In planning for succession (via a sale), you may want to keep the following information top of mind.
Maximizing Shareholder Value
All business persons know how to package, market and sell their products and services. Few however, know how to package, market and sell their company!
The information contained in this blog post should get the juices flowing. There are 6 major categories that should be considered prior to selling any company:
Improving Financial Position
Strengthen Key Management
Reduce Industry and Company Risk
Convert Personal Goodwill Into Commercial Goodwill
Selling Cycle
Tax Planning
1.0 Improving Financial Position
Before selling a company, financial preparatory work is essential. Tax planning needs to be considered before implementing any of the actions suggested below.
1.1 Balance Sheet
Up to two years prior to selling, the weaknesses inherent in a company's balance sheet should be addressed. A company's value can be enhanced through:
ratio analysis comparing industry norms to company norms and identifying areas to improve
improving liquidity ratios by reducing outstanding accounts receivables
removal of non-operating assets on a tax-advantaged basis (condominiums, term deposits etc.)
reduction of non-operating loans
acquisitions of new technology to create production efficiencies
clearing any contingent liabilities
cleaning up past tax issues with Revenue Canada / IRS and provincial and state tax authorities
stabilizing inventory costing
1.2 Earnings Statement
ratio analysis to compare results to industry norms and identify areas of weaknesses
reducing non operating and non recurring expenses to a minimum
reducing payments to family and spouse if not involved in the company
reducing excessive interest cost
renewing long-term leases or putting long-term leases into place if the company is location dependent
reducing bad debts by proper credit control
1.3 Administration
Ensuring monthly financials are available on regular basis
Establishing excellent credit relations with bank
Ensuring year end financials are available within six weeks of year end
2.0 Strengthen Key Management
A major strength in selling is the management team of the company. To enhance value:
Train back-up personnel for key areas in sales, project management, finance etc.
Put into place a comprehensive compensation package which will reward exceptional key personal
Identify outside consultants that can aid in a transition
Create a board of directors - advisory group - with outside expertise
3.0 Reduce Industry and Company Risk
Identify key products and services and assess long-term potential
Plan for introductory new products and services
Increase sales to a wide variety of customers or clients
Ensure there are at least two to three suppliers for each major major raw material purchased
Ensure use of sub-contractors is spread over several groups
4.0 Convert Personal Goodwill Into Commercial Goodwill
Ensure long-term contracts with customers and/or suppliers
Patent or trademark products, services or trade names
Brand products or services in the marketplace
Put key management in place
Identify intellectual capital ( customer, structural, human in addition to financial)
5.0 Selling Cycle
There is a time to sell every business. Having one's house in order does not mean that value will be maximized. The best time to sell is when:
Merger and acquisitions of large companies are in an upswing
The stock market is strong, especially for small capitalization companies
The economy has been growing for several years after a downturn
Market activity for small and medium size companies is strong
6.0 Tax Planning
Ensure the company is a Canadian Controlled Private Corporation (CCPC) and eligible for the $750,000 capital gains exemption if applicable
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