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The Leveraged Capital Newsletter,
sponsored by Graham Financial Corporation
(http://www.GrahamFinancial.com),
is a free monthly newsletter that presents growth
and strategy issues effecting entrepreneurs and owners of small to medium sized
companies.
You are receiving this newsletter because you have requested that we send you
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We were quite overwhelmed with the
response received from our inaugural edition last month. Thanks to all who
took the time to comment and provide suggestions for articles. We will
have an interesting and varied line up of featured authors and corporate
profiles for the fall, once out holiday season is over.
In this months issue:
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Quote Of the Month:
"Entrepreneurship is not a place to fall back" - Bob Kagle, one of the
founding partners of Benchmark Capital and original investors in E-Bay. As
quoted in the book "e-Boys".
Investment Hindsight:
"This company is not bust. We are merely in a cyclical
decline."
(Lord Stokes, Chairman of British Leyland, 1974)
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Welcome
to the Leveraged Capital Newsletter.
Our goal is to provide you with timely and informative articles about growth
and strategy issues effecting entrepreneurs and small to medium sized companies.
Each month Leveraged Capital will deal with issues affecting your
business. You will be able to read topics ranging from finance, human resources, buying companies, selling your company,
and technology. In coming months you
will read profiles about other entrepreneurs and current decision makers.
We will keep timely content levels high, advertising content low, and
welcome your feedback.
Are you interested in contributing articles?
Or, do you have an interesting and unique story to tell about your
company? We would like to interview you.
Please contact us by Email at: editor@GrahamFinancial.com
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Selling Your Company. Part One - Is
It Time?
Selling your business is perhaps the single
largest decision that you will be faced with in your business life. In fact, as the owner of an SME, decisions you make not only
affect your business life but will also have implications on your personal and
family life.
This multipart series will take you through
the sale process from start to finish.
Part One - Is It
Time?
Pre-sale considerations to selling your company.
Part Two - The Steak And The Sizzle.
Packaging and marketing your company for sale.
Part Three – What’s It Worth?
A detail of valuation methods and pricing considerations.
Part Four – The Art Of The Deal.
A discussion of negotiation, documentation, and closing issues.
SELLING YOUR
BUSINESS – PART ONE: IS IT TIME?
There are many points in the sale of business that can lead
to the deal not closing. Failure to close a sale can be emotionally frustrating
and financially expensive for owners and employees alike.
In our experience, perhaps the single largest reason for a business not
being sold can be traced to a lack of planning and setting of realistic
expectations on the part of the seller. For this reason, before we begin to
discuss the mechanics of selling a business, we will explore some of the issues
and information needed for you to assess if this is the right time for you to
sell.
When selling your business, there are two distinct areas
for you to consider: i) personal
considerations and ii) corporate considerations. Both areas must be clearly developed and understood before
you put your company on the market. By qualifying and understanding these
areas before you sell, you have a higher likelihood of a successful closing and
create a controlled process by which you can obtain the highest value for your
company.
Personal
Considerations.
Some of the personal considerations that you should explore
are found in these questions:
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Why do you want to sell at this point in time?
Issues to explore include: your
retirement plans, frustrations that you face in the company, burn-out,
desire for transition, perhaps you have grown the company as far as you
personally can contribute. |
|
Is the timing right for a sale for personal reasons?
Check your motivations to sell.
If you truly do not want to sell don’t bother with a very time
consuming process. |
|
Can you adjust to the psychology of not being the owner
of your company? |
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Can you afford to sell?
What is the company generating as an income toward your lifestyle
that selling the company would not provide into the future? |
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If you desire to stay as management after a sale, will
you be able to emotionally handle not being the owner? This is not as easy as it sounds – many owners are fiercely
independent and cannot adjust to reporting to someone after many years of
relative independence. |
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Have you sought out tax and estate planning advice? We are simply amazed at the number of vendors that we have
met that have not sought out tax planning for the largest asset in their net
worth. We have seen instances
where much more effort and forethought went into planning for a holiday than
for a sale such as this! Spend
the time and money now to seek out good tax planning. |
Personal Motivators
To Sell.
