For business owners looking to sell, they need to be aware that their companies may not fetch the price they want when a market downturn hits.Everywhere you look these days, there is much hand-wringing about the warning signs of a looming recession. We are more than 10 years into a bull market, the longest in history. When – not if – the correction comes, it will have a detrimental impact on people’s savings and investment portfolios.
Let’s be clear. We are definitely in the late innings of the current bull market, and people should be adjusting their thinking about investments accordingly. That said, there is one big asset many Canadians usually overlook. There are almost 1.2 million small and medium-sized businesses with less than 500 employees in Canada. These businesses are, in general, their owners’ single biggest asset. History shows that when the market turns, the value of these assets will be impacted negatively.
For business owners who contemplate a potential exit, and for financial professionals who want to help business owners prepare in the face of a market downturn, there are five important points to keep in mind:Business owners have many reasons for doing what they do: build a business for their children, provide for their employees and support their community – among others. All are valid reasons – and none of them are purely financial.
One potential solution is that a business owner may choose to agree to a partial exit now with a mechanism to sell the rest of the company in a few years. Conversely, the business owner could choose a full sale now with a post-sale consulting or employment contract. A variety of options may exist that allow business owners to protect their downside while retaining some upside – a business owner is typically in a better position to negotiate these options before a market downturn.
Sam Sivarajan is managing director at Crosbie & Co., a specialty investment bank in Toronto, and has held strategic leadership roles with several private wealth-management firms in Canada.
globeinvestor “Business owners often fall prey to the IKEA effect and price themselves out of the market by valuing their sweat and tears at a higher price than justified objectively.”