A great paper penned by my colleague Ian Smith that addresses common concerns of business owners with respect to a sale of their business. If you are currently considering your options, or have a client that is currently considering an exit, please feel free to reach out to us directly and we'd be happy to have a chat.

1. Issues in Transitions
To Sell or Not To Sell – That is the Question

2. When coming to the decision of whether or not to sell, we commonly hear
entrepreneurs weigh the proceeds they’ll receive on the sale of the business vs.
holding on to the business for a few more years to pay out profits before selling.
This debate often hinges on the transaction multiple being offered in relation to
EBITDA (earnings before interest, taxes and depreciation) and can be
summarized nicely in a recent quote from a client:
“If I sell my business today for “X” times EBITDA, wouldn’t it make sense to defer
the sale for “X” years and collect dividends and then sell? Wouldn’t I double my
cash proceeds?”
As transaction values for private companies have steadily increased over the
past decade, now reaching heights not seen since immediately prior to the 2007-
08 Great Recession, we believe this question is worth addressing.
Our experience shows that entrepreneurs must look at this debate through an
after-tax lens to make an apples to apples comparison of selling vs. holding.
Additionally, we believe the question of whether or not to sell actually hinges on
other factors, many of which are non-financial, that must be taken in to
consideration.
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“ The current
environment for mid-
market businesses is
leading to the highest
valuation multiples we’ve
seen in over a decade.
Whether or not to sell, the age-old question

3. Generally speaking, the value of a business is often simplified into a multiple of
EBITDA because EBITDA is commonly seen as a “proxy” for cash flow. Given the
frequency this term is used in relation to a transaction, it is common for business
owner to assume EBITDA is actually a fair approximation for cash flow, when in
fact it is often materially different.
Mistaking EBITDA for cash flow is often why entrepreneurs ask us why they
should sell when they could simply hold on to the business for a few more years
to extract that cash flow and then place the business for sale.
The key to analyzing this situation is realizing that EBITDA is not cash flow that
can be distributed to the shareholders. EBITDA excludes cash items like interest,
taxes, changes in working capital, and capital expenditures. In reality, cash flow
available to shareholders are generally far lower than EBITDA. Moreover, the
analysis must take in to consideration after-tax cash flow at the hands of the
shareholders.
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“ The key to any
financial analysis of
whether or not to sell
should focus on after tax
proceeds distributed to
shareholders.
EBITDA is not cash flow, why cash is still king

4. Let’s use an illustrative example: assume a family business (owned by
the husband and wife) generates $1,000,000 of sustainable EBITDA and
it has received an offer of 7x EBITDA for 100% of the shares in the
business for a total transaction value of $7.0 million. For simplicity, we
will assume the company has no debt and we will ignore other costs.
With a sale of shares, the owners will be able to take advantage of their
life time capital gains exemption (“CGE”). At $848,000 (2018) each, the
CGE will allow for tax free proceeds of just under $1,700,000. With some
straightforward tax planning, the owners could bring the taxes on the
remaining $5,350,000 of ‘gains’ to less than 20% - and even lower with
some advance planning and asset-heavy businesses. In our illustrative
example, we will assume a blended tax rate of 18%. The after tax
proceeds our example comes to just over $6,000,000 with an effective
overall tax rate of under 14%.
With net proceeds of $6,000,000 the owners will be naturally inclined ask
us:
“I can take $1 million of EBITDA out of the business per year, and then
sell. Why not hold on? I’m only 60, and 6 more years doesn’t sound like
that much more time to defer the sale... “
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After tax proceeds, it’s not what you earn it’s what you keep
Transaction Value
1
7,000,000$
Less: Lifetime Capital Gains 1,696,504
Value Subject to Taxation 5,303,496
Estimated Blended Tax Rate 18.0%
Taxes Payable 954,629
After Tax Proceeds 6,045,371$
Effective Tax Rate 13.6%
1
Assumes shares have nominal value

5. Deferring a sale to collect $1.0 million per year seems to be pretty
straight forward and intuitive; however, the reality is far from clear cut.
Remember that EBITDA is not actually cash flow that can be
distributed to the shareholders. So what does $1.0 million in EBITDA
mean for shareholders in actual cash distributions?
For the sake of simplicity, we previously assumed the company has no
debt and therefore has no interest expenses. A business of this size
will have depreciation and amortization for fixed assets and intangible
assets. We will use $100,000 for depreciation and amortization in our
example. With the current tax legislation, this results in a tax bill of
$168,000. This leaves us with after tax proceeds of $832,000; however,
we still have to account for cash expenditures not reflected in the
income statement, namely capital expenditures (e.g. replacing
equipment) and investments in working capital (e.g. building
inventory). For a business of this size, we’ve assumed $150,000 in
such cash expenditures. Personal taxes will then have to be paid on
dividend income paid out to shareholders.
We finally arrive at after tax cash receipts of $491,000, which is
materially lower than the $1,000,000 EBITDA that the sale of the
business is predicated on. Consider this: on an after tax basis, this
results in an effective transaction multiple of 12x. This is double the 6
year hold period the business owner in our example was considering.
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The folly of intuition, sometimes it’s not so clear cut
EBITDA 1,000,000$
Less Depreciation 100,000
Taxable Income 900,000
Tax Rate on First $500,000 12.0%
Tax Rate After First $500,000 27.0%
Taxes Payable 168,000
After Tax Income 832,000
Less: Sustaining Cap-Ex & NWC 150,000
Cash Available for Distribution 682,000$
Personal Taxes 1
190,496
After Tax Proceeds 491,504
After Tax Proceeds on Sale 6,037,000$
After Tax Cash on Cash Valuation 12.3x
1
Assumes cash is distributed as dividends

