And how much money are you going to get?
Business owners spend years building companies.
They invest capital, work long hours, develop customer relationships, hire employees, establish supplier networks, acquire equipment, build reputations and, in many cases, purchase commercial or industrial real estate to support the operation.
Yet one of the most important business questions is frequently postponed until surprisingly late:
How are you eventually going to get your money out of the business?
For some owners, the answer appears straightforward: sell the company when retirement approaches. But selling a business is not necessarily the same thing as recovering the value an owner believes has been created.
A business may generate excellent income while the owner operates it but have considerably less value to someone else. The business may depend heavily on the owner’s relationships, technical knowledge or personal involvement. Valuable real estate may be mixed together with the operating company. Equipment may have less resale value than expected. Family members may have different succession plans, and employees who would like to purchase the business may not have the financial capacity to do so.
An effective exit strategy therefore begins long before someone places a “business for sale” sign in the window.
It begins by understanding what you own, where the value actually resides, what another person may be willing to pay for it, and what you ultimately want your exit to accomplish.
Start With the Outcome You Want
Before choosing an exit strategy, owners should determine what they want the eventual transition to achieve.
For some, maximizing the financial proceeds is the overriding objective. Others may place considerable importance on protecting employees, maintaining the company name, transferring the business to children, retaining ownership of the real estate, or remaining involved in a reduced capacity after the transition.
Those objectives can lead to very different strategies.
An owner seeking the highest possible sale price may favour an open-market sale or strategic purchaser. Someone primarily concerned with preserving a family legacy may accept a different financial structure to facilitate succession. Another owner may discover that selling the operating company while retaining the property and leasing it to the purchaser provides a more attractive retirement-income strategy.
There is no universally correct exit.
The appropriate strategy depends upon what the owner is trying to accomplish.
Understand What You Actually Have to Sell
This is where business owners sometimes encounter an uncomfortable distinction between a successful business and a valuable transferable business.
A company may produce excellent income because its owner personally maintains the customer relationships, negotiates with suppliers, solves technical problems, supervises employees and generates most new business. From the owner’s perspective, that represents decades of expertise and goodwill.
A purchaser may see something different.
If much of the revenue disappears when the owner leaves, the purchaser may conclude that they are acquiring assets and a customer list rather than an independent operating business.
Transferable value is generally strengthened when the company has reliable financial records, documented procedures, capable management, diversified customers, stable supplier relationships, predictable revenue and systems that allow the organization to operate without constant owner involvement.
This leads to an important question owners should consider well before retirement:
If I stopped working in this business tomorrow, what would still be here for someone to buy?
Business Value and Owner Income Are Not the Same Thing
Owners sometimes estimate the value of their business based upon how much income it has historically provided them.
Those are not necessarily the same thing.
A purchaser will normally evaluate the future economic benefit the business can provide after ownership changes. That may require adjustments for owner compensation, discretionary expenses, related-party transactions, unusual one-time costs, capital requirements, customer concentration and other factors affecting normalized financial performance.
This is one reason reliable accounting records become so important during exit planning. A purchaser, lender, accountant or business valuator needs to be able to understand how the company actually performs.
The easier the business is to understand financially, the easier it generally becomes to evaluate.
Real Estate Can Be a Separate Exit Decision
For many business owners, some of their most valuable equity is not actually in the operating company.
It is in the property.
A manufacturer may own its industrial building. A retailer may own the commercial plaza in which it operates. A contractor may own a yard, warehouse or shop. Over many years, mortgage reduction and property appreciation can create substantial equity independently of the business itself.
When the owner begins considering retirement, the business and the property do not necessarily have to be sold together.
The owner might sell both to one purchaser, sell the operating business while retaining the property, lease the building to the purchaser, sell the property separately, relocate the business before selling it, or restructure ownership before the eventual transition.
Each alternative can produce different financial, tax, financing and operational consequences.
This is where exit planning and real estate strategy become closely connected. The question is no longer simply “What is my business worth?” It becomes “Where is my wealth actually located, and how should each component eventually be converted into retirement capital or income?”
Professional Insight
Business owners sometimes discover that the real estate accumulated alongside the business has become as important to their retirement strategy as the operating company itself. Treating the property and the business as separate assets can reveal exit alternatives that may not otherwise have been considered.
