader.

Management – Top quality people with creativity, experience & know-how.

New Market – Penetrate new markets faster & ahead of the competition.

New Product – It may be faster, cheaper and less risky to acquire than develop.

Channel – Immediate access to established distribution channels.

Competition – Eliminate your competition before they eliminate you.

Synergy – Overhead, Capacity Utilization, Marketing, R&D & Purchasing.

Investment – Maximize return on excess capital by making sound acquisitions.

Customer Base – Expand to increase revenue and diversify risk.

Diversification – Increase competitiveness (one stop service) and reduce risk.

New Technology – Faster, cheaper and less risky in capturing new technology.

Capacity – Reduce seasonal impact and maximize capacity utilization

Qualifying Suspects, Prospects & Buyers

How do you screen out the tire-kickers? Did you know that 90% of inquiries are from unqualified prospects? Do they have sufficient cash or have financing in place? Do they have a focused acquisition plan? Do they have the background or capability to operate the business? Have they bought a business in the past? Why do they want to buy your business?

Confidentiality

How do you let the right buyer know you are selling while protecting confidentiality? Have you got everyone to sign a Confidentiality Agreement before releasing information? Does the agreement contain all provisions that prevent prospects from damaging your business? Have you creatively sanitized or camouflaged your marketing material? Are you keeping track of all the packages given out and details of all people that received information? Are you ensuring the return of all information if they abort? When should you release sensitive/competitive information?

  1. Have the Confidentiality Agreement signed by all prospective buyers
  2. Use the qualifying questionnaire to ask relevant questions to determine the basic qualification
  3. Have the prospective fill out the registration form and sign for verification authorization – the questions should include ready cash amount, management background, education, acquisition history, decision making process & authority, objectives, acquisition criteria, urgency,
  4. Call and verify the references
  5. Have them come into the office to discuss and pick up information
  6. Do a search: web, D&B, bankruptcy, litigation/courts
  7. Anonymous advertising
  8. Full information is not released until fully qualified and perhaps until the site visit

Integrity

Are you being clear and straightforward about the business and reasons for selling? Is the buyer being same? Credibility can be lost quickly after a couple of surprises. Have you developed mutual respect and trust with the buyer that will be fundamental in completing the deal?

Being Current

Do you know what’s going on in your industry and can you present your business in a positive light? Can you defend the negatives that the buyer will try to use for negotiation?

Q & A Practice

Have you prepared for buyers’ questions – past performance in sales, gross margins, wages, expenses, capital expenditures, sales breakdowns, obsolete inventory and monthly operating variances, etc.?

LOILetter of Intent

Should you consult your lawyer and tax specialist before signing back on the LOI? Do you think you can reopen the discussion on terms already agreed in your LOI if you find out later that you made a mistake? Do you know if it is truly non-binding? Should you ask for a deposit? How much? Should you ask for a break fee? Should you address the price allocation if it is an asset sale? How much detail should you address at this stage?

Letter of Intent sets forth certain basic terms and conditions of a subject transaction. It is not usually intended to be binding. It generally only imposes a moral or good faith obligation on the parties. However, actions of the parties may create certain obligations and legal advice should be sought prior to signing the letter.

Continuity

Would you sell to a buyer with highest offer even if you don’t like that buyer? How long are you willing to stay after the sale? How important is your stay, after the closing, to the business? What if you can’t get along with new owners?

Consideration

Buyers seldom pay all cash in private company transactions. Are you prepared for offers with vendor financing, earn-out, consulting fee, employment contracts, common shares, preferred shares and other combinations? What should be your remuneration if you decide to stay on? What are the tax implications?

Earn-out

Earn-out is a form of consideration that is based on future performance of the business. Should you agree to an earn-out? Should it be based on the sale, gross margin or something else? Should it be 3 years or longer? What are the tax implications? The earn-out provision usually takes time to be negotiated, can be subject to disputes after the closing and thus needs to be carefully crafted.

Earn-out from Seller’s Perspective

It’s a payment over a period of time based on certain performance of the business. It can be based on sales, gross margin, EBITDA or other combination of benchmarks. It is usually used to bridge the price gap.

It makes easier for buyer to finance the acquisition and thus more saleable.

The seller will be more committed to ensure future performance since its payment is tied to the future performance.

It’s treated as capital gain that lowers the tax rate.

The seller may no longer have sufficient control to influence the direction and performance of the company.

It should not be more than 5 years since the tax treatment is different after 5 years.

Clarifying the benchmark is not an easy task. How do one-time costs, unexpected costs, new management costs get treated?

What happens if the seller and buyer can’t get along?

Vendor Financing

Will any one buy without vendor financing? How much are you willing to finance and at what terms? What kind of security or collateral should you ask for?

Vendor Financing

Most small-medium businesses involve VTB or note. Buyers will almost always seek VTB as a performance assurance and is seen as vendor’s confidence and commitment in the business. However, the vendor that provides VTB should and will act like a banker – asking for security on the loan and personal guarantee.