The reasons to sell are many and varied.
Here are some of the recurring reasons and motivations to sell that we
have seen over the years. By clearly understanding your motivations, you
will be able to assess the speed and timing, acceptable pricing, and other key
issues of importance to you as you commence the sale process.
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Owner wants to realize the cash value of what he/she
has built up in the company over the many years of operations. |
|
Family succession is not possible due to either an
inability or desire of the next generation to carry on with the business, or
there is no next generation to succeed. |
|
A desire by the owner to start a new business, or to
retire as a lifestyle change. |
|
Health considerations by the owner, spouse, or family
member. |
|
The owner may not have given much thought to selling
but has been approached by a third party. |
|
Financial stresses felt because of declining business
due to operational issues, economic conditions or a combination of both. |
|
Desire to give up day to day responsibilities of the
operation. |
|
Need for capital to expand may be obtained by selling a
part of the company to a third party equity investor. |
Corporate
Considerations.
At times, external factors can dictate timing and pricing
of the sale of your company. Some external corporate considerations to
explore and understand are the following:
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Stage of your company's / industry's business cycle.
If your company / industry is in a growth cycle, you are likely to generate
a larger sale price. Alternatively, if the business cycle is downward
trending, this may not be the time to consider selling. |
|
Assessment of strategic buyer possibilities.
Strategic buyers typically will pay a premium price to acquire your company
because of synergies and value added to current operations. Financial
buyers will generally value your company based on historic, present and
projected cash-flows. |
|
General economic conditions within the marketplace.
If the economy is generally is a downward trend, your company may be as
well. Consider if you truly need to sell at this point in time.
Are you able to ride out the economic downturn and sell into an up
market? If so, you may want to use this time to implement positive
changes to prepare your company for sale in a better market. Our
experience has shown that many companies either choose to sell or sadly are
forced to sell with the wrong economic timing. |
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Will a union have any bearing or influence on the sale
of your company? Indirectly, a union may dictate potential
purchasers and how certain aspects of a negotiated sale may take place. |
Some internal corporate considerations that must be
understood are the following:
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What effect will a sale have on your employees,
management and minority shareholders? Retaining key employees and
management could have a bearing on the ultimate sale price you are able to
negotiate. Deals may fall apart if key management is not prepared to
stay for a period of time after the closing date. Earn-outs could be
effected if certain management does not stay or perform after close.
We have seen cases where minority shareholders made closing a deal
impossible. |
|
What exactly are you selling?
A division or subsidiary, minority or majority of equity, share or
asset sale. Each of these possibilities have implications to deal
structure, taxation issues, and certain representations and warranties that
you may have to enter into to close a deal with a purchaser. |
At some point in this process you will need to discuss the possibility of a
sale with trusted advisors, either in-house management and/or external
advisors. Arming yourself with trusted advisors will allow you check your
motivations to selling and will provide you with practical advice for critical
issues such as packaging and negotiating the sale of the company, and other
issues such as tax and estate planning. We will discuss the importance and
roles of various team members in the next part of this series.
Selling a business is a decision that every business owner will be faced with
at some point in time. It is never too soon to begin to think about these
issues. The better you understand internal and external motivators and
reasons for a sale, the better prepared you will be when you decide to consider
selling the company.
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SME
Facts and Frustrations.