Liquidation
Sometimes there is no practical purchaser for the operating business.
This can occur where the company is heavily dependent upon the owner, where profitability has declined, where there is limited transferable goodwill, or where the underlying assets are worth more separately than the business is worth as a going concern.
In that situation, liquidation may become the exit strategy.
Equipment, inventory, vehicles, real estate and other assets may be sold, liabilities and creditors addressed, and any remaining value distributed according to the company’s ownership structure and applicable legal requirements.
Liquidation is rarely the exit owners envision while building a successful company, but it illustrates why exit planning should begin early. A business that cannot operate without its owner may gradually need to be transformed into something another person could eventually acquire.
Keep the Business in the Family
Family succession appeals to many entrepreneurs because it allows the business, reputation and relationships they developed to continue into another generation.
However, family succession involves considerably more than identifying which child or relative might eventually take over.
The successor needs the capability and desire to operate the business. Other family members may have ownership expectations. Financing may be required to compensate the retiring owner, and responsibilities may need to transition gradually so customers, employees and suppliers become comfortable with the new leadership.
The owner’s financial needs also matter. Transferring a business to family may preserve a legacy but may not provide the same immediate liquidity as selling to an unrelated purchaser.
The emotional and financial objectives therefore need to be considered together.
Sell the Business to Employees or Management
Employees or managers can be attractive purchasers because they already understand the company.
They know its customers, suppliers, operating systems and culture, while employees and customers may appreciate the continuity created by an internal transition.
The challenge is often financing.
A capable management team may have the experience necessary to operate the company but not enough capital to purchase it outright. The transaction may therefore require external financing, vendor financing, staged ownership, earn-outs or other structures developed with appropriate legal, accounting and financial advice.
For owners who care deeply about continuity, however, an internal succession can provide a compelling combination of financial exit and business preservation.
Sell to Another Business
A strategic purchaser may view the company very differently from an individual entrepreneur.
A competitor might want the customer base. A supplier may want vertical integration. A company entering the market may value established facilities and employees. Another organization may see geographic expansion, intellectual property, specialized equipment or operating capabilities that would be difficult to reproduce internally.
Because of those strategic benefits, another business may sometimes perceive value that is not reflected solely in conventional financial measures.
Owners considering this route should think well ahead about who the logical purchasers might eventually be and what would make the company particularly attractive to them.
Preparing for a strategic sale can begin years before an actual transaction.
Sell the Business on the Open Market
For many owners, selling to an unrelated purchaser remains the most straightforward exit concept.
However, a business should ideally be prepared for sale before it is marketed.
Purchasers will want to understand financial performance, customer concentration, employees, leases, equipment, inventory, contracts, regulatory obligations, intellectual property, working capital requirements and the owner’s involvement in daily operations.
Unresolved problems can reduce value or cause purchasers to withdraw during due diligence.
Preparing the business may therefore involve cleaning up financial statements, documenting operating procedures, resolving shareholder issues, reviewing contracts, strengthening management, addressing deferred maintenance, organizing corporate records and reducing unnecessary dependence on the owner.
The objective is not simply to make the business look attractive.
It is to make the value easier for another person to understand, verify and eventually operate.
The Owner’s Departure Can Affect the Value
One of the most important issues in small-business succession is owner dependence.
If customers call specifically because of the owner, suppliers provide favourable arrangements because of personal relationships, or employees rely on the owner to make every important decision, the owner’s departure may materially affect the business.
Reducing that dependence can take years.
Customer relationships can be broadened across the organization. Employees can assume greater responsibility. Procedures can be documented. Management systems can be established, and important supplier or customer arrangements can be formalized where appropriate.
Ironically, one of the best ways to increase the value of the business may be for the owner to gradually make themselves less essential to its daily operation.
Know What Could Reduce the Sale Price
Owners naturally focus on the strengths of the company they have spent years building, while purchasers and their advisors will also search for risk.
Customer concentration, declining revenue, undocumented agreements, pending litigation, environmental concerns, employee issues, outdated equipment, regulatory problems, weak financial records, expiring leases or excessive dependence upon one supplier can all affect value.
