Alain Tremblay
Partner | CPA, CA, CA•TI | Assurance

You wish to acquire an SME as part of a business transfer. Key step to take: convince a banker to help you finance the transaction.

You’re on the verge of buying an SME as part of a business transfer and negotiations are coming along well. Before your dream can come true, you’ve probably got one more step: convince the bank to help finance the transaction.

Remember that, first and foremost, when financing a project, the lender’s priority is to minimize its risk, particularly considering that an ownership transfer is a fairly risky event in a business’s life.

That being said, as a transferee (we’re using the singular here, even though you may be several partners), you have an advantage over someone who’s just starting a business. The company you want to buy already has a history, its revenues and profitability, clients, etc. are known quantities. You have tangible information to support your application.

Different criteria

The company’s background is a key element in analyzing a business financing project because different criteria apply depending on how old the company is. SMEs that are less than five years old are generally considered to be more sensitive, as they are riskier.

Lenders also consider the size of the transaction, which will impact their requirements. In the case of smaller transactions (under $500,000), for example, the lender will look at a few key indicators, such as the transferee’s credit and net worth and could require personal guarantees. In this type of transaction, the lender could also analyze the transferee’s ability to inject funds to support the business and cover any contingencies.

A solid team is key

If the lender is satisfied with the financial aspects of the application, he will then undertake a qualitative evaluation. This is when he will take a close look at the quality of the transferee’s management team, including:

-The transferee’s entrepreneurial experience and knowledge of the targeted company. If the transferee is already in the company (family member or employee), the risk is lower, since the transferee already knows the business and its industry;

  • Whether key employees are identified and if they will remain;
  • The transferor’s commitment to stay on to ensure a smooth transition;
  • The presence of an advisory committee, ideally with the transferor on board;
  • Whether the transferee is supported by a professional accountant and is receiving outside help (specialists, mentor, etc.), particularly if he has any managerial weaknesses.
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Make a good impression

The fewer unknowns in the project, the greater the financial institution’s confidence will be. Be prepared and properly supported. You need to carefully plan the business’s transfer and development.

The financial forecasts must be well developed and based on solid assumptions.

Beyond the numbers though, it’s critical that you make a good impression with the lender. You have to prove that you’ve asked yourself the right questions and found solutions to offset any weaknesses. For example, talk about the support you have (transferor’s involvement, advisory committee, support from a professional accountant, etc.), especially if you’re an external transferee and don’t know as much about how the business operates or its industry.

Our team can help you with complex steps, such as evaluating the business, performing the pre-purchase investigation and determining the strategic issues and business plan.

Hint: To accelerate the processing of your financing application, get the lender involved early on, that way the process won’t be delayed if he has additional questions.

The balance of sale

Another key component of the business transfer financing process is the balance of sale. This is the total transaction amount that will have to be subsequently repaid to the transferor, in accordance with the terms set at the time of the sale.

This is often a major issue during the transfer negotiations. The transferor wants to minimize the balance to reduce risks, the transferee wants a higher balance to keep short-term financing requirements as low as possible.

Most of the time, the lender’s preference is that the transaction include a balance of sale in order to limit its fund injection and share the risk evenly between the three parties: lender, transferor and transferee. The balance of sale takes on greater importance with a less-experienced transferee with limited financing. Furthermore, if there is a balance of sale, it’s in the transferor’s interest to stay on board and support the business’s operations, which also reduces the lender’s risk.

The balance of sale is calculated using the debt ratio, and in a business transfer should not be greater than 3:1, i.e., debt should not be more than shareholders’ equity times 3.

In some cases, the balance of sale could be considered as shareholders’ equity if paying the bank loan has priority. Consider a $400,000 transaction with a $250,000 loan, a $50,000 injection from the transferee and a $100,000 balance of sale. The balance can’t be paid until the loan has been repaid, which reduces the lender’s risk. The balance of sale improves the overall financing application and makes it easier for transferees with limited resources to become shareholders.

If you’re planning to transfer your business, our experts can help. Contact them today!

30 Sep 2021  |  Written by :

Alain Tremblay is an assurance expert at Raymond Chabot Grant Thornton. Contact him today!

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Eric Dufour
Vice-President, Partner | FCPA, FCA | Business Transformation

The workforce shortage is a major issue that requires SMEs to be quite agile. In this respect, an effective and timely succession plan is a very useful tool to retain the best talent within the organization.