Some businesses are too big for individual buyers to come up with all cash and it is usually tough to get bank financing.

  • Personal guarantees by the buyer and spouse
  • 3-5 years at prime plus 1-3%
  • Security position after the banks on fixtures, equipment and inventory
  • Shares held in escrow (held by seller’s lawyer until note is paid off) and in default, the shares and voting control revert to seller to allow recoup investment
  • Remuneration to buyer and related parties of buyer is capped at certain threshold until the note is paid off
  • Major capital purchases, commitments, guarantees, change of suppliers and other relevant seller perceived risks must be approved by seller until the note is paid off

Exclusivity

Should you give any prospective buyer an exclusive period that restricts you from marketing the business or accepting another offer?

In a letter of intent, buyers may ask for an exclusive period to conduct due diligence and negotiate a definitive agreement. Unless a significant price premium or very short time is offered, a deposit or break fee commitment should be obtained; otherwise it is a free option and the opportunity to accept a better offer may be lost.

Try to obtain non-refundable deposit or substantial break fee.

In some cases, the difference from a higher bid is shared between the two parties.

Negotiation

Are you clear on what’s being sold? What are the excluded assets and liabilities? What should you concede on and what should you be firm on? Should you read and understood every detail of the agreement, especially the representations and warranties? Should you calculate the risks and potential consequences of representations and warranties?

Insurance

What happens if the buyer dies or becomes disabled before paying off your note? How do you protect yourself from these possible events?

Due Diligence

A Data Room should be set up at a neural location (intermediary’s or lawyer’s office) to centralize the information, control the access and minimize interference with operations of the company. It contains the company’s material financial and accounting, tax, legal and material contractual information but does not include competitive, secretive or privileged information.

Competitive information such as customer and pricing information should not be provided until a firm commitment is received.

Intellectual Property and Trade Secret information should not be provided until a binding commitment is received. Sometimes, seller’s lawyers or consultants, who already have the information under obligations of confidence, will provide a report to provide sufficient comfort to a prospective buyer to enter into a binding commitment.

Privileged communications regarding tax assessments, patent filings and litigations should not be provided.

Generally, transactions of moderate size will require audited financial statements. Management statements will also be required but the company should disclaim any representation or warranty regarding the statements. It is important for respective accountants to agree early on a common accounting treatment of the company. The payment for the audit is usually shared.

Legal due diligence will include review of minute books, legal audit letters, publicly filed litigation documents, material contracts, banking and credit agreements, security and title reviews and intellectual property reviews.

Final Agreement

Sometimes, a minor glitch can kill a deal. Some of the issues to be addressed are: collection of receivables, undisclosed liabilities, minimum level of equity and working capital at closing, audited statements, costs, covenants, representations, warranties and indemnities.

Covenants

Pre-Closing

  • Conduct Ordinary course of business
  • No capital expenditures without consent
  • No material obligations without consent
  • No hires without consent
  • Maintain rights and property
  • Maintain Insurance
  • Satisfy conditions

Post-Closing

  • Further Assurance to complete the transfer of business
  • Tax – cooperation on filings and elections
  • Third party claims – procedures, assumption and responsibilities in the event of third-party claims
  • Employees – responsibilities on retention, benefits plan and incentive plans

Conditions

Regulatory approvals, third party consents, no material adverse change, performance of covenants and the bring-down of representations and warranties at closing are standard conditions. Buyer’s request for conditions on financing and board approval should be resisted.

Representations & Warranties

“Reps & Warranties” is about disclosing information and risk allocation. Without certain representations and warranties, buyers will not buy your business. But many representations and warranties are up for negotiation and qualification. What’s the difference between “to my knowledge” and “to the best of my knowledge”? What should be the time limit (e.g. 3 years after closing)?

The representations and warranties serve to confirm factual matters and to allocate risk between the company, the seller and buyer. The normal representations include corporate structure, corporate approvals, no third-party consents, no conflicting laws, bylaws or agreements, no prohibiting litigation, all proceedings disclosed and the agreement creating binding and legally enforceable obligations. Some of the representations addressed are:

  • Financial Statements – Standards, Accuracy and Completeness
  • No Undisclosed Liabilities
  • No Infringement of third-party technology
  • Tax
  • Environmental
  • No undisclosed material facts

Other Agreements

Buyers will ask for a non-compete agreement from you. How many years and how wide of a radius restriction? You may not sell the real estate and lease out the facilities. What should be the rent? Who will fix the roof leak? You will most likely be asked to stay around for the transition period or even longer to ensure the business reaches targets set in the earn-out provisions. How much should you be paid? What restrictions should you accept in the employment/consulting contract? What if you want to get out before the expiry?

Recommendation

This is probably a lot to digest unless you have done this before and this is only a brief summary of what’s involved in selling a business. It pays to hire a pro.