This guest post is written by the Sampford Advisors. Sampford Advisors is a boutique investment bank exclusively focused on mid-market mergers and acquisitions (M&A) for technology, media, and telecom companies. Sampford understands what it means to sell a business, after all, they work with entrepreneurs on the process, all the time. I’ve known Ed Bryant, the President of Sampford, for a few years, and have witnessed, first hand, the success he’s had both with his firm, and the sellers his firm has represented.
There are certain clichés that stand the test of time because they will always be true, this one more than others; if you fail to plan, you plan to fail. This is especially true when prepping for what most likely will be the largest transaction of your life – the sale of your business.
Once the decision is made to pursue a sale, there are many surprises that spring up along that way that could prove to be quite costly. The most common we here at Sampford have seen are listed below:
The Most Surprising Things Business Owners Don’t Know About Selling Their Business
How much work it is to actually run a process to sell your business
Throughout our careers, we’ve seen many entrepreneurs try to “go at it alone” when it comes to selling their business, only to find out how much work it is and how quickly it becomes a distraction from day-to-day operations. Not only that, but employees of the business often become much more suspicious when they constantly see senior management tied up with “important” calls or meetings that no one really knows about – this is something that can be completely eliminated with an M&A advisor.
Running a broadly marketed process is typically one of the best ways to ensure you get the maximum price for your business. However, there is a TREMENDOUS amount of work that goes into this such as:
- Preparing due diligence materials – a one to two-page pre-NDA “teaser”, financial model, detailed information memorandum (often between 20 – 50 pages), management presentation (often 30+ slides), and setting up a data room to share with buyers post receiving offers that contain the “right” amount of information
- Researching buyers to contact (our broadly marketed processes generally see between 25 – 150 buyers, usually with a 60/40 mix between strategic and private equity buyers)
- Finding contact information for those buyers, emailing them, and correcting bounced emails.
- Responding to buyer emails, setting up introductory calls, exchanging NDAs, etc. – for many of our broadly marketed processes, we’re having 100+ calls from the start of the process through to picking the ultimate buyer
- Continuously following up with buyers on a weekly basis to make sure no one buyer falls behind another and everyone keeps on the same bid timeline – this is VERY hard to do when you have a business to run
- Receiving bids, providing buyers access to a data room, conducting management presentations, and moving into exclusivity
An M&A advisor will GREATLY reduce this workload (particularly around #1 – #5 above) and will only bring you into the “important” conversations with the most likely buyers. This will allow you to continue running your business as you normally would, while also greatly reducing employee suspiciousness.
The importance of good legal advisor
A frequently overlooked aspect when selling your business is the importance of a good lawyer that can bring your transaction over the finish line fast and efficiently, which minimizes closing expenses. Having a lawyer with extensive M&A experience is important, but also someone who can draw a fine line between being too “by the book” versus being practical when it comes to negotiating key terms in the closing process, such as representations and warranties. Throughout our careers, we’ve seen many different cases where lawyers go over the top with trying to get their clients the absolute best or most “seller-friendly” terms. In reality, what this most often does is creates endless cycles of iterations that ultimately end with seller neutral terms, put the transaction at risk (time is never our friend), and in-turn increase the ending legal bill.
The importance of tax planning
When contemplating the sale of your business, it is important to invest the time to understand tax planning strategies to minimize your burden post-transaction. Receiving cash at close as a lump sum directly into your bank account ensures that the tax authorities benefit as much as you have from this transaction.
Strategies that can be leveraged to substantially reduce your tax burden are variations of income splitting. Income splitting is the division of income of a person who is in a high tax bracket (like a founder) to another person is in a lower tax bracket. In the case of a startup, this means having some, or all, of the shares that were allocated to a founder issued instead to a lower-income spouse, children, or other family members. Income splitting can be done either by having family members hold shares directly, implementing a family trust or holding shares through a holding company. Although many of these strategies are now being challenged in Canada and other western countries with recent regulatory changes.
Direct ownership: this structure may be the simplest way to document share issuance and avoid unforeseen tax consequences. However, each family may act independently in matters like electing directors and determining whether to accept an offer to purchase shares.
Family trusts: an alternative to direct ownership of shares by a founder’s family members is to issue shares to a family trust (very common in Canada). Unlike with direct ownership, beneficiaries of the trust don’t have direct access to the shares.
Holding company: a holding company has the same advantages over direct ownership as a family trust would, but the costs of setting up and maintaining a holding company would generally be equal to or greater than those associated with a family trust.
However, many of these strategies for minimizing tax need to be in place for a cooling-off period of up to a couple of years. So make sure you get proper tax advice on these strategies well in advance of an actual sale.
Getting your house in order before you engage with buyers
Any sophisticated buyer (especially private equity funds!) is going to be EXTREMELY data-focused. Many companies are so focused on scaling their business and in doing so try to take short cuts where they can in order to save time and limit complexity – the most common area we see is on accounting and financial analysis. Common places we’ve seen shortcuts being taken are:
- Reporting financials on a cash basis vs. accrual (buyers are generally exclusively focused on accrual) and we would highly recommend having a reconciliation to accrual accounting before engaging a buyer
- Not tracking KPIs important to your business – a common example is a Software as a Service (SaaS) company that neglects to track key metrics such as Monthly Recurring Revenue (MRR), churn rates (dollar and logo), upsell and downgrade rates, Customer Acquisition Cost (CAC), win-rates, detailed pipeline metrics over time and others. To position yourself in the best light, buyers generally expect three years of historical data (ideally monthly) which allows them to see important trends in the business
- Keeping accounting “apples-to-apples”. We’ve seen many situations in the past where companies are not consistently recording revenues in the appropriate bucket (i.e. booking services revenue in the software revenue bucket, etc.), or are changing account naming/classification schemes in one year but failing to adjust their statements retroactively for that change. These situations make it difficult for buyers to analyze yearly trends in financial statements on an “apples-to-apples” basis. This is something that is EXTREMELY important to have cleaned up before showing any buyer, as it could do more harm than good.
About Sampford Advisors
Sampford Advisors is a boutique investment bank exclusively focused on mid-market mergers and acquisitions (M&A) for technology, media, and telecom (TMT) companies. We have offices in Toronto, Ottawa, and the US and have done more mid-market tech M&A transactions for Canadian clients than any other adviser.
Good luck with your wealth-creating journey.
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