A review of the CVs of Ottawa’s entrepreneurs will demonstrate that it is a group full of fresh ideas and that loves to pursue new opportunities. The passion for starting a new business and watching it grow is often one that calls our entrepreneurs a number of times – meaning that business owners may start and sell a number of businesses over the course of their careers.
Given this, what should a savvy entrepreneur do in order to structure their business so as to ensure their operation is marketable to potential buyers and to make the most of a sale?
Implement Written Employment Agreements: This is a piece that is often missed as small businesses transition into larger entities, but there are few things that can protect a business more effectively than a written employment agreement. On the sale of a corporation, the employment contracts will usually transition to the new owner and a prospective purchaser will review them carefully - if they are not properly drafted this can mean additional liability for a purchaser and that liability can be used to negotiate a lower purchase price. Having written employment agreements protects the business owner and also increases the marketability of a business in the event of a sale.
Consider Corporate Structure: A basic corporate structure can be all that is required for a fledgling business, but as operations expand there are a number of ways a corporation can be structured in order to make the most of tax planning and to best protect assets. Considering corporate structure is of benefit both for an ongoing business and when considering next steps. Giving thought to these issues in advance of a sale will enable a business owner to structure a corporation to maximize profit from the purchase price.
Succession Plan: Is the seller the only person with the knowledge to run the business? If so, and if the seller doesn’t want to stay on after a sale, consideration should be given to whether there are employees that can be mentored over a period of time in order to be able to take on a management role in the business to assist a potential purchaser. Mentoring key employees to increase their capacity is of substantive benefit to any business and also increases the “curb appeal” in the event of a sale.
Contemplate the Next Project: It is not unusual for a buyer of a business to require a non-competition agreement with the seller, to restrict their ability to compete in the same business and geographic area. Within this context, an entrepreneur planning for their next phase needs to consider whether any proposed new projects will concern a prospective purchaser and to ensure that the terms of any non-competition agreement won’t interfere with new business opportunities and plans. Non-competition doesn’t necessarily mean a prohibition on new business ventures - the terms of these arrangements are often negotiated amicably with an eye to protecting the interests of all involved; however, this is something to consider as a key consideration of a proposed sale, not as a small side issue. The earlier these issues are considered, the more effectively they can be addressed.
Even if a sale of a business is not in the immediate future, considering these points should be part of every entrepreneurs short term plan – both in terms of the advantages to ongoing operations of an existing business and so that profits can be maximized in the event of a sale of the business.
Megan Wallace is a lawyer in the Business Law Group at Perley-Robertson, Hill & McDougall and is called to the Bars of both Ontario and Alberta. She works with a variety of clients ranging from corporations that operate across Canada to local family-owned businesses. She assists her business clients on a range of issues, including incorporations, mergers and acquisitions, financings and review of key agreements. Megan is also a 2017 Forty Under 40 recipient.
She can be contacted at 613.566.2857 or firstname.lastname@example.org.