As interest rates show signs of stabilizing, many business owners who were previously in a holding pattern may be ready to reconsider a sale.Sam Edwards/iStockPhoto / Getty Images
Recent cuts to interest rates by both the Bank of Canada and the U.S. Federal Reserve Board have created a more accommodative environment than economies have seen in recent years. With further cuts possible, Canadian small and medium-sized businesses may benefit.
In 2022, a Canadian Federation of Independent Business survey found that 76 per cent of business owners were considering leaving their businesses by 2032. However, business owners have since faced rising interest rates that reduced access to capital, resulting in lower valuation multiples for those looking to sell.
Now, as interest rates show signs of stabilizing, many business owners who were previously in a holding pattern may be ready to reconsider a sale. To increase the likelihood of maximizing proceeds, here are tips that financial advisors should remind their Canadian business owner clients to keep in mind:
A lean business is a sale-ready business: Emphasize increasing profitability and steadily growing cash flows. Keep spending tight and debt low, and focus on operational efficiencies. Ensure the customer base is diversified and not overly reliant on a few large customers.
Offer a subscription to success: Focus on growing recurring revenue. A business will look much more attractive with a diverse stream of dependable income versus a haphazard collection of one-time sales.
Don’t sell a fixer-upper if you can offer a dream home: Consider investing in the business’s capital assets, buildings and equipment. Turn-key businesses often fetch higher multiples than those that require development.
A business that runs like a clock sells at the right time: Strong processes and systems give buyers confidence in the long-term sustainability of the business. Where possible, build streamlined systems that empower staff and don’t rely on daily involvement from leadership. The longer the track record of success using these processes, the more attractive the business is likely to be.
A captain’s ship is worth more when the crew can steer themselves: Encourage the development of a strong management team and staff. Potential buyers will be concerned with preserving business continuity. That may require the owner to remain on the payroll for a few years after the sale of the business. Alternatively, if considering selling to an employee ownership trust (EOT), a strong management team becomes especially valuable.
Clean books attract clean offers: Detailed and accurate financial reporting is crucial. Consider having at least three years of clear, well-prepared, audited financial statements and reviewed reports. While private companies may use Accounting Standards for Private Enterprises, the robustness of International Financial Reporting Standards is often preferred. Potential buyers appreciate transparency.
A diamond stands out in a sea of stones: Business owners should ensure their business is differentiated clearly from its competition. Value can be added by highlighting unique selling points including product and service features, market share, distribution networks and customer demographics. Where possible, use market research to contrast directly with leading competitors to show what makes a business truly stand out.
Only a jeweller knows the price of gems: During any negotiation, information is vital. Hiring a chartered business valuator at the onset can help determine a benchmark price for the business using various methodologies. That should be done while maintaining strict confidentiality, so succession plans don’t leak into the market and potentially complicate the sale.
Sell the future, not the past: Successful business owners outline a road map for growth. While past performance is important as it demonstrates the viability of a business, a solid growth plan is what creates excitement and could affect valuations positively.
Once owners are confident in the optimization of their business, they should also consider tax incentives that could reduce their tax bills when they sell. The three most prominent programs are:
1. The lifetime capital gains exemption (LCGE) which, in 2025, provides up to $1.25-million of capital gains exemptions for qualified small business corporations.
2. The new Canadian Entrepreneurs’ Incentive, which can reduce another $2-million of capital gains for qualifying transactions in addition to the LCGE.
3. Sales to EOTs of up to $10-million could be exempt from capital gains if the business is being sold to its employees and meets regulatory requirements.
Selling a business is complex and requires careful planning and strategic execution. The key to a successful exit lies in being well-prepared and timing the sale to align with favourable economic conditions. With the macroeconomic environment seemingly stabilizing, some business owners may be ready to explore sale opportunities – and potentially lucrative returns.
Chris Warner is a wealth advisor and client relationship manager with Nicola Wealth Management Ltd. in Victoria. Simran Arora is a wealth advisor and portfolio manager with Nicola Wealth in Calgary.