Selling a business that you have grown from the ground up is a once-in-a-lifetime event. Even for serial entrepreneurs, each sale presents a unique opportunity to maximize value and exit on the best possible terms.
There are a number of strategic steps business owners can take well in advance of a sale to streamline the process and enhance sale value. Below are five critical areas that can help optimize the transaction and increase your chances of a successful and lucrative exit.
1. Tax Structuring
It is an unfortunate reality that tax is inescapable. However, with smart planning, it is possible to minimize or defer tax liabilities, especially in the context of a business sale.
Effective tax structuring must begin well before a transaction is on the table, even years in advance. Common strategies may include:
- Reorganizing corporate structure to maximize the use of the Lifetime Capital Gains Exemption (LCGE) for the owner and potentially their family.
- Purifying the corporation by removing excess passive assets (such as surplus cash or investments) that could disqualify the company from LCGE eligibility.
- Considering rollovers with the purchaser to defer taxation.
One of the most impactful early steps a business owner can take is speaking with our tax team to map out a proactive tax strategy.
2. Vendor-Side Due Diligence
Buyers will conduct rigorous due diligence, so it makes sense for vendors to get ahead of the process.
Vendor-side due diligence helps uncover and address issues before they become deal-breakers or lead to price adjustments. It also builds credibility with buyers by showing that the vendor is transparent and well-prepared.
Key areas to assess include:
- Transaction-related issues, such as:
- Change of control or anti-assignment clauses in material contracts
- Employment agreements with bonus triggers on sale
- Credit facilities that may need replacing
- Risk factors that could impact the going
concern value of the business:
- Legal disputes
- Intellectual property ownership gaps
- Unpaid taxes or liabilities
- Rights of first refusal (ROFR) granted to third parties
- Industry specific licensing and whether it is transferrable
- Commercial concerns that impact valuation:
- Unfavourable lease terms or pricing models
- Heavy customer concentration
- Long-term fixed pricing contracts
- The existence of restrictive covenants applicable to the business
3. Contract Review
While reviewing the business during vendor diligence, vendors often uncover outdated, incomplete, or informal contracts. Cleaning these up before a sale improves deal readiness and reduces buyer skepticism.
Common areas to address include:
- Updating employment agreements with enforceable, legally compliant termination provisions
- Documenting unwritten policies that govern the business in practice
- Ensuring IP and confidentiality protections are in place for all employees and contractors
- Updating vacation and leave policies to avoid the buildup of costly liabilities
Taking care of these contractual housekeeping items helps present a professional, low-risk business to prospective buyers.
4. Engaging in a Competitive Bid Process
Many successful business owners find themselves facing a common problem at retirement: they have built a profitable company, but there is no obvious buyer waiting in the wings.
This is where a qualified transaction broker can add significant value. By leveraging their network, brokers can connect vendors with buyers they would otherwise never connect, which in turn could create a competitive bidding environment.
Studies show that businesses sold through a structured bid process often achieve significantly higher sale prices than those sold through informal channels.
To make a bid process successful:
- Conduct vendor due diligence in advance to give bidders confidence in the business
- Create a well-organized data room with all relevant company documents
- Consider preparing a vendor due diligence report, a strategy more common in Europe but gaining traction in North America
With sufficient competition, vendors can often require buyers to obtain representation and warranty insurance without any recourse to the vendors, reducing or eliminating the need for purchase price holdbacks or escrow. This creates a "clean break" for the vendor.
5. Preparing Early Pays Off
Above all, the key to a smooth and rewarding sale is early preparation. Whether it is tax planning, tightening up contracts, or organizing your internal data, these steps take time, but they pay dividends when you are ready to sell. The earlier you start, the more leverage you have to shape the deal on your terms.
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.
