Selling a Business That Survived the Recession in Cananda

Since the economic downturn officially started in 2008 and the subsequent Canadian recession in 2009, many businesses have struggled to stay afloat in southern Ontario.  In fact, many severely hit industries in Canada have seen companies go bankrupt or change drastically for the worse.  Selling a business in this environment is very challenging and some sellers have discovered that they cannot find an exit strategy that is a viable solution for them. 

Now that Canada has returned to economic growth, and even if the recovery is somewhat tepid, many companies have emerged from a scenario where they have survived the recession and are now at or close to pre-recession revenue and profitability.   In fact, some business brokers are seeing companies with revenues fall 30-50% during the recession only to return to normal in calendar 2010.  Some of these businesses would have liked to have sold prior to the downturn but have held off with the thinking that the business valuations would have been too low.  Also, many of these business owners are ready to retire and may be thinking if the timing is finally right for them to sell. 

This article will examine some options for a company owner looking to sell a business after the recession if they find themselves emerging from a classic dip – a healthy business pre-downturn, followed by a dip during a recession then finally a stage of sustainable recovery.

Selling the Business Through an Earn Out
An earn out is a scenario where the price and money received by a seller is pegged to the future performance of a business or other metric.  It is a useful way for a buyer to have some comfort that the seller stands behind their business and also is a way for the buyer and seller to share the future performance risk of the company.  It essentially helps to transition the goodwill of the acquisition to the buyer in a structured and formulaic method, versus in a lump sum amount.  An earn out could stipulate, for instance, that a company’s contract revenues must not dip below a pre-determined amount or an amount of money held back would be reduced on a relative, sliding scale. 

There are some challenges with an earn-out situation though.  A business seller may argue that unless they have direct authority into the operation of the business that the results may decline for the simple reasons that a new owner may not possess the aptitude or may even shirk on responsibilities.  Also, if a new owner wants to make major strategic changes to a venture once they take over, that may pose some risks to tracking the results for an earn-out.

Offer a Higher Ratio of Vendor Financing
Selling a business that survived the recession and is coming back to normal profit levels is probably difficult to find bank acquisition financing for.  Financial institutions in Canada are very risk averse, especially to their US counterparts.  To mitigate this reality, a business owner may choose to finance a bigger part of the deal themselves.  By offer financing to a purchaser that exceeds 50% may open up the business to a larger pool of investors.  A prudent seller should be careful with what their recourse is though should the buyer default.

The key take-away is that selling a business in the post-recession economic environment is very difficult so it is important to be creative on how to structure a deal and to be flexible with a buyer.  There is no ‘one size fits all’ solution unfortunately but you can increase your chances of selling your business by working with ethical business brokers who can offer a creative approach to the transaction.  As always, work with a solid attorney and C.A. for an business you sell.


Contact Steve Skrlac, MBA at 905-592-1525 if you are considering selling your business in Toronto, the GTA or southern Ontario, Canada.