Business owners know that they are going to leave their business
at some point in the future and it's never too early to
consider an exit strategy. After all, the owner will be dealing
with what is likely their most important asset. That said, every
owner has options when it comes to their succession and who will
ultimately own their business. In every case, the process can be
complex, time consuming, fraught with anxiety and has the potential
for animosity. The three basic alternatives are family succession,
management buyout and sale to a third party. Each of these
alternatives has its positive and negative considerations. (See
When multiple family members are involved it is critical to
maintain transparency, fairness and to establish governance and
control measures over the business and personal affairs. Forming a
family council, i.e. an organized forum, can allow for open
communication between family members and can include both those
involved in management and those not directly involved in the
day-to-day operations of the business. This can also be a vehicle
to deal with the differing risk profiles, liquidity needs and
expectations amongst family members. In our experience, for
shareholders looking to transition out of the business the creation
of a liquidity event can prove the biggest challenge when
transitioning the business to the next generation. Sometimes
financial leverage is available through traditional lenders as the
business is capable of taking on additional debt to satisfy the
needs of the existing shareholders. However, often the transition
takes place over an extended timeframe and the shareholders remain
exposed to the risk profile of the business.
Management Buyout ('MBO')
An MBO refers to the process of management acquiring a minority
or majority stake in a company as a means of ownership succession.
MBOs can provide a viable exit strategy for owners and an
attractive opportunity for management, particularly when the
business is positioned for continued growth and financing is
available. In our experience, private equity firms have played a
growing role in the marketplace as they are attracted to strong
management teams with a willingness to form a working partnership
and who are willing to have a vested interest in the business. The
private equity firm often looks to management for an investment
which is meaningful in terms of each individual's financial
wherewithal. Management's financial contribution may or may not
be significant in the context of the overall value of the business
but nevertheless aligns all stakeholders' interests and
demonstrates the team's commitment to future success.
Sale to Third Party
Whether selling to a corporate buyer (i.e. competitor) or
financial buyer (i.e. private equity firm), value can be maximized
when the target acquisition is viewed as being strategic in nature.
In the case of a financial buyer it may represent a platform
investment that forms the basis for a roll up or consolidation
strategy or perhaps an add-on acquisition for an existing portfolio
investment which means they may be willing to pay a strategic
value. Strategic buyers typically want to pay for a value based on
historical performance and not value that they believe they will
create through a roll up strategy (economies of scale) or realizing
synergies (cost reductions, cross selling opportunities). However,
in our experience, when a competitive auction process is undertaken
that is backed by a strong negotiating team, a strategic buyer can
be persuaded to share in some of the prospective upside despite the
risk associated with realizing any synergistic component.
Other trade-offs that should be considered include the
flexibility of deal structuring, tax efficiency opportunities, time
requirements, risk of deal failure and
professional costs (lawyer, tax advisor, investment banker, etc.)
associated with execution. These factors influence the value to the
owner which is made up of, not only the stated purchase price, but
also the economic terms of the deal and the intangible aspects of
the deal. Understanding that every situation is unique an owner
should consider each alternative and carefully weigh the pros and
cons while managing the process in such a way that allows them to
reach their personal and business goals.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
While most are well aware that the sale of a business is generally a complex process, even sophisticated business owners are surprised by just how much cost and effort is required to complete the sale.
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