In an exclusive interview with CanadianSME Small Business Magazine, Charlie Kim, Partner, and Matthew McGuigan, Associate, at Robins Appleby LLP, share why business owners should begin preparing for a potential exit long before a buyer enters the conversation. With experience advising companies on mergers and acquisitions, financing, and strategic business transactions, Charlie and Matthew discuss how strong legal foundations can protect value and create smoother transitions.
Interview By Maheen Bari
Charlie is a partner in our firm’s Business and Transactions group. He is deeply invested in his clients’ success.
Charlie employs a straightforward and practical approach to transactions and the practice of law to meet his clients’ goals and objectives. As a strategic advisor, Charlie is committed to building long-lasting relationships with his clients by understanding their businesses and supporting them across their businesses’ life cycle.
Matthew’s detail-oriented approach to the law provides him with the necessary skillset to tackle his clients’ matters in a comprehensive and effective manner. He enjoys solving complex legal issues for his clients, and practically applying solutions to his clients’ individual business needs.
Matthew is an associate in our Business and Transactions Group advising clients on mergers and acquisitions, debt financing, private capital markets, and shareholder and partnership arrangements. His practice areas encompass the Canadian, cross-border, and international context.
CFIB data suggests that roughly 76% of Canadian business owners plan to exit within the next decade, involving more than $2 trillion in assets. In your experience at Robins Appleby, what percentage of those owners are actually ready to sell when a buyer shows up—and what does “not ready” usually look like on the ground in terms of contracts, records, and expectations?
Although we do not track a formal percentage, in our experience the vast majority of owner-managers are not “ready” when a buyer enters the picture. Typically, the owner is mentally ready to sell, but the business itself is not transaction-ready. This includes issues such as incomplete minute books, unsigned or outdated customer and supplier contracts and inconsistent financial records. The owner-manager may also not have done the requisite tax planning to optimize their value from the transaction.
An M&A transaction is not as simple as the parties agreeing on a purchase price and a closing date. Poor organization can delay due diligence, increase professional fees, lead to larger holdbacks or indemnities, and sometimes reduce the purchase price. Owner-managers should begin preparing for a potential sale well in advance by addressing deficiencies in their legal and financial records.
Furthermore, owners who enter a transaction without adequate pre-transaction tax planning may face a large tax bill at closing. Some potential tax saving strategies must be implemented well before the ultimate closing date. Therefore, sellers who have not done adequate tax planning well in advance of a transaction may lose valuable planning opportunities and net far less from the sale than expected.
Many owners assume that a sale will be quick or largely driven by headline price, then discover how complex the process really is. What are the most common misconceptions you see about how long a sale takes and what it involves, particularly around due diligence, consents, and the legal work required to get from intent to closing?
Selling a business is an exciting time for owner-managers. For some, it is their retirement plan. For others, it may generate a sum of money they never imagined receiving. When an initial offer arrives, the natural instinct is to close as quickly as possible.
The biggest misconception is that signing a letter of intent means the deal is almost finished. In reality, it usually marks the beginning of the most intensive part of the process. Clients often expect to close within weeks. However, depending on the size and complexity of the business, a sale will normally take several months.
Buyers will invariably conduct legal, tax, financial and operational due diligence on the target business. Additionally, sellers may be required to obtain third-party consents from landlords, lenders and key suppliers and customers as well as regulatory approvals. Finally, the parties must negotiate the definitive purchase agreement and related documents. The headline price is only one term. The parties must also negotiate deal terms such as working-capital adjustments, holdbacks, indemnities, representations and warranties, restrictive covenants and other allocations of risk. All of these elements take time. More particularly, the advisors need sufficient time to adequately protect their clients.
You’ve said assignment restrictions and change‑of‑control clauses in supplier and customer agreements are among the most frequent causes of deal delay. Can you walk us through how one of these clauses can actually slow or derail a transaction, and how early an owner should be reviewing their key agreements to identify and plan around those provisions?
Third-party consents are among the few aspects of a transaction outside the parties’ direct control. Often, agreements with landlords, lenders and key suppliers and customers will contain assignment restrictions or change-of-control clauses, requiring consent to the transaction. Depending on the industry, regulatory approvals may also be required. These consents can sometimes take a long time to obtain, delaying the closing of the transaction. To that end, we recommend that owner-managers begin reviewing their material contracts before the business goes to market, or at minimum, before signing a letter of intent. The earlier the requisite third-party consents are identified, the more time the seller has to plan.
Care should be taken to assess the appropriate time to seek consents. Early identification does not necessarily mean seeking consent immediately. Prospective sellers must balance the desire to obtain consents early with the sensitivity of disclosing that a sale is in the works. A planned approach allows the seller and its advisors to determine which consents are critical, when to approach each third party and whether alternatives are available.
Disorganized, informal, or incomplete financial reporting often hands negotiating leverage to the buyer, including the ability to reprice mid‑negotiation. Without naming specifics, can you describe a situation where weak records or “family‑style” practices forced a change in deal terms—and what practical steps SMEs can take now to avoid that kind of surprise?
Owner-managers often rely on informal practices with respect to financial and accounting records. This includes using inconsistent accounting policies, preparing financial statements on a compilation basis and commingling personal and business expenses. The business may be profitable, but the buyer cannot easily determine which earnings are recurring and which adjustments are legitimate.
Buyers will often focus on revenue and EBITDA. However, when financial records are disorganized and mismatched, buyers may put less weight into the information they are receiving, thus making the target business less attractive. Consequently, buyers may require more in depth due diligence to appease themselves that the business is worth the price, decreasing the net value received by the owner-manager.
Furthermore, poor accounting records and informal practices may be perceived by the buyers as an increase to the risk of a future CRA reassessment. This may reduce the purchase price or cause buyers to increase the amount held back at closing to mitigate that risk.
Prospective sellers should work with their advisors early to tighten financial reporting, separate personal and business expenses and ensure consistent accounting policies. Owners should also ask their financial advisors whether reviewed or audited statements or a sell-side quality of earnings report would be worthwhile. Clean records help support valuation.
Many Canadian SMEs rely on oral arrangements with key customers or suppliers that work internally but don’t withstand outside scrutiny. At what point in a sale process do these informal deals become a problem, and what does “exit‑ready” legal preparation actually look like and cost relative to the value and protection it provides over the three‑to‑five‑year window before an owner plans to sell?
Oral agreements are common in owner-managed businesses. Often, key customers and suppliers place trust in the owner-manager and are willing to provide favourable terms. These arrangements, however, are premised on their relationship with the owner-manager. However, buyers do not have these same pre-existing relationships and may not be able to rely on the same oral arrangements.
In an M&A transaction, a significant portion of the purchase price reflects goodwill. Customers create revenue. Suppliers are relied upon to generate revenue. If a purchaser cannot trust that the same favourable arrangements will remain in place after closing, the goodwill is inherently less valuable. For sellers, this can either mean a reduction in the purchase price, or an increase in the buyer’s holdback at closing as an attempt to mitigate risk.
“Exit-ready” legal preparation includes identifying and documenting material arrangements. The cost varies with the number and complexity of the issues, but it is generally modest compared with the value at risk. An early, targeted legal review can preserve purchase price, avoid last-minute professional fees and strengthen the seller’s negotiating position.
Disclaimer:
The views and opinions expressed in this interview are those of the interviewee and do not necessarily reflect the official policy or position of CanadianSME Small Business Magazine. Our platform is dedicated to fostering dialogue and sharing insights that inspire and empower small and medium-sized businesses across Canada.
