Selling a business is more than just an event, it is a process. It requires not just the preparation of assets and contracts, but also the employees and the entrepreneurs themselves. Every industry is different and every sale is unique.
Key issues to be discussed on this podcast include:
How shifts in global distribution and supply chain have effected demand;
The steps to prepare the business for sale and can it run without the owner;
How to ensure a smooth transition of ownership (i.e. taxes & local laws);
The importance of building a team of trusted advisors.
Andrew Abdalla, CPA, CA provides his clients with a variety of management advisory services including strategic planning, financing, as well as tax and succession planning.
With over 20 years experience helping clients maximize their potential future growth potential, Andrew offers specialized focus on sales and income tax, acquisitions and divestitures, business valuations, corporate reorganizations, financing and government assistance programs, and technology solutions.
Andrew holds a Bachelor of Commerce and a graduate diploma in public accounting from Concordia University in Montreal. He has also completed the comprehensive Canadian Institute of Charted Accountant (CICA) In-depth Tax Course.
Make sure to check The Northland’s YouTube Channel for more episodes.
Andrew Abdalla, Joseph Adramson
Joseph Abramson 0:13
Welcome to the artists and podcast, where we share insights from the investment world's leading minds. Today, we will discuss how to successfully sell your business with Andrew Abdalla, a partner at MNP and one of Canada's leading experts on mid market m&a. I've known Andrew for many years, and he's always proven insightful with a deep knowledge of his craft. Andrew, welcome.
Andrew Abdalla 0:41
Thank you, Joseph. Happy to be here today.
Joseph Abramson 0:44
Absolutely. A pleasure. So, um, you know, let's start off with the M&A market itself. It's been extremely hot, um, you know, is it still booming? And do you expect it to remain that way, in a rising rate environment.
Andrew Abdalla 1:00
Things are, as you say, very, very buoyant. Right now, in the market, there have been a lot of transactions in the last 18, 19, months, when you know, COVID first hit, there was a lot of uncertainty, a lot of deals got stalled. That were in process. But then, you know, a few months into it, people realize life goes on business goes on, people still need products and services. By and large, we've seen very, very few bankruptcies, major setbacks, in most businesses, you know, bars, restaurants excepted and travel different. But in the rest of the business world, it's been a generally a very good year. So yes, we're seeing transactions. Every firm has a large backlog of transactions. You know, if anything's there's perhaps a shortage of businesses to buy lots of buyers out there, maybe a lack of sellers right now. But still more transactions that we've seen in the last six months than we've saw, say, two and three, four years before active active market, what will it look like, as interest rates start to inch up, I still think it's going to be very, very active. Just because of the growth opportunities down the road, a lot of businesses are going to be inflation protected. So they'll be able to move the pricing and the revenue with the increased inflation and interest rate rising that we're seeing in the market. So as long as they can keep ahead of it, there's no reason why, you know, businesses should not go up in value in acquisitions, be creative to to purchasers.
Joseph Abramson 2:50
And below the surface, what do you see as the major themes, like are certain industries, hotter than others? Are certain industries everyone, is staying away from? And more structurally, you know, what do you think is driving this? Is it the fact that there's this, you know, generation of entrepreneurs that are now getting towards retirement age? And their children? Really, they don't want to be in that business? Maybe it's, its manufacturing, maybe it's something more boring. So what do you see as kind of the near term cyclical trends, but also the longer term structural ones?
