Boom, Bust, and Get Out


A business exit strategy can preserve your nest egg In Canada 1.7 million businesses are owned by baby boomers, that generation of people born in the heady, optimistic years between 1946 and 1962. About 70 per cent of those owners will attempt to sell their enterprises over the next five to 10 years as they prepare to retire. That means $1.2 trillion of wealth will potentially change hands through the sale of boomer-owned businesses. Right now only 25,000 Canadian businesses are sold in any given year. But this number is expected to double in each of the next 10 years, given the boomer demographics. The increase in the supply of sellers will overwhelm the current demand for acquisitions. The boomer owner who is unable to sell the company that took years to build will have no lasting legacy – nothing that stands as a testament to decades of creativity, entrepreneurship and hard work. Even more sobering is the fact that unprepared owners may lose their retirement nest egg. And if businesses are forced to close, there will be job losses, diminished tax revenues to various levels of government, less consumer choice and a loss of familiar corporate names. Given the high stakes of being without an exit strategy, why are some business owners so reluctant to think of the things involved in selling, such as developing a growth strategy to attract investors and succession planning? One reason is practicality. These are busy people so focused on the daily operations of their companies that they lack the time to prepare for the day when they won’t be part of them anymore. A second reason is naiveté: they view their companies as successful – so why would there be trouble selling them? Another reason is that selling means a dramatic shift in the owners’ identity, status and level of power. And some owners find it hard to confront those prospective losses. Lastly, owners don’t want anyone to know they might be selling, so they don’t talk about it and therefore don’t know what is involved in the process. Yet preparation must take place well in advance of any sale to attract investors. It can take two to three years for a viable enterprise to prepare itself for a sale, or to give it “curb appeal” to prospective investors. That means assuring investors about its future profitability. Businesses must take certain steps to achieve this curb appeal. But the process involves more than the corporate equivalent of fresh paint and new granite counters. To prepare for a sale, businesses must do valuation planning, which means showing certainty of profitability going forward. These are some of the basic steps:

  • Showing three years of growing profitability.
  • Demonstrating that the company is in growth mode with a healthy potential-sales pipeline.
  • Resolving any factors behind historical profitability fluctuation.
  • Transfering knowledge and key relationships to a management team so that the owner can leave the business knowing it will run smoothly in his or her absence. It takes at least a year to find and train competent people.
  • Having in place legal agreements that avoid ambiguities – especially the shareholder’s agreement and management contracts.
  • Investors need certainty about a company’s future financial health. They don’t care about its past the way the owner does. If, because the owner has failed to do the necessary preparation, an investor cannot see clearly that the business has a viable future, that investor will take a pass. And that would be the saddest legacy of all.