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Operating a business for many can be both an exciting and rewarding experience. However, at some point in the business lifecycle, business owners turn their minds to what comes next for both the business and their personal goals. Whether it be moving into an advisory role with the business, becoming an investor or consultant with other businesses or retirement, there is no one size fits all approach to making that transition. Identifying what is best suited for the business and the owners’ personal objectives can take a number of forms. Below, we cover a few of the common options available to an owner for transitioning their business:

  • Family – A potential ownership successor may be right under the current owner’s nose… in their own family. For family operated businesses unique drivers motivate a transition to the next generation, be it the continuation of the family legacy or to allow for a certain degree of retained control/influence post-closing. A number of strategies exist to assist with that transition, be it on a tax efficient estate freeze to a family member(s) or by structuring favourable deal terms to ease with the transition to the purchaser (such as a reduction in the sale price from market).
  • Management – A management buyout is another typical structure that business owners use where they transition ownership to the existing management of the business. Often these types of transactions are structured on more favourable deal terms to ease with the transition to the purchaser (such as deferred payment of the purchase price). Those in existing management positions typically know the most about the business (certainly more than a third party), require limited time for due diligence and tend to be friendly parties to work with, which is favourable to structuring a deal that will close. Management (in addition to family) may also be in a position to assume existing business debt and service it over the long term through ongoing operations, more so than a third party purchaser.
  • Industry Associates – Those that operate businesses in related, up/downstream or directly competitive industries may have existing relationships with the owner and accordingly may be a strategic fit for a sale. While the due diligence process may be more robust than the first process, the existing relationship between the parties may lead negotiations toward being amicable and more reasonable than those with a third party purchaser. There can be strategic reasons for these types of transactions and can help the seller feel comfortable about who will manage the business post-closing as well as provide the seller with a transition period out of active operations.
  • Market Based Process – Transaction brokers can be an invaluable resource to assist an owner with both identifying and targeting a strategic purchaser, unbeknownst to the owner, that may be a strong fit with the existing business and who may pay an increased purchase price in consideration for that value. Working with a broker can assist with identifying market trends and opportunities for positioning the business for sale in a way that best reflects its value in the market. Business brokers are also familiar with deal making and accordingly are well suited to support an owner with the transaction process and transition period dynamics.

Determining which of the above processes might be most appropriate is highly case specific. However, a strong starting point is a third party valuation which can both identify strengths as well as areas for improvement. The valuation can also help with setting a yardstick for the seller’s expectations regarding price. There are a number of strategies to bridge potential gaps in perceived value between a purchaser and a seller (such as an earn-out), but setting the starting point with impartial data helps set a sturdy foundation for negotiations.

We at KMB are experienced at drafting the appropriate legal documentation required to effect the acquisition or sale of a business, in a cost effective manner than enhances value for you, the client. We work in a team-based manner together with your valuator, accountant and broker. If you have any questions regarding this or any aspect of your business, please do not hesitate to get in touch with me at 905.276.0431 or kfernandes@kmblaw.com. We are here to help.

This article is provided for general information purposes and should not be considered a legal opinion. Clients are advised to obtain legal advice based on their specific situations.

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