Andrew Abdalla 3:33
A few things have happened. And yes, you're correct, that there is a bit of a generational and market change that a number of entrepreneurs and especially in Quebec and in Canada have reached an age where they need to start thinking of the next generation and, and, and also what they want to do personally in their lives. You know, businesses get sold for all sorts of reasons. People change, they want to do something else. They're tired of their business, they see more opportunities elsewhere. So I think that's part of it. The low interest rate environment that we've had for the last several years, also makes it much easier for a buyer to acquire a business. There's been a receptive, financial and capital market. You know, when I started in this business, you could only borrow essentially against hard assets, whether it was fixed assets, inventory back perhaps by receivables as well. There weren't very many lenders out there that were lending against future cash flow of a business. So that business has developed in the last 20 years from nothing to being a very, very large part of where entrepreneurs acquires go out and buy businesses. So that market is the develop, the pricing has come down on that, you know, when I started, those cash flow loans were being done at 15 to 20% interest to acquire a business. And today we're seeing cash flow loans, loans being done it for five and 6%. So we're back to rates that we saw initially on hard assets such as business. So that market has developed, we've had also support from private equity companies that are coming in, and going through a lot of consolidation and roll up strategies. So that's a little bit of a structural change on the financial land, but also a change on the market and where a lot of businesses now realize that they can grow domestically and internationally, in a virtual world. So that's been a pandemic structural change, that I think will continue. You know, I was looking at a transaction last week for Computer Services Support desktop roll up strategy across Canada, where all that work used to be done by technicians that would physically go into somebody's office. Now, it's all being done remotely. So again, a structural change and in the business marketplace, that is enabled that type of activity. Right,
Joseph Abramson 6:28
right. What do you see as kind of the the big trends for the next five or 10 years? Like maybe some of the past ones will continue? Or maybe there'll be some, some new ones? What are your thoughts there?
Andrew Abdalla 6:41
I think we're gonna see more and more foreign buyers into the Canadian market, as things have become globalized. I think we're going to seeing that we're going to see Canadian companies being going outside of Canada as well. We've been seeing, you know, Canadian companies go to the US for several years. But now we're seeing more into Europe. And we've been I've ever seen, we've seen European companies come into Canada, especially in some sectors like real estate, we've seen a lot of European acquires of Montreal real estate, especially in residential space. So that is going to continue. Other trends, consolidations, roll ups, specialty products and services. That didn't exist five and 10 years ago. So think of all the financial tech world medical world, we're seeing that being expanded from small and mid market companies, where that used to be really, for the large companies, telecom and technology. 5g technology is bringing about a lot of new industries and businesses, Internet of Things, autonomous driving up, all these new sectors didn't exist five and 10 years ago. And we're starting to see a lot of activities, especially in Montreal, and Toronto now, that is really nice to see that we're actually on the forefront of some of these new growth industries.
Joseph Abramson 8:13
And I was wondering, something that I've seen in the last little while, our PE firms that are scouring some of the industrials, particularly close to transportation hubs, on the outskirts of the city, and near the airport, and basically looking to acquire them for their land and building. Not not because those kind of last mile real estate have gone up so much in value, and there's such little supply that businesses are being bought just for their real estate. Is that something that you're seeing as well?
Andrew Abdalla 8:49
Well, one of the things that, you know, you can't help noticing, when you pick up, you know, in newspapers, you're reading about all the supply chain issues that have occurred during the the pandemic, so it was somewhat COVID related. We had some weather issues we had, you know, a big boat and the the Nile, we had some rail strikes, rail breakdowns, ship shortages that are that are driving cars and trucks. So you're reading about all these supply chain issues add, add to that port congestions in Los Angeles, and now it's starting even in Canada and a shortage of containers. So, you know, there's a big shortage of containers, those that have done well have their containers, shortage of truck drivers. We're seeing action in the m&a world transaction I'm involved in in that shipping logistics company and they're a hot commodity right now. They've got physical assets, land and building as you mentioned, they've gotten containers, they've got trucks, and they've got shippers. We're seeing it in rates rates. I'm going through the roof. My girlfriend works in men's apparel, and you know, she was telling me, you know, to ship a container from China apparel to Canada, used to be about $5,000 to cross the ocean. Today, it's 25 and $30,000, to get a container across lack of container lack of capacity. So as you say, the brick and mortar solid, you know, assets near points of entry points of distribution have become key, the distribution model has also changed somewhat, you know, Amazon has sort of changed that and how product gets distributed? No, no, if you look around Montreal or Toronto, some of the big distribution facilities that they've set up, well, those are huge tracts of land, as you say, near highways near rail near infrastructure. So that will continue. As retail consumption changes, you know, everybody, you know, reads about and knows about how brick and mortar stores, retail stores have morphed into multi channel Omni omni channel distribution, where stuff is being bought online, seen in a retail store, that is going to continue, there's been a fundamental shift, I think, and how consumers acquire goods and services. You know, I used to run out to my local Loblaws probably go to buy my groceries. And now I've just gotten used to punching away on my computer and worrying and here it shows up on my doorstep. I don't see myself changing. And I think a lot of consumers are probably like me, so. So that's, I think driving a lot of what you're talking about, and seeing in terms of the sudden demand for those real estate assets. And then physical shipping.
