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Selling your business to those who know it best

Hussein Poonjani

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Hussein Poonjani

August 26, 2014
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So now that you know what your business is worth, what’s next? If you find yourself increasingly drawn towards saying goodbye, you are not alone—more than half of Canadian small-to-medium sized business owners are planning an exit over the next 15 years.[1] And their options? Depending on how far along they are in the succession process, they can be many and varied. There is, however, an advantageous path that is often less taken: selling your business to those who already have the most intimate knowledge of the company—your management team. Selling any business, be it to a third party or internally via a management buyout (MBO), requires years of planning in order to achieve your financial and non-financial goals and objectives, not to mention ensuring the business remains a going concern. But it’s perhaps the latter option that requires the most preparation time from the owner’s perspective. Firstly, it requires that your business has the necessary management structure in place. If it does not, you will have to ask yourself whether there’s enough time to implement one before your planned exit. If, however, it does, then you’re well on your way to reaping the rewards from this type of transaction. For a merger or acquisition type of transaction, it’s estimated that anywhere from 70 to 90 percent end up failing,[2] often times because the new owners fall short in their integration efforts. In a successful MBO, you’re essentially maintaining the status quo, meaning that a smooth transition is all but ensured. Reduced risk is another benefit, with current clients, vendors and employees more likely to be reassured throughout the transition process, and in the months and years to come. Minimal interruption to the day-to-day workings of the business and greater flexibility to remain involved post-sale (if desired) are two more pluses, both of which offer a greater chance of lasting success beyond the transaction. But it’s perhaps from a purely financial perspective that a MBO makes such an attractive exit strategy. With fees potentially reduced significantly through an internal sale, you’re likely to see your net proceeds from the sale impacted in a positive way. All the benefits aside, exiting your business by way of a management buyout is not without its challenges, chief among them that a key successor—or successors—must be identified. Care must be taken to ensure that the individual (or individuals) has the appropriate experience to run the business without its former master at the helm. Business development and service delivery are areas that should be looked at with particular scrutiny, but strategic hiring or implementing training programs are options should these skill sets not yet be up to snuff. The key to all of this, however, is time. In fact, it’s the underlying factor in any successful exit strategy. In the case of a MBO, where the potential buyers may not have gone into the business with the mindset of eventually purchasing it, this is compounded by the fact that they will need time to ensure they have the financial wherewithal to do so. But done right, it can be an excellent way to hand over the keys to your business and allow you to reap the rewards of years of hard work.   [1] Canadian Business, Half of owners of small-, medium-sized business to retire in next decade, http://www.newswire.ca/en/story/1069531/retiring-business-owners-to-transfer-1-9-trillion-in-business-assets-in-the-next-five-years-largest-turnover-of-economic-control-in-canadian-history-c, November 13, 2012, accessed July 9, 2014 [2] Harvard Business Review, The Big Idea: The New M&A Playbook, http://hbr.org/2011/03/the-big-idea-the-new-ma-playbook/ar/1, March 2011, accessed July 9, 2014

About the author:

Hussein Poonjani

Hussein Poonjani

Managing Director, Transactions
Email: Hussein.Poonjani@ca.gt.com
Phone: +1 780 401 8254
Office: Edmonton
  • Jeff Pocock

    I agree with Hussein. It should also be known that Management does not need a lot of money to purchase the business. GT’s Corporate Finance team will source the appropriate capital to facilitate the transaction and work with Management to get the best terms. A transition plan can also be put in place if the Owner wants to transition out of the business over time. An MBO is an elegant solution to an Owner wanting to preserve his legacy in the community and to reward his Management team who helped build the value — without sacrificing purchase price.

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