6. Consider this for a moment, 12 times actual after tax annual cash flow
distributions! That’s 12 years of owner cash flows upon completion of a
transaction. This is a far cry from the intuitive analysis showing only 6 more years
of ownership to match the cash flows on the sale of the business.
Holding on to the business means 12 more years of staffing issues, trade shows,
new competitors, major investment decisions and other operating stresses. Not
to mention all of life’s other twists and turns. Remember also that the proceeds
on a sale can be immediately used generate passive returns (i.e. stocks, bonds,
real estate) or to support investments in other ventures.
An additional, but extremely important, consideration is timing of a sale in
context of overall market conditions. Currently we are seeing earnings multiples
in the mid-market at historic highs and it’s our view there is more downside risk
to future adjustments than upside potential in the medium term.
With our illustrative example in mind, imagine if in 5 years overall market
conditions shift and EBITDA multiples fall from 7x to 5x. In order to garner the
same $7,000,000 transaction value, EBITDA would have to grow by 40% over this
period – and that’s after five years of hard work and impressive results. For those
of us who have painful memories of 2007 and 2008 - if there’s a downturn in the
overall market - how likely is 40% growth?
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“ Deferring a sale brings
risk and uncertainty as
business and market
conditions can rapidly
and inexplicably change.
Deferring a sale, facing the slings and arrows of uncertainty

7. In our experience in advising entrepreneurs, we believe the best way to maximize the value of a business is
to ask the right questions, well in advance of a sale. If you’re considering selling your business in the next
year or two, here are some questions you might want to ask yourself:
• Do I have a written succession plan in place so that the management team can cope with my departure
upon the sale of the business?
• How do I make myself less relevant to the day-to-day business, so that I can leave as soon as possible
following the sale?
• What can I do to make my business more attractive to a broad range of potential buyers? Do I have a well
thought-out business plan, a compelling value-proposition and identified growth opportunities?
• Is there any way to reduce the variability of earnings and improve operating leverage?
• Are there any ways to reduce the working capital requirements of the business?
• Have I considered the impact of debt burden of the company will have on my sale proceeds?
• What is the quality of my financial reporting? Is it compliant with GAAP? Should I step-up to audited
financial statements?
• Are there other things I can do to structure the company’s affairs in order to improve my after-tax
proceeds upon the sale of my business?
• Do I have the right team of financial, legal, tax and accounting advisors with relevant M&A experience?
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Selling your business, key questions prior to starting a process

8. 8
Transition Advisory Partners – About us
Working with entrepreneurial and family-owned businesses is our sole focus. Having advised on
numerous transactions, we understand the unique needs and challenges in successfully
completing a transaction.
Invest time and energy up
front to understand the
concerns of stakeholders
Develop a deep understand
your business
Create a highly tailored
strategy to maximize value
Provide hands-on
assistance throughout the
transaction
Our Approach

9. Ian Smith, MBA
Ian founded TAP in 2016 after having led the B.C. M&A practice of an international
advisory firm where he focused on sell-side and financing assignments. Ian had previously
spent nine years with another international advisory firm where he headed up their
corporate finance practice - first in Hong Kong and then in Vancouver. In this role, he also
helped create and lead their global M&A advisory executive committee which directed the
development of their global M&A practice. During this time, he managed a wide range of
complex, cross-border transactions involving privately held businesses.
Ian spent 17 years living in Taiwan and Hong Kong where his career progressed from
strategy consulting to operations and to private equity investing. During this time, he was
appointed Managing Director of an international services company and established
profitable operations in Taiwan, Hong Kong and Korea. He also founded the world’s first
on-line duty free retailer with notable investors which included AOL and China.com
amongst others. This company was eventually sold to a traditional retailer in Hong Kong.
Ian brings this unique background in both operations and financial transactions to bear in
leading business owners through difficult transitions.
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Education
MBA - Ivey Business School, University of Western Ontario
BComm - Haskayne School of Business, University of Calgary
Expertise
Strategy
Valuation
Negotiations
Structuring
Strategy
Transition Advisory Partners – Our partners

10. Education
MBA- Ivey Business School, University of Western Ontario
BCom (Hons.) - Sauder School of Business, University of British Columbia
Chartered Accountant (CA)
Chartered Professional Accountant (CPA)
Expertise
Valuation
Financial
Analytics
Financial
Modelling
Accounting &
Diligence
Support
Michael Bains, CPA, CA, MBA
Michael has over 10 years of experience encompassing corporate finance and accounting
advisory. Prior to joining TAP, Michael led a family backed private equity fund. Prior to
managing this fund, Michael worked a variety of roles within leading advisory firms and
within his own consulting practice.
Michael is a driven corporate finance professional passionate about identifying and
realizing organizational value. He has a broad base of experience encompassing mergers,
acquisitions, divestitures, capital raising, capital structuring, financial reporting and
corporate financial management.
Michael has “hands on” private enterprise experience through a variety of corporate and
consulting positions with roles including financial reporting, forecasting, budgeting,
financial modelling and restructuring.
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Transition Advisory Partners – Our partners

11. Office
Suite 200 8661 201st Street
Langley, BC V2Y0G9
Michael Bains, CPA, CA, MBA
mobile: 604.518.8134
email: michael.bains@tapartners.ca
Ian Smith, MBA
mobile: 778.928.6140
email: ian.smith@tapartners.ca
Whether you’re contemplating a transaction, looking for a sounding board, or simply want to chat about
your business, we are always available to meet over a cup of coffee and get to know you. We promise to
give you honest, independent and timely advice that best serves you and your business.
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Transition Advisory Partners – Contact us