Joseph Abramson 12:01
Yeah, absolutely, I think I think that you're bang on on some of those trends. And some of them will outlast kind of the supply chain issues. And I think it's going to take some time to build out this industrial last mile real estate to fulfill the demand, well, maybe we can get down down to the micro from from kind of the, the macro trends. And you know, you've been in the business for quite some time, I presume that you've developed an acumen. And so if we think about it, what are maybe the three key secrets to successfully selling your business? How do potential sellers get top dollar?
Andrew Abdalla 12:53
I think the first thing is to be well prepared for the process. And it's a process and you have to think through selling the business as being a process, and not just an event. So the process really needs to start with a little bit of introspection on the part of the business owner entrepreneur, in where he is today. What does he enjoy doing? What is he good at doing? And where does he want to be in five and 10 years. And we know we find a lot of entrepreneurs are good at some things, not necessarily good at other things and don't want to do everything forever. I you know, I tell the story of a consultant that I worked with many, many mandates and he was a fix it guy when a business would come in to get into trouble. He'd get it redirected and back on its feet. And what he always said, the hardest thing on earth was take take a business from zero startup to $10 million in sales, you'd have no clue how to do that. wouldn't know what to do how to do, it wouldn't have the stomach for it. But he could take a business from 10 million to $100 million that he could do relatively easy because that's what he knew. So I think business owners need to think through what are you want to do? What are you good at? Where do you see yourself and then set up yourself. I need to start thinking about what I want to do next with my life. Pandemic the pandemic has given people the opportunity to be reflective on where they are, where their business is. So start thinking in terms of that process and then it's a function of planning out your exit and your exit needs to start two to three years before you think you want to have your exit And the reason you need that lead time are for a bunch of different things that will all converge when you come to sail. So the first thing is, you know, really what is your business look like?
What are the value drivers of the business? And how am I going to maximize my value three years down the road or four years down the road? So maybe time to start surrounding yourself? So one is the that preparation process to ask me for three things would be selecting your advisors to get you thinking throughout this process. So selecting advisors, and you're going to need an Mergers & Acquisitions lawyer, you're going to need an M&A specialist, maybe a business broker for a small business, and a solid accountant that understands your business. Because when you start thinking about it, you're going to need to think through Well, what are the the metrics on a sale that will give me the maximum price and the metrics could be most businesses, it's EBITDA. So it's earnings before interest, depreciation taxes, could be cashflow. Some businesses in a startup phase, it could be gross revenue, but start having those discussions now, to know that if you're in a world where businesses get sold based on EBITDA, well, what are the things that I can do now to prepare for in three years that I can maximize my EBIT debt when I come to sell? So that often means taking a hard look at your business today and say, What is my growth plan? What is my growth strategy? How do I make myself attractive to a buyer three years down the road? Well, the first thing that usually means is getting your house in order. So bring your make sure your your, your legal framework organizational framework is up toward sure minute book up to date is all your documentation in place, have you secured the contractual arrangements around your business, because when somebody comes to buy three years down the road, he's gonna want to see that you actually own your property free of title or with title, that you've got a proper lease in place, that your employees have employment agreements, that they have non compete agreements, non solicitation agreements, because the person that's buying three years down the road, the assumption is that that business is going to keep on going forever, and be in a growth mode. So if you don't have your employees locked up, if you don't have your premises locked up, you know, I went through a deal, one of the first deals I did about, I don't know, 20 years ago, it was a seven store, retail chain, and we got to closing. And, you know, you go part of a due diligence process where, you know, you essentially take off your clothes, and the buyer looks at everything, we realize, because he'd asked for copies of all our retail leases for the stores, because without the stores, you don't have anything, right. And three of the six, six or seven stores, the leases were coming up for renewal in the next six, seven months. So the buyer wasn't going to commit to buying that business until we had gotten all those lease renewals in place. So it's a little awkward if you go into negotiate a transaction with the landlord, and he knows you're going to sell because you've been shopping the business to start negotiating your