Commercial real estate can introduce additional considerations involving zoning, environmental conditions, deferred maintenance, property taxes, lease arrangements and future-use limitations.
Identifying these issues before going to market gives the owner an opportunity to decide what should be corrected, what should be disclosed, and what may simply need to be reflected in the transaction structure.
That is considerably better than discovering the problem after a purchaser has already begun due diligence.
How Much Money Will You Actually Walk Away With?
The headline sale price is not necessarily the amount available to fund retirement.
Debt may need to be repaid. Taxes may become payable. Professional fees, transaction costs or brokerage expenses may apply. Working capital adjustments could affect proceeds, and part of the purchase price might be deferred through vendor financing, earn-outs or holdbacks.
If real estate is involved, mortgages, environmental work, repairs or other transaction expenses may also influence the eventual proceeds.
This is why the owner’s original question should not simply be:
“What can I sell my business for?”
The more useful question is:
“After the transaction is completed, what will I actually have available to support the next stage of my life?”
Accountants, tax advisors, lawyers, financial planners and other professionals become particularly important in answering that question.
Exit Planning Should Begin Years Before the Exit
Waiting until retirement to begin preparing a business for sale can significantly restrict the available options.
Some of the factors that improve transferability—developing management, diversifying customers, improving financial reporting, documenting systems, restructuring property ownership or reducing owner dependence—cannot be accomplished effectively in a few months.
An owner who begins planning several years ahead has something extremely valuable:
choices.
There is time to improve the business, investigate succession alternatives, address weaknesses, evaluate the real estate, speak with tax and financial advisors and decide what an acceptable outcome actually looks like.
That preparation may ultimately influence not only whether the business can be sold, but how much of the value created over decades the owner is able to preserve.
Professional Advisory Requires Coordination
A successful business exit rarely belongs entirely to one professional discipline.
Accountants may evaluate financial performance and tax consequences. Lawyers address corporate structure, agreements and liability. Business valuators may assist in establishing value. Financial advisors help determine retirement-income requirements. Lenders assess financing, while commercial real estate professionals may evaluate the property, lease structure, marketability and alternatives for retaining or disposing of real estate.
These decisions affect one another.
Selling the business may influence what happens to the building. Retaining the building may influence who can purchase the business. Tax planning may affect transaction timing, while the owner’s retirement-income needs may influence whether immediate proceeds or continuing rental income are more desirable.
Effective exit planning therefore requires the various pieces to be considered together rather than as unrelated decisions.
Final Thoughts
Most business owners spend years asking how they can grow revenue, improve operations, serve customers and make their company more successful.
Far fewer spend the same amount of time asking how the value they are creating will eventually be converted into personal wealth.
Yet every privately owned business ultimately faces some form of transition.
The company may be sold to an outside purchaser, acquired by a competitor, transferred to family, purchased by employees or management, or eventually liquidated. The real estate may be sold with the business, retained as an investment or disposed of separately.
The appropriate strategy depends upon the business, the assets, the owner’s financial requirements and what they want the next stage of their life to look like.
The important thing is to begin thinking about those questions while there is still time to influence the answers.
A successful exit is not simply about finding someone willing to purchase the business.
It is about understanding what you have built, where its value resides, what needs to happen to make that value transferable, and how much of it you will ultimately be able to take with you.
Guidance for Smarter Real Estate Decisions.
Written by Rodney Harvey, Broker of Record at Konfidis, Brokerage providing advisory-focused commercial, industrial, investment, and real estate brokerage services across Oshawa, Durham Region, and Ontario.
Continue Building Your Investment & Business Knowledge
You may also find these articles helpful:
Why Transaction Structuring Matters in Ontario Real Estate
The Difference Between Transactional Sales and Professional Advisory
Ethics, Transparency and Informed Decision-Making in Ontario Real Estate
Ontario Real Estate Is More Than Just Sales
Why Clear Communication Reduces Real Estate Disputes in Ontario
Sophisticated Negotiations Involve More Than Price Alone
When it Comes to Offers, it’s Not Always about Price
“If you require professional guidance regarding representation structure, transaction strategy, commercial leasing, investment property, due diligence, or real estate advisory services, consultation and representation options may be available depending on your objectives and circumstances.”
