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A tidal wave of business ownership change is coming, and many business owners should be preparing now, urges Carson O’Neill, Managing Principal of Rincroft Inc., a Waterloo Region-based company which facilitates the sale of small and medium-sized businesses.

His firm has completed the sale of more than 50 family-owned businesses, many of them in Waterloo Region.

Carson most recently penned a book for business owners entitled The Road to Enterprise Value.

He confirms that most owners of Canada’s 1.2 million SMEs are now in their 50s and 60s and looking to sell their businesses over the next five years to fund their retirement.

“The owners are capable in running the operation. They’re down to earth, salt of the earth people and smart,” says Carson. “But most have never been down this path before. For many of them, it’s unchartered water with a lot of money on the table.”

Carson adds that the process is complicated and can last six to nine months.

“There are many issues above and beyond agreement on purchase price. Who’s going to pick up the employees? What about the future of the manufacturing facility? What about the leases? What about the intellectual property? It can be complex and multi-dimensional.”

As entrepreneurs, he says business owners often are often inclined do everything themselves which runs the risk of them receiving much less than what their business is worth, in turn resulting in a less comfortable ‘nest egg’ for retirement.

“The buyers are typically aggressive and want to get the price down,” says Carson. “They’re professional buyers, many of whom who’ve bought many businesses before, so they want to work with a business owner who unfamiliar with the process.”

To better understand the process of selling a business and some of the factors that drive business owners to sell, we discussed several questions:

Q. What would you recommend be the first steps a business owner should take when it comes to selling?

Carson: Delay if you possibly can and get the business in good shape. The business owner should step back, assess the state of the operation, and take steps to strengthen it any way possible. They should not be in a hurry to go to market; our company sometimes takes months working with owners to build the business up before the divestiture process even begins. The best defense is a good offense. Don’t go into this defensively, thinking ‘oh, we have to retire now’. You need to make sure the business is fundamentally strong to secure top dollar.

Q. What are some of the misconceptions a business owner may have when it comes to the process of selling?

Carson: Having never been through the process before, many owners think selling a business is like selling a house. The process is far more complicated and takes much longer. The valuation is far more complex, the information package is far more extensive and there are multiple conditions which need to be met before the funds are wired. Is there inherent value in the business? Does the business have unique capabilities so it can be sold? Where is the ‘secret sauce’?

Q. Other than impending retirement, what are some other reasons a business owner may decide to sell?

Carson: There are usually three other reasons: health problems with one of the owners; shareholders issues with at least one shareholder in need of cash; or the business has plateaued and is going south and that is never a good time to sell a business. Other reasons can include major players are entering the market with vast resources to spend to build market share and the owners are justifiably concerned they will have difficulty competing. They may not yet have reached retirement age, but they are concerned that the value of the business may well go down in the years ahead, so they are better off to sell now.

There is also the possibility of a pre-emptive offer. It is not uncommon for a buyer to approach an owner to buy even if the business is not being sold. This happens with very strong businesses. Sometimes millions are put forth, well over the assessed value. Owners may not have ‘planned’ to sell but many will seriously consider if the price is right.

Finally, the next generation has made it clear they have no interest in the family business. The owners may be in their late-40s with the second generation in their early-20s but that serves as a valuable wake-up call that it is inevitable the business will change ownership. With the emergence of the digital economy, at an early age, many in the next generation have absolutely no interest in ever taking ownership of the established family business.

Q. How has the pandemic affected the sale of businesses?

Carson: Not really. In the early months of the virus there was a period of adjustment, but people realized there was very little need to meet to complete the transaction. Our business did not miss a beat; actually, it got stronger. The change in ownership in Canada will continue relatively unaffected by the ebb and flow of the economy.

The reality is many owners have too much money locked in their business – they usually need it for a comfortable retirement. That has remained the primary reason why they sell, whether the pandemic is here or not. Canadian business owners are getting older. You can’t stop ‘Father Time’.

Q. How has the process of selling a business changed?

Carson: It is now more complicated due, in part because due diligence has become much more rigorous. We live in an age of increasing importance of transparency and full disclosure. No stone will be left unturned. Buyers will look at everything.

Did someone slip on the ice outside your business? What insecticides do you use on the grass and plants? Do you have an alleged harassment situation happening? If one is pending, it must be dealt with because the buyer doesn’t want any liabilities and will walk away. Due diligence and purchase agreements alone can now take three months.