lease, so you've lost your leverage. So same thing with trying to nail employees down and getting proper employment contracts in place. Non solicitation clauses, non competition clauses, the buyer is going to look for that down the road. So I think you'd have to sort of work on that whole organizational, legal, structural part. You know, if you're buying a product from a particular supplier, well, you better get it your distribution agreements tie down, because the buyer is going to say, why would I pay top dollar for this business, if your main supply contract could be canceled on six months notice. So try and get those long term contracts in place early in the process. So that's sort of the the next piece that I would sort of work on is is let's build this business so that it will last so let's make sure we've got that together. The next sort of piece of that you need to deal with is what are your skeletons in the closet? Every business has skeletons? Is it a lawsuit that that's been dragging forever a potential employee issue? Is it
Something in my financial statements. So common common thing that we see with with, you know, small, medium sized businesses, that their financials are subject to some bias. And if you're a very profitable business, you tend to try and reduce your profits to save on income taxes. Or if you're struggling a little bit, you're trying to make your results look better to please the bank or the lender. Well, that could be a smart strategy, if it's only you, and you're going to be owning this thing forever. But if you look at a scenario where you've purposely done your best to bring down profits to save taxes, and your business may be sold at six times EBIT down three years, well, you're hurting yourself, you know, you know, half a million dollars, say you've depress your earnings is saving you 27% in income tax, right. So roughly $120,000 of income tax saving, but that half a million dollars, if you're selling just cost you $3 million on the sales price. So you need to start to normalize your numbers, and bring all these things out. Before you get into that sales process, the buyers gonna look at long term trends from the past, they'll be paying particularly particular attention to your last trailing 12 months. And they'll be looking at the future projections, always easier to say to the buyer, this is what it is, you lose credibility if you have to go to your buyer and say, Yeah, well, we showed, you know half a million dollars, but it's really a million dollars. Trust me, this is real, the buyer can only go with what he sees on paper. So get your you know your financial house in order speak to your accountant, consider whether or not you should have upgraded financial statements. If you're just doing basic statements, without disclosure, should you be looking at accounting standards for private enterprise have a review done perhaps an audit, if the buyer may be foreign? Should you be looking at international financial standards, start working through that process, that's going to take three years to get that in order. Start thinking through what are the decisions I'm making now in my day to day business, that may impact positively or negatively my earnings or my sales or whatever the sales metric is, in three years, when I come to actually sell my business, those things decisions have to be made. Now, to get that in order. Start thinking through the financial leverage in your business. Whatever cash you can take out now, either, you know, typically will pay up a dividend to tax free to a holding company, maybe additional value to you. A buyer looks at what is required in terms of working capital to run this business. So it's much smarter if you can run your business, unless working capital, less cash, less inventory, less receivables, and take that excess money out of the company. It's extra money to you in your pocket. And it lowers the perceived acquisition costs to the buyer. So start thinking in terms of running your company, a little leaner, a little tighter, don't sacrifice the business, like I'm not saying, you know, don't invest in this piece of software or this piece of equipment, do the right things for the business that start thinking in terms of operating leaner, if your sole shareholder, and you've been putting through some discretionary expenditures, travel, cars, things like that, maybe now's the time to think twice about that. When we come to actually sell we we put together what's called a normalized earnings so we'll take the earnings from the past year or projected and then adjust for one off items. You know, we took spent this money we spent that money we had this litigation the special legal fees, so we add back much easier. If you don't have very many of those items. The buyer just starts to lose interest in confidence and more for them to via verify. So try and keep it as clean and as in simple when you come to sell other pieces is perhaps some tax planning that you need to do
