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Selling your buisness 101

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Selling your buisness 101

  1. 1. Osler, Hoskin & Harcourt LLP Chad Bayne Selling Your Business 101 September 17, 2018
  2. 2. 2 SELLING YOUR BUSINESS 101 Introduction • Areas to Be Covered: ◦ Why Sell? ◦ Initial Preparation ◦ Answering the Fundamental Questions ◦ Assessing and Managing Risks ◦ Accounting ◦ Tax Planning ◦ Process and Getting to a Letter of Intent ◦ Getting to a Deal and Closing
  3. 3. 3 SELLING YOUR BUSINESS 101 Why Sell? • Why Do You Want to Sell? ◦ This will generally be the first question a buyer will ask. • There are various reasons: ◦ Retirement ◦ Shareholder disputes ◦ Illness ◦ Death ◦ Overworked ◦ Boredom ◦ Weighing additional dilution vs potential return on exit ◦ Maximized growth potential ◦ Investors need liquidity ◦ Market consolidation ◦ Financial imperatives ◦ Bull market ◦ Suitor makes an offer you cannot refuse
  4. 4. 4 SELLING YOUR BUSINESS 101 Initial Preparation • Start as early as possible ◦ Often 1 to 2 years in advance • Start assembling a multi-disciplinary team ◦ M&A counsel ◦ Accountant ◦ Tax advisor ◦ Banker ◦ Other Advisors • Planning options vary ◦ Owner/operator ◦ VC backed • Who is the core team at the company that will be “in the know”? • After the exit – then what?
  5. 5. 5 SELLING YOUR BUSINESS 101 Answering the Fundamental Questions • Is now the right time to sell? ◦ Is there a consolidation happening in the market? ◦ Is the company in high demand? • Who will the likely buyers be? ◦ Existing partner ◦ Strategic buyer ◦ Private Equity ◦ Consolidator • What is your floor price? • Are you willing to take shares back of the buyer (or do a management roll)? • Are you willing to work for the buyer for a number of years in a retention arrangement? • Are you willing to agree to an earn-out?
  6. 6. 6 SELLING YOUR BUSINESS 101 Assessing and Managing Risk • Start preparing well in advance ◦ Buyer will do extensive diligence ◦ Buyer’s advisors are tasked with uncovering issues ◦ Buyer will use issues uncovered to re-cut deal • Allocate risk to the sellers • Implement or increase holdback/escrow • Reduce purchase price ◦ Buyer may walk if they uncover too many issues or any major issues
  7. 7. 7 SELLING YOUR BUSINESS 101 Assessing and Managing Risks (Continued) • Assess Risks ◦ Understand potential legal risks ◦ Prepare appropriate explanations or take steps to mitigate • It is always better to be proactive rather than reactive ◦ Correcting issues while a transaction is pending can be time consuming and get expensive • Some issues may require “payola” to resolve • Delays in resolving could jeopardize the transaction ◦ Understand the representations and warranties that the target/sellers will need to make
  8. 8. 8 SELLING YOUR BUSINESS 101 Assessing and Managing Risks (Continued) • Be Ready ◦ Ensure all arrangements are properly documented and signed • Make sure you own your IP assets and have sufficient rights to use IP assets of others ◦ Ensure minute book is up to date ◦ Resolve outstanding litigation (if possible) ◦ Build a data room • You will have to do it and it is a lot of work, so it is best to be ready before the process even starts • Even though the buyer will have its own due diligence checklist, you will be able to cross-reference ◦ Buyer and its advisors draw conclusions from poor record keeping
  9. 9. 9 SELLING YOUR BUSINESS 101 Accounting • Statutory remittances • Tax returns (income, HST) • Audited financial statements • Quality of earnings report • Maximizing EBIDTA • Do not co-mingle personal/non-business assets with corporate assets.
  10. 10. 10 SELLING YOUR BUSINESS 101 Tax Planning • Share vs Asset Sale ◦ Buyers will generally prefer an asset sale ◦ Sellers will generally prefer a share sale ◦ Hybrid possible to create win-win? • Qualified Small Business Corporation / Lifetime Capital Gains Exemption • Family Trusts • Use of Losses ◦ IP Drop-Down and Use of Capital Dividend Account • Other Tax Planning
  11. 11. 11 SELLING YOUR BUSINESS 101 Process and Getting to a Letter of Intent • Prepare a form of NDA • Hire a banker? ◦ Process will vary depending on whether you hire a banker? ◦ Who to hire? ◦ Negotiate engagement letter • Fees • Expenses • Ability to Terminate • Tail • Indemnity • Consider market comparables / potential price range
  12. 12. 12 SELLING YOUR BUSINESS 101 Process and Getting to a Letter of Intent (Continued) • Process ◦ Prepare a CIM (confidential information memorandum) or a teaser? ◦ Single stage auction or multi-stage process? ◦ Prepare list of buyers • First stage outreach • Second stage outreach ◦ Sign NDA with potential buyers ◦ First-stage diligence ◦ Management presentations ◦ Initial indications of interest ◦ Second-stage diligence ◦ In-depth management presentations ◦ Form of purchase agreement / indicative summary of terms ◦ Bids ◦ Negotiate letter of intent ◦ Enter exclusivity
  13. 13. 13 SELLING YOUR BUSINESS 101 Letter of Intent • Generally non-binding other than exclusivity and confidentiality • Understanding what is, and is not, ‘market’ is crucial • Purchase Price ◦ Form of consideration ◦ Timing ◦ Cash free? ◦ Debt free? ◦ Working capital adjustment? ◦ Earn-out?
  14. 14. 14 SELLING YOUR BUSINESS 101 Letter of Intent (Continued) • Transaction Structure ◦ Share vs asset sale ◦ Treatment of options and other equity-based compensation • Allocation of liability ◦ Indemnification regime ◦ Caps ◦ Escrow vs Rep & Warranty Insurance • Key employees / retention arrangements • Exclusivity
  15. 15. 15 SELLING YOUR BUSINESS 101 Getting to a Deal and Closing • Comprehensive Due Diligence ◦ Legal ◦ Financial ◦ Tax ◦ IP (code review) ◦ Business (although usually mostly done at this point) ◦ Customer calls ◦ Other? • Transaction Documents ◦ Purchase Agreement ◦ Ancillary Agreements
  16. 16. 16 Getting to a Deal and Closing (Continued) • Retention arrangements • Integration planning • Communications strategy / press release • Implementing pre-closing tax planning • Signing • Closing Conditions ◦ Third party approvals ◦ Regulatory approvals ◦ Discharging debt ◦ Other • Closing
  17. 17. Thank you! 17

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