Some of your best-performing employees could therefore be involved in the eventual transaction, becoming future shareholders. To this end, communication between the transferor and potential buyers must be clearly established. The current business owners must indicate their intentions. If they want to leave the organization in five years, they need to be up front about it. Nowadays, business succession is no longer just a family matter.

Therefore, have the courage to discuss the issue directly with those you think could eventually take over internally. Three steps make it easier to complete this transition project.

A– Identify key employees

Have the employees you’re considering established a career plan? Do they have the requisite entrepreneurial skills? What are their professional goals? These discussions set the stage for the next steps. For example, you could give targeted employees a few management assignments in advance to gauge their interest and see if they have the right job profile.

These additional responsibilities assigned over time can also facilitate the transfer of authority. The financial capacity of the buyers to obtain the required financing should also be considered. They can then benefit from a gradual integration into the shareholding structure. At the same time, the buyers will increase their participation in the organization.

B– Get help

Entrepreneurs obviously can’t do everything alone. People who transfer ownership of a company they’ve been running for 25 years sometimes think they can navigate the transfer maze on their own. Beware of this wishful thinking. The support of a specialist can make all the difference in the development of a succession plan. Using an external resource ensures that you have a fresh perspective on the situation. And what could be better than to be able to count on leading-edge expertise to leave nothing to chance?

Lastly, remember that a business transfer is not something you can improvise. By relying on a specialized team, you can anticipate potential problems and gradually transfer the required knowledge. Transferors should not disappear overnight following the conclusion of the transaction.

C– Ensure a smooth transition

Over time, potential buyers will put their own stamp on the business. The transferor and buyer should expect an overlap during the transition process. It is not uncommon to see the buyer get involved during the first year following the transfer and even to hold the position of board chair. This type of transfer doesn’t just take place at the time of the visit to the notary’s office: rather, it is spread over a period of time.

You have to trust the leaders you choose to carry out the process. They may have different methods, but you have to accept these differences. For their part, buyers must understand that it is a part of yourself that you’re leaving in their hands.

Get employees involved and ensure their loyalty

If you plan to withdraw from the business, state your intention early enough to allow for the development of a proper succession plan.

By letting it be known that there are opportunities for advancement as a result of your eventual departure, you give key employees a chance to demonstrate their interest and skills and, perhaps, invest their energy in ensuring the sustainability of “their” SME. That way, you can be sure that you can count on your best collaborators in the coming years.

30 Sep 2021  |  Written by :

Éric Dufour is a vice-president at Raymond Chabot Grant Thornton. He is your expert in management...

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Clara Demers
Manager | Human Resources Consulting Practice Leader | Business Transformation

When it comes to business transfers, setting up a family council can be a winning strategy for ensuring the sustainability of a business.

Over the next few years, many Quebec businesses will be transferred to buyers from within the family circle.

In some cases, it’s also possible that external buyers will also be involved, but the fact remains the same: multigenerational management is an issue that family businesses must face.

Starting an entrepreneurial succession process is a long and complex project. In the context of a family succession, the stakes, emotions and feelings are put to the test. It’s like airing problems and issues that are usually private.

Preserving the harmony thanks to a family council

The family council is a key structure when the family grows and the family-business relationship becomes more complex. It provides an opportunity for family members to express themselves. However, setting up a family council is not automatic.

It’s important to understand the family history, ties and relationships between family members. When we undertake a business succession assignment, it’s essential to have a human approach and a proper grasp of all aspects involved.

This is even more true in a family succession context. It’s almost like interfering in people’s private and professional lives; some discussions will be easy, but others will be more difficult and painful. The complexity of the case will determine whether or not to involve a family council. In complex family succession cases, a family council can be very useful for all parties involved.

What is seen in most cases is that when the future management team, which includes external members and others from within the family circle, meets, some things may be left unsaid. And if they are not addressed, these unspoken things can be detrimental to the proper functioning of the management team. That’s where the family council may have a role to play.

When setting up the family council, it’s important to define a broad framework and structure that includes all family members. It’s also essential to identify a common goal. Achieving this goal requires active listening and honest participation by all.

The family council’s mission is to preserve family harmony while ensuring the business’s stability. To achieve this, everything depends on good communication between the participants.