To get ready to actually sell your business, a lot of tax plans will take two and three years to put into place and make sure that they're effective for you. A very, very often planning technique used for private companies is to plan to use their enhanced small business capital gains exemption of approximately 850,000. It's indexed, it goes up every year. So how to plan for that requires a tax specialist early on in the game. And if you've got other family members, you're able to multiply that capital gains exemption. So you might have a business that's worth $5 million. But if you've got a wife, and three or four kids, you may be able to plan so all those that proceeds are Tax Review. But it takes at least two years to put that in place. So plan deal with the skeletons start dealing with what is your balance sheet and income statement going to look like when you come to sell, do some tax planning, make sure your corporate houses in order that when you come to sell, the buyer knows exactly what he's getting. If he's buying employees, well, you need employment contracts, if he's buying intellectual property, make sure you've got title to that intellectual property, maybe you should start looking at filings and patents, you know, I sold the business almost have been about seven or eight years ago, they were in the technology business. And they were actually a spin out of McGill University. And they had acquired some of the intellectual property from McGill at the time. But there was sort of a loosey goosey agreement with the University on who owned the business, the intellectual property there was will be payments being made, it was time to actually get some really strong intellectual property lawyers involved to make sure that we had full and clean title and a clear statement from the university that we actually own this intellectual property, you don't want to go down the road of a transaction, and then fine, you've got a weak weak link, because the buyer is going to come back and either walk away, or renegotiate your deal.
Joseph Abramson 27:29
So that's, that's great, Andrew, um, you know, thank you very much. I think that provides a lot of insights where, you know, novices, you know, just very simply wouldn't need these things. I can say, having been on the other side of these transactions as a buyer for some years, I think the financials are critical. And when you get to the point where you're really serious about selling than it has to be audited. And you have to make all of these adjustments for quality of earnings that always occur in, in private businesses. I was wondering the kind of the other side of that in two or three minutes, what would you say, are the key mistakes that novices make when they're trying to sell their business? So what are the two or three things that people should try to avoid,
Andrew Abdalla 28:25
you need to have your data ready. Once a buyer gets serious, he's going to, you know, he may make you an offer, and he may ask you for some data. So you need to show that your shop is well organized, and that you can provide the data I tell people start preparing the data room now. So it's every buyer has a due diligence checklist, have all the data ready, have it all scrubbed before. Another error I see made often is not knowing your price. Speak to your advisors, your professionals you have to know what your prices, what you'd like what's the lowest you would take what's the deal terms you will take buyers will try and trick you and give you your price but not give you the deal terms you want to get $5 million for business $500,000 today and the rest payable in 10 years may not be such a good deal even if you got your price. So think that one through other errors I see made by vendors is his overall get letting their ego get in the way. But the buyer wants essentially is a business that can run with out the vendor, the entrepreneur that started that business. So often, you know, entrepreneurs are proud of the business so they always talk of I did this I did this I did that That kills them when they come to negotiate the deal. You have to make yourself in the background in terms of the business, and have the right people in place that the business can run without you maybe not immediately, but in six months or a year. Otherwise, the buyers gonna say, Oh, this business is really just John and not anybody else. Know that that
Joseph Abramson 30:25
definitely, definitely make sense. And would there be any recent tax changes that, you know, potential sellers should take into account, or maybe just some big parts of the tax code that are really kind of critical to a successful transaction,
Andrew Abdalla 30:45
there have been some changes in terms of the treatment of goodwill and gotten capital gains are being tweaked all the time, and some of the more aggressive tax plans. But I wouldn't say anything that significant. Most of the planning is around capital gains exemption, being able to remove as much money as you can by tax free dividends to a holding company. I think that's where most of the work is that we're seeing being done. Right now. I don't, you know, I tell people don't let the tax get in the way, you know, eventually, you're going to have to pay the tax, our capital gain rates aren't so high right now. You know, you're paying essentially 26% is so could be left with a lot of money in your pocket, if you get the right price. So work on creating value and getting the right price. A lot of people are scared right now that that capital gains rates may go up in the next budget or the next year, somehow the government needs to pay for all the handouts they've had throughout the pandemic. I personally don't think that's coming for at least the year going to will be something that has to be whether it's a capital gains rate, a wealth tax, some other sort of tax that comes down the road. Okay, I wouldn't rush out and sell right now. Because I think that's coming down the road.
