Is it a mistake to start selling after a bad year?

A weak year changes what you may be asked and what you will need to show. BDC’s guidance on negotiating a sale says a business’s price is fundamentally determined by its perceived value to a potential buyer, often a blend of financial performance, future potential of growth and strategic fit. On BDC’s account, financial performance is one of three elements in that blend.

What buyers examine

BDC says buyers meticulously examine historical revenues, profit margins, cash flow and asset values, and that consistent profitability and strong cash generation make a business more attractive. Its guide to selling adds that buyers want to understand your financial performance to see a solid track record that will continue, and will ask for historic and interim financial statements, projections, tax returns and other records. A weak year will therefore appear in the file next to earlier years and any interim figures for the current one.

Explaining the year

BDC says you may not be able to resolve every issue before a sale, but it helps to show a buyer a plan to address them. It also says unaddressed issues complicate a sale because the buyer must think about resolving them without the knowledge you have, which can affect price or terms. Ask your accountant to prepare year-end and interim statements and realistic projections, and ask what the records show about the cause. Then settle what you will say when a buyer asks why you are selling now.

Waiting, or structuring around it

CFIB’s succession research warns that poorly managed ownership transitions may result in a premature sale that does not receive the business’s full value. BDC’s advisors also say many people wait too long before starting to plan the sale, and then sell at a time that is not ideal. BDC also notes that some buyers want milestone payments based on company performance when a growth plan is not yet mature. What happens if an earn-out target is missed shows how that kind of term can work. Compare the options with your advisors rather than treating the timing as fixed.