The family council as a place of exchange

Our approach to the practice is very human; our desire is to satisfy everyone, and in order to achieve this, we must let everyone express themselves and hear them. We set up a family council in which we play the role of mediator. This council meets about twice a year and offers all family members the opportunity to share their opinions and resolve certain situations.

The family council is an ideal place to communicate, exchange and set policies and procedures concerning family members, such as hiring them in the organization.

Family council sessions are not family meetings; their purpose is to resolve situations and address concerns. In a family succession context, there is tension and disagreement. Our role is to guide these meetings, but to do so, all family members must be present.

Family councils are opportunities for everyone to express themselves and be heard. It’s not about interfering in family life, but rather it’s a window where everyone can speak and be heard.

What do the external buyers think?

This approach is very well received by external parties taking over, who encourage and respect this practice. It’s also in their interest to put all the chances on their side to ensure the sustainability of the business. Moreover, the family council is not a decision-making forum, so this does not bother external buyers who are in favour of such an action. Instead, it helps preserve harmony.

Preparing the next generation

The family council also helps to raise awareness and prepare the future generation that will take over the business. By valuing members, they act on the family’s behalf to preserve its heritage, which will have a positive impact on the company’s sustainability.

For more information, contact our team.

30 Sep 2021  |  Written by :

Clara Demers is your expert in Business Transformation at Raymond Chabot Grant Thornton. Contact her...

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Jeannette Boulanger
Senior Manager | CPA, CA, M. Sc. | Human resources consulting

Everyone is talking about the labor shortage. How can we create the right conditions for hiring?

1- Look past resumes and keep an open mind

We all know there is no such thing as the perfect candidate. Skills and experience are obviously important, but it is worth looking beyond these considerations.

  • What are the candidate’s aspirations for the position and their career in general?
  • What are their areas of interest?
  • What are their core values? Are they aligned with those of your company?
  • What potential do you see in the candidate?
  • What are their short- and medium-term career goals?

By looking beyond people’s resumes, you may discover hidden talent. With enough time and training, these people could become the key players you’ve been looking for.

2- Encourage internal mobility

Keep talent within your company by encouraging workers to apply for lateral or vertical moves. Even if they don’t have all the skills required for the job, your current employees have the advantage of being familiar with the company and its values.

Finding and training external talent is costly for organizations and involves a certain adjustment period. Meanwhile, giving employees the chance to do something new can contribute to an improved sense of belonging. After all, people shouldn’t be discouraged from wanting to learn new things and expand their skill set. Not only will providing workers with in-house opportunities translate into better retention and engagement levels, it will also help employees grow at a faster pace. It is a win-win situation.

Find out more about talent development.

Find out more about knowledge transfer.

3- Assess employee wellbeing regularly

The past year has been challenging—both personally and professionally—for all of us. Psychological distress and health problems, related to COVID-19 or otherwise, plagued a lot of people. Some are still suffering. Everyone has their own way of reacting to the situation. That is why it is important to keep an eye on employee wellness indicators.

Check in with your teams on a regular basis to make sure they are feeling well both physically and mentally. This can be as simple as making informal calls, sending monthly questionnaires, or planning a lunch or virtual tour to connect with your workers and teams.

By taking an interest in your employees, you will be able to monitor their health and bolster their engagement.

Find out more about worker health.

4- Be open and flexible

Work arrangements have become a hot topic and there is no shortage of options, including: 100% work from home, 100% work from the office, or hybrid work with or without fixed days. To choose the one that’s right for your team, consider surveying your employees and asking them what they want. Since each person and business is different, look for an option that reflects your needs and goals, as well as those of your clients and staff.

Then be flexible in how you apply your policy. Today’s workers are looking for ways to balance their personal and professional lives.

Find out more about hybrid work.

Find out more about work and life balance.

5- Be real, be yourself

Cultivating solid relationships with your personnel is essential to building employee engagement. Show them that you’re human too. Express an interest in your employees and let them know that they are important to you and to the company.

Be genuine. As a manager, you can’t do everything or know everything. That is why you need to surround yourself with good people. By being open, you will gain their respect and build trust.

Find out more about how to communicate effectively with employees.

29 Sep 2021  |  Written by :

Jeannette Boulanger is a Human Resources Consulting expert at Raymond Chabot Grant Thornton. Contact...

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