What’s the advisor’s role when a client sells their business?

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Financial advisors are finding more clients are looking to sell their businesses as they approach retirement. According to research from the Canadian Federation of Independent Business, more than three-quarters of owners of small- and medium-sized businesses are planning to exit their companies by 2032. When they do, advisors often get to manage the bulk of the proceeds from the sale.

With that in mind, advisors need to understand the sale process and provide guidance where they can. So, what’s involved in selling a company?

What to expect

A typical transaction takes nine months from start to finish. Here’s a breakdown of the process and what a mergers and acquisitions (M&A) advisory firm does:

• Valuation estimate (two weeks): When an M&A advisory firm is introduced to a client, it prepares a free valuation estimate for the company. That ensures the parties are aligned on price expectations before moving forward.
• Preparation phase (two months): If the parties decide to work together, they enter the preparation phase. The M&A advisory firm prepares three deliverables: a confidential information memorandum, which is a 20-30 page detailed report about the business; a list of the most likely buyers; and a virtual data room, which is an online repository of company documents required for due diligence.
• Deal marketing (two months): Once the client has approved the deliverables, the M&A advisory firm contacts everyone on the list of buyers to solicit interest. Interested parties send a wide range of questions and the M&A advisory firm works with the client to prepare answers. Some parties request meetings with the business owners, and the advisory firm helps the client prepare.
• Letter of intent (one month): After prospective buyers’ questions are answered, those still interested submit a letter of intent (LOI). The LOI outlines the price and key terms of their offer. The M&A firm reviews and negotiates with the interested parties and the client chooses the winning bidder. That’s often the one with the highest price and the most cash upfront.
• Due diligence (two months): Only the winning bidder is given access to the virtual data room to conduct their due diligence, and they bring in accountants and lawyers to examine the company’s financial and legal records. This is a cumbersome but necessary part of selling a company. The buyer’s due diligence review will be extensive but the M&A advisory firm helps supervise and manage this process.
• Legals and closing (two months): Upon completing their due diligence, the buyer instructs their lawyers to draft the purchase agreements and any ancillary agreements (lease, employment, etc.). The client reviews these agreements with their lawyer, accountant and M&A advisor, who all provide feedback. It usually takes several revisions before reaching final agreements that are mutually acceptable to the buyer and the client. When the agreements are signed, the deal is closed and the funds are paid to the client.

How financial advisors can help

The sale process is lengthy and complicated. It’s the M&A advisory firm’s job to execute the deal and get it closed, but the financial advisor plays a greater role in setting the client’s expectations early and educating them.

The financial advisor should try to stay on top of the client’s intentions for their business, especially if they’re at or approaching retirement age. It’s always better to start the conversation early and get the business owner thinking about what an eventual exit will look like. Some business owners don’t even realize they can sell their companies.

If the client decides to sell, advisors can introduce them to an experienced M&A advisor, ideally one within their professional network. At a minimum, the M&A advisor can give the client some advice and a free valuation estimate.

Mistakes to avoid

Business owners shouldn’t try to negotiate a deal on their own. There are too many stories in which a seller is contacted directly by a buyer and they agree to a deal, only for the buyer to take advantage of the seller’s lack of knowledge and experience with M&A matters. The seller ends up leaving millions of dollars on the table.

A financial advisor can get clients thinking about succession planning early and ensure they get the most from their lifetime of labour. And, of course, advisors will make sure clients manage the proceeds in a safe and tax-efficient manner.

Mark Groulx is president and founder of AIM Group Canada, a Toronto-based M&A advisory firm specializing in the sale of privately owned Canadian businesses. Reach him at mark@aimgc.ca.