4 Considerations When it's Time to Sell Your Business

Preparing for an upcoming presentation or vital meeting are common activities for business owners, but when it comes to planning for a life-changing event such as selling a business, many entrepreneurs are not forward thinking. The impact of a sale is both financial and emotional, and it encompasses both your personal and business life.

Yet according to a recent survey by the National Center for the Middle Market, just 6% of owners plan more than two years in advance for their business transition.

Unless you plan to pass your business onto the next generation of your family, which of course requires a thorough but different preparation process, it's essential to develop a detailed set of goals and establish a team of advisors who can help you with a successful sale. Typically, business owners find it difficult to separate their business lives and their personal lives. That means preparing for a sale requires personal financial planning and a business plan.

While an unexpected and generous offer may present an easy solution to selling your business, if you haven't taken steps to prepare to sell you may not realize the full range of benefits available to you. Generally, it's best to be ready for a sale well in advance for a smoother transition for your employees and to mitigate tax consequences and create a solid financial future for your family and your next life phase.

The more preparation you do for a sale, the more you can optimize the outcome of your business transition.

Here are five ideas to consider.

 

1. Determine Why and When You Might Want to Sell

As much as you may love running your business, you may not want to run it forever. It can be helpful to think about what circumstances might encourage you to sell and how you would like to position your company for future success.

For many business owners, the company itself is their primary asset, so the sale will fund their next life chapter. Whether you want to stay in the business in some capacity, start a new business, retire, move, or dive more deeply into philanthropy, it's important to think about what you want to do and to develop a financial plan to support your goals. Meeting with a wealth advisor for a holistic review of your financial plan should be part of your business transition preparation.

Sales proceeds will generally be divided into several categories, including taxes due from the sale and expenses for the first few years after the sale. In addition, some portion of the proceeds will likely be needed to fund your long-term goals for current and future generations. Many business owners also want to set aside funds for angel investing, buying real estate or to support nonprofit organizations with a mission that is meaningful to them.

Alongside your personal goals, you'll want to consider your business sale priorities, such as:

• Maximizing valuation
• Securing more upfront cash
• Retaining a minority stake in the business
• Retaining or incentivizing key employees
• Reducing contingent earn-out provisions
• Establishing a continuing role in the business
• Maintaining the culture and legacy of your business

If you identify which of these priorities are most important to you, this can help you prepare to negotiate a sale.

 

2. Consider Your Exit Options

For most privately held businesses that are sold rather than passed to heirs, the buyers are either internal or external. Understanding the pros and cons of each of these options well before a sale can help you position the business for the type of buyer you prefer.

A sale to internal buyers often takes years of planning and sometimes requires you to continue to be involved in the business to ensure its success. Often, these sales are structured as a management buy-out, a leveraged recapitalization or an employee stock ownership plan (ESOP). Internal buyers may not have the cash to buy your business outright, so you may want to consider whether you would be willing to provide seller financing or help the buyers obtain financing from a bank or other source of capital. Generally, internal sales tend to generate a lower price for the business because of the relationship between you and your buyers.

A sale to external buyers means your business may be purchased by a competitor, a private equity firm or a family office investor. In many such cases, an investment banker or business broker will be part of the formal sales process. Depending on the details of the sale, it may take six to nine months for the sale to take place. Most of the proceeds will be received at the closing or within one year of the sale, but in some cases, it could take several years before you receive full payment.

 

3. Assess Your Business

Before you can consider your options for a sale and estimate potential proceeds, you need to review your financial position. Well in advance of a possible sale – several years ahead, if possible – you'll want to examine your financial records to make sure they're transparent and to get a full picture of the business. This is an opportunity to look for ways to increase your business value or make changes to make it more appealing to potential buyers.

 

4. Assemble Your Support Team

Once you anticipate selling your business generally within the upcoming one or two years, it's time to establish a team of professional advisors who can help you through the process, protect your interests, preserve as much as possible of the proceeds for your financial needs, and potentially secure a more favorable deal.

Start with an evaluation of your current advisors and ask them if they have experience with mergers and acquisitions or if they can recommend someone who does.

Your team should include:

• A CPA for financial transactions and tax advice.
• A mergers and acquisitions attorney to negotiate the sale and to offer presale insights into potentially restructuring the business.
• An investment banker or business broker to market your business, identify potential buyers and manage the transaction.
• A wealth manager to recommend investment strategies for the proceeds.
• A trust and estate attorney to advise on gift and estate transfer opportunities and asset protection strategies before the business is sold.

Key management and employees may also need to be involved as contributors to the sales process. A strong leadership team can be an asset when marketing your business for sale.

Whether you've been planning for a decade or just a year or two, your team of advisors can help you decide when the time is right to sell your business based on market conditions in your industry and your personal timeline. The key to a successful sale is to have both your personal plans and your business plans in place for a smooth transition.

Depending on how the sale is structured, you may receive a lump sum or a portion of the proceeds followed by a series of payments. You may also serve as a paid consultant to the business after the closing. Your financial plan should include cash for taxes and living expenses immediately following the sale, investments for long-term wealth management and a fund for future opportunities such as investing in a new business or for philanthropy. Your team can provide the advice and support you need to maximize the sale for your future success.