It’s an unfortunate scenario in business: An entrepreneur or company founder receiving less money than they deserve because they realized too late that they were woefully unprepared to sell.
While many business owners may not be imminently planning an exit, there are still several practical steps that one can take to build the maximum value into a business.
Susan Richards is the co-founder of numbercrunch, a cloud-based accounting firm that offers bookkeeping, controller and virtual CFO services to Ottawa-area businesses. As an entrepreneur herself and the CFO to a number of local firms, Richards has seen firsthand what can make or break the sale of a business.
As with so many other things in the business world, sale readiness comes down to owners doing their due diligence.
When a business changes hands, standing contracts typically go with it. As a result, it’s important to ensure all contracts – whether with clients, employees or contractors – are in order. Even systems that make sense in the moment may create challenges down the road.
For example, while verbal contracts built on trust are commonplace in some situations, they can quickly crumble when someone leaves or sells the company. Similarly, in the age of electronic documents and CRM
software, it’s not uncommon for signed contracts to be left forgotten in someone’s inbox.
Even more critical are employment agreements. Without them, prospective business buyers have no idea what commitments have been made to the individuals working for the business, including salary, time off and other important factors.
“If I was buying a business and they couldn’t produce employment contracts, then I’d be very scared of what I was taking on,” says Richards. She explains that in employment disputes where there is no signed agreement, case law tends to lean in favour of employees, not employers.
Contracts serve as the documentation for business relationships, and thus are critical in attributing value to those relationships in the event of a sale.
Much like contracts left unsigned, uncollected payments can also be disastrous to the sale of a business. Many businesses sell at a price that is equal to a certain multiple of revenues.
“You have to be able to substantiate your revenue,” says Richards. “Having evidence that your clients pay provides that assurance.”
Whether a credit card payment failed or a cheque didn’t clear, it’s important for a company to stay on top of client balances and ensure their timely payment.
In the software-as-a-service realm, companies are rarely cash-flow positive, especially in the startup period. At this stage, SaaS companies often have to fundraise in order to survive, which can easily distract from paying attention to aged receivables. They are also often dealing with new customer relationships and sensitive to upsetting clients by chasing payment. As a result, these are often the businesses that especially struggle to defend revenues when it comes time to sell.
Richards explains that owners should be reviewing their aging receivables report on a regular basis. In addition to the obvious source of cash it provides, it also gives businesses an idea of where they stand with their clients and whether certain files need to be escalated or terminated due to non-payment.
Though it should go without saying that it’s important to file your income taxes on time each year, Richards regularly sees clients who have let their HST remittance or other payroll remittance filings fall by the wayside.
In these cases, she explains, sales can actually fall through while the seller is scrambling to complete filings and both parties await Canadian Revenue Agency to produce documentation proving good standing.
“You’re stuck waiting on the government,” says Richards. “Do you really want the fate of your business sale to rest in their processing cue?”
Another consideration in preparing a business to sell is its expenses. Many entrepreneurs choose to claim certain personal expenses – such as automobiles, entertainment or travel – through their business in an attempt to reduce their taxable earnings.
While this is often touted as normal among entrepreneurs, it can also cause problems when it comes time to sell. If the business valuation is based on earnings, cash flow or earnings before interest, tax, depreciation and amortization (commonly dubbed EBITDA), then the seller will now be motivated to remove those personal charges to present the highest value to the buyer.
Need a hand? Numbercrunch offers bookkeeping, controller and virtual CFO services. Learn more about what numbercrunch can do for your business at numbercrunch.ca.
Not selling, but looking for cash?
The due diligence process is similar for both selling and fundraising for your business. These tips for sellers can also be applied to securing loans and raising capital.