Strategies to transition on your terms and make the most profit
There's no greater feeling than looking at your business and seeing firsthand the success you have achieved. Like many businesses in the Foresty Industry, you've seen your share of tough times. Despite this you have pushed through. You have kept your iron working and in working order; your employees are happy and productive and they aren't looking to move to Northern Alberta for the quick dollar. You have built a great management team and you and your company are respected by your competitors, your suppliers and the licencees. You are a success.
But you are also tired. This is not your first time through the cyclical "ups and downs" of the forest industry. You are ready to move on to the next stage of your life, perhaps spend more time with the grandkids and improve your golf game. But how do you effectively transition?
Like others, you could just take your equipment to auction. Since you have been very careful not to accumulate a large debt load, you would have some cash but you would not get back the value of the business you built, and what about the employees and other sub-contractors you work with?
In the "good old days" you would just look for one of the big companies to buy you out, but many of these larger companies are not as interested these days. So now what? Have you considered your children, key employees, sub-contractors, your competitors, or even a combination of these options?
Deal Financing Options
An entire book could be written about all of the aspects of finding and negotiating the deal –completing the sale, tax impacts, and how to deal with preparing for and managing transition and succession. Today I will focus on how the purchaser finances the deal. It may seem that this would be a discussion for an article on how to purchase a forestry company as they need to get the financing, but for you, the seller, it is of vital importance to know how this can be done, so that you can find a way to exit your business with the highest value.
Times are improving for the forestry sector and you know that the company you built will be able to take advantage of the better times, reap a profit, and finance the sale. However, for the normal sources of finance, the banks and credit unions, this isn't as clear. Financial institutions are generally not rushing out to finance the sale of goodwill; that is the extra value you have built in your business. They like the security of assets.
When it comes to financing the deal, there are a number of options that the purchaser can look at and as seller you may have to assist with. A combination of these options will likely be used. They include:
- Purchasing shares of the company for the value of the net assets plus the goodwill value
- Re-financing assets to generate cash within the company to fund the sale
- Asking the seller (vender) to finance the sale; receiving their payment over time from company profits
- Selling the company a portion at a time
- Restructuring the company to build separate units to be sold individually so each unit is more affordable.
Out-Right Finance Purchase
An out-right finance of the purchase is great for the seller and generally acceptable to the purchaser. However unless the sale price is very close to the net asset value (minimal goodwill) it will be difficult to find financing (unless mixed with other options like vendor financing). Re-financing inside the company may work but likely will have tax issues and may make it very risky for the purchaser to continue on in business.
Vendor Financing
Vendor financing (where the seller is paid over time) is used in many small-and medium-sized businesses, especially to finance the value of goodwill. The rationale behind this is that if the business is worth more than its assets and generates a good cash flow, then it actually has goodwill and as such the company can afford to pay over time. In essence, if you believe in the value of your business then "put your money where your mouth is" and take some risk of payment. There are risks for you the seller and you won't have all of your money up front. It generally means you can't move to Costa Rica and ignore your creation. For the purchaser it generally means they pay more but they also do not reduce their business flexibility with crippling debt and often have access to the advice and support of the seller for a period of time since the seller has a vested interest in ensuring the business is successful.
There are several legal, financial and tax issues to deal with for both sides in a vendor sale. You should discuss these with your professional advisors.
Sell Over Time
Another option used with vendor financing or with bank financing is to sell the business to a successor a period at a time. For example, you sell 10% of the business to a key employee/manager (or child involved with the business) and after it has been paid for, you sell them another percentage. In essence, this is a form of vendor financing. You do not get to retire right away, but on the other hand you can keep control of the company. It gives both parties a chance to learn from each other and it makes it more likely that that a key employee will stay now that they own a piece of the company. Eventually you will have sold a controlling interest and will move away from the business.
Restructure the Business
Another option is to restructure the business to break it into different components. Perhaps all of the real estate is moved to one company, major equipment to another, hauling and sorting to another and forest operations to a fourth and so on. Each component is smaller now and perhaps easier to afford by the purchaser. Perhaps you want to keep some of the business or some of the cash flow or maybe your daughter is ready to purchase and run the hauling company while your son is already running your field operations and will soon be ready to buy it. Sometimes the operations are broken into separate geographical units so that they can be sold separately.
A Final Word
There are serious tax and legal issues in using any of these options. Therefore, it is important to speak to a professional about the pros and cons of each and what works best for your personal situation. You've spent significant time, effort and money building your business and you should expect to do the same to effectively transition the business. It's important to start early so you can address any complications and if needed, have the time to prepare a successor. By integrating the right strategy, you can transition on your terms and get the highest value from your business.
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.