How
well do you know your business environment? You might be surprised at some
of the statistics about Small to Medium Sized Enterprises (SME's). We have
summarized some interesting facts and frustrations about the SME
environment. Information has been taken from Stats Canada, Industry
Canada, The CFIB, and Business Development Bank Of Canada
What
is an SME? Industry Canada makes a distinction between the services and
manufacturing sectors.
|
Services
Companies: Small sized service companies have up to 50 employees and
up to $5 million in annual revenues. Medium sized service companies
have between 50 and 300 employees with annual revenues between $5 million to
$25 million. |
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Manufacturing
Companies: Small sized manufacturing companies have up to 100
employees and up to $5 million in annual revenues. Medium sized
manufacturing companies have between 100 and 500 employees with annual
revenues between $5 million to $25 million. |
|
Canada
has over 2.6 million SME's which represent over 60% of the total Canadian
private sector employment and that created 81% of all new Canadian jobs in
the past decade. In fact, more Canadians are now self-employed than
work in manufacturing. |
|
Of
the total SME's, 97% employ less than 50 people and 78% employ less than 5
people |
|
Specific
to annual revenues, a BDC survey found the following:
27% of SME's have annual revenues under $1 million;
42% of SME's have annual revenues between $1 million to $
5 million;
14% of SME's have annual revenues between $5 million to $
10 million;
14% of SME's have annual revenues over $10 million. |
|
Greater
than 50% of SME's export their goods and services, accounting for greater
than 25% of annual sales for these companies. |
|
Successful
SME's have place high emphasis on management practices, employee training,
market expansion and innovation with regard to products, policies, and
management. |
|
Not
surprisingly, SME's capital structures change as they grow. New
companies depend highly on retained earnings, personal investments, and
trade finance as a source of funds. As companies grow however,
emphasis shifts to other forms of equity and more traditional forms of long
and short term debt facilities. |
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Despite
the growth numbers and the importance of SME to our national economy,
perhaps the largest challenge and frustration facing SME 's today is the gap
that exists between SME need for debt financing and the larger financial
institutions willingness to lend to SME's. This is even more glaringly
obvious with knowledge-based SME's that do not have a high level of tangible
asset capitalization. |
|
Women,
youth and Aboriginal Canadians continue to face unique challenges and
obstacles when attempting to obtain traditional financing. |
|
Many
SME owners started their companies with a focus on financial independence.
In fact, the average SME owner makes less per annum than a paid
employee. According to the CFIB, SME owners made an average of $47,000
versus a paid employees average of $59,000. |
|
In
spite of making less money on the average, work hours for SME owners are
also longer. The CFIB survey also showed that over 81% SME owners work over
50 hours per week versus 14% for paid employees. Over 50% of SME
owners surveyed work over 60 hours per week. |
|
Employees
of SME's are more likely to rate their job enjoyment and satisfaction
as good to excellent versus employees of large firms or public companies. |
|
In
return for less money and longer hours of work, over 90% SME owners depend
on the market value of their companies, the one time $500,000 capital gains
exemption for small businesses sold and RRSP savings as their vehicle for
retirement. |
Perhaps
one final thought to consider. Many owners of SME's started their
companies as a result of being dissatisfied with their boss or employers.
Just remember, now you are that boss and employer!
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Quick
Stuff: Characteristics Of A Good Goal.
Our
culture and society is often described being "Goal
Driven". Goals change over time; what should
not change is the process of creating positive, effective, and worthwhile
goals. Before we can answer what our goals are, we should ask the
question, what is a goal? The following summarizes the characteristics of
a goal. By defining each of these points, your goals will go beyond mere
words and will provide you a framework to monitor growth and success.
Check you goals in life and business to see how your goals are characterized.
- It is Specific and can be Quantified.
- It is Measurable.
- It has a distinct Time Frame.
- It is Challenging and Attainable.
- It is Important to the organization and the individual.
- It is Accepted by the person who must achieve it.
- It is accompanied by a Statement of the Cost to achieve it.
- It specifies What and When not why or how.
- It is Short and Understandable.
- It must allow for Feedback to the person trying to achieve
it.
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Graham
Financial Corporation Announcement.
We
are pleased to announce that Daniel Gregory has partnered with Graham Financial
Corporation by accepting the role of Director, Client Strategies. Dan is a
Chartered Accountant with 20 years of “hands on” experience
and an
outstanding track record in Strategic
Planning, Financial Management, Mergers & Acquisitions, Corporate Finance,
and Operations Management in a diverse range of industries.
Read
Dan's professional profile by clicking here.
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