From the buyer’s perspective, a business that can show healthy cash flow, that’s well maintained and enjoying sustained growth, is much more attractive.
Canada’s population is aging and Canadian entrepreneurs are no exception. In fact, close to 60% of Canada’s small and mid-sized business owners are aged 50 or older, nearly double the proportion of the overall workforce.
As a result, Canada is in the midst of a major shift in business ownership as the baby boomer generation retires.
Within the next five years, 41% of entrepreneurs in Canada expect to leave their existing business without acquiring another one. This is up from one in three in the mid-2000s. Of the entrepreneurs who expect to leave without acquiring another business, 83% say they plan to retire.
An increasing number of entrepreneurs are thinking about retiring and selling their businesses. With so many sellers on the market, the competition could be fierce, especially for those who haven’t taken the right steps to prepare the sale of their business.
Entrepreneurs could be leaving money on the table
Much like a homeowner putting a house up for sale, any entrepreneur planning to sell a business—typically his or her biggest asset—wants to realize the highest possible return. And, as for a house, careful preparation is an important step that will precede the successful sale of a business.
Unfortunately, many entrepreneurs are not making the best moves to boost the price of their business before their exit.
Among the entrepreneurs looking to exit without acquiring another firm:
- 71% are reluctant to take risks to improve their business’s performance.
- 52% have little interest in expanding their business.
This cautious approach may drag down the market value of these businesses, and could even impact the entrepreneur’s retirement.
Need to track financial performance better
Improper bookkeeping and business owners not leaving enough cash into the business are other issues that can affect the sale price of a company.
42% of business owners who expect to sell to buyers outside the family appear to have done little or nothing to spruce up their financial reporting. Most have also not taken action to maximize cash flow in anticipation of a sale.
These omissions do not augur well for the future value of their enterprises. From the buyer’s perspective, a business that can show healthy cash flow, that’s well maintained and enjoying sustained growth, is much more attractive.
Larger businesses are better prepared
The recent study paints a brighter picture for entrepreneurs in bigger businesses. They seemed to be better prepared for transition compared with the overall sample of Canadian businesses.
For example, entrepreneurs with 20 or more employees were more willing to grow their companies. 63% said they plan to continue expanding their business before selling it, compared with only 48% of all Canadian SMEs.
They also track financial performance better, two-thirds of larger businesses have sound financial reporting in place, and they were more likely to have taken action to maximize profits.
Finally, entrepreneurs with 20 or more employees seemed more preoccupied with the continuity of their businesses. Only 3% of them plan to wind down the business and sell the assets, compared with 22% of all Canadian SMEs.
6 tips to boost the value of your business
There are a handful of fairly basic things entrepreneurs can do that can help maximize the sale price of their business. Unfortunately, we don’t always see these things happen.
Here are 6 tips to help entrepreneurs boost the value of their companies before their exit.
1. Invest and improve right up to the sale
A business that has limited potential due to outdated buildings and equipment is usually worth far less than a firm that has maintained its capital assets.
2. Boost your profits and keep money in the business
The best way to boost the value of your business is to show solid performance and profits in recent years.
3. Keep detailed and reliable financial reports
A three-year audit trail or three years of financial reports prepared under a review engagement will give outside buyers confidence in your numbers.
4. Make your business stand out from the crowd
Strategies for building interest around a business can be as simple as maintaining an up-to-date online presence or having a bank of favourable customer testimonials.
5. Look for buyers outside your local market
Finding serious buyers locally can be a challenge, especially for rural businesses. Consider looking to bigger, urban centres, both for advice and as a source of potential buyers.
6. Get outside help
Consider tapping key advisors, including your bankers, accountant, and lawyer to identify serious prospective buyers. You may also want to hire a consultant who specializes in business transitions.
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