Joseph Abramson 32:26
But, we'll see, you know, and are there any government programs that are, you know, quite useful to either the seller, or that can be mentioned to the buyer, so that they would be willing to pay more money.
Andrew Abdalla 32:42
So about almost 15 years ago, both the federal government and the Quebec government, were really concerned that there were a lot of Quebec and Canadian businesses that were not being transitioned to the next generation as they were in the past. So there are a number of programs right now from people like Avis snack CABAC, phone solidarity, labor sponsored venture capital, and a snack CABAC. Some of the banks that have these so called business transition programs, to allow you to transition the business to a family member to an employee buyout group, another possible exit Avenue. There's certainly money available to a buyer to acquire businesses. You know, I mentioned all the cash flow loans that are being done now. And private banks are in that market to BDCs always been there, they've always been there on the real estate piece of things. The labor sponsored venture capital funds have been there to do it. So yes, there is lots of money out there from governmental quasi governmental businesses out there, a new thing that that that we're seeing in the last five years more and more, the so called dividend recapitalizations, where you've got a successful business, let's say you're making $3 million of cash flow EBITDA a year, and you're not ready to sell, but you'd like to D leverage yourself in that business, take some risk off the table, have some money in your holding company to be virus, diversify your portfolio. So banks will come along and lend you three, four times your EBITDA that you can then pay yourself a dividend. So if your business is making $3 million a year, you can negotiate a deal with the bank, borrow seven $8 million from the bank, say and pay yourself a big tax free dividend to your holding company. And then you can invest them whatever you want, whether it's real The state of portfolio stock. And that's another way of diversifying your your risk because most entrepreneurs 98% of the risk is in their business. And nothing is risk free, as you know, Joseph. So another smart strategy that didn't exist years ago.
Joseph Abramson 35:20
No, that's a that's very insightful and very, very interesting. I think that could be useful to to a lot of Northlands clients, because a lot of them, you know, are entrepreneurs. I was just wondering, is there anything we missed, you know, you know, a minute or two to kind of wrap things up, or anything that we may have not gone over?
Andrew Abdalla 35:45
I think we pretty much covered everything, you know, it's it's planning, having the right people around you, accountants, lawyer, M&A professional, plan early for the transaction, get your house in order, get your head in order, you know, where do you want to be? And and start thinking of your business, where you're the investor, and you're not the guy running the business, there is a great book that was written, I don't know, maybe 10 to12 years ago, something called the E Myth. And what the author recommends to entrepreneurs is that stop thinking of working in the business, but start working about being working on the business. So you're not in there doing the minutia, you're at that 10,000 foot level and you're thinking through, how do I improve my business? How do I grow my business? How do I make it more profitable? That's what's gonna get you to the best exit possible under your terms and your timing for a deal that that you will be happy with, to let you go on and do something else. And that's what I mean about getting your head in order. Where do you want to be in what do you want to do?
Joseph Abramson 37:04
Well, thank you so much for your time. Andrew, you're you're always welcome at at Northland. We look forward to speaking with you again.
Andrew Abdalla 37:14
Thank you, Joseph. My pleasure and happy to speak again whenever you guys want me thanks.
Selling A Business, Buying A Business, Generational Wealth, Foreign Buyers, Globalized Markets, Family Wealth, Tax Specialist, Entrepreneur, Family Enterprise, Canada,