I recently had the privilege of hearing Garth Stephanson speak at the May 2013 Estate Planning Council of Toronto dinner. Garth’s story was fascinating and he provided extremely valuable advice for business owners when it comes to building a business for a successful transition. His advice is especially critical given the implications for business owners of the unprecedented transfer of business wealth expected over the coming decade.
After 32 years as CEO, Garth sold his manufacturing business in 2004 when sales had grown to approximately $15 million. The planning, however, began 3 years earlier. According to Garth:
"There was no doubt that this would be the largest one-time transaction of my life. Having never sold a company, I didn’t know how to start the process, so I began doing preparation work. It paid off big time." 
Garth began the process by preparing a seller’s pre-diligence package which he referred to as his "black book" binder. This binder contained answers to questions that advisors and potential buyers would likely ask and Garth knew that it had to be logical, informative, current and accurate.
According to Garth, "More than one professional was considered for each position on the exit team and different tabs were requested by members for varying reasons." Members of the exit team included a Chartered Accountant (CA), Chartered Business Valuator (CBV), investment banker, lawyer, insurance professional, estate planner and personal financial planner.
The key for Garth was starting the process early. This allowed him to proceed at his pace and did not interfere with the day to day management of his business.
Every business owner’s "black book" will be different and unique to the business. Some of the tabs included in Garth’s binder included:
- Brief history and overview of company, including corporate organization chart
- Audited financial statements for past 2 years
- Corporate tax returns and assessment
- Details regarding the top 5-10 customers
- Anticipated changes in existing customers’ future purchases
- Top 10 potential new customers (targets) over coming 2 years
- Strategic plan, including financial projections
- Key senior executives and reasons why each would remain with the company after a sale
- Capital asset summary, including condition and estimated market value
- Details regarding IT/computer system
- Independent business valuation and real estate appraisal
- Normalized EBITDA calculations
- Summary of legal actions in past 5 years
- Company handbook and employee profit sharing plan
- Copy of non-compete agreements and employee benefit plans
Garth admits that it was a lot of work preparing his binder but completing it slowly over several months decreased the anxiety and provided a significant payoff.
"Between the reduction of legal and accounting fees because required data was readily available, and providing leverage to our skilled negotiator, I estimate a 10% premium" Garth states. "Of far greater importance was the acceptance of our file by some very skilled and competent advisors. Several admitted that they had previously refused clients who were improperly prepared or were selling from a position of weakness. Attracting excellent professional advisors was imperative in obtaining a significant premium sale price."
Starting early allows you to spread the time and investment over a number of years and the benefits will be significant: a smoother transition process; maximize price; and reduced transaction costs.
If you have any questions regarding the exit planning process or if you would like assistance with building your pre-sale diligence package, contact us at www.vspltd.ca.
1. Article by Garth Stephanson entitled "Before Selling Your Business, Build a Black Book" published in Plastics Today September 2008.