Why you should start thinking about selling your business now, even if you aren’t ready to hand over the keys.
Whether you are looking to retire, move on to another venture, merge multiple businesses or start to plan for a transition, selling your business can present a variety of problems, stressors and uncomfortable situations.
In any event, setting your business up so that it’s ripe for a future transfer should be a primary goal of any business owner (even if it’s five or 10 years down the road). The benefits of doing so will not only ensure maximum value when you decide to transfer, but will help you maximize your current growth and profitability.
Identifying your options is paramount in this process. One of the most overlooked areas in this process is identifying your financial needs after the sale. In this regard, you need to be realistic in terms of what you have and what it’s worth. I can’t tell you how many times I’ve worked with owners who believe that prospective purchasers need to pay an amount equal to what they need in order to retire. Unfortunately, buyers are not interested in what you need but rather, can they purchase your business for a fair price?
Your financial needs are not part of the equation. However, if your needs are congruent with the value of your business, a deal becomes much more feasible. Clearly it’s important to hire the proper advisers, such as a CPA, to help you build value between now and your exit date as well as show you how to structure a deal so that taxes are minimized and the cash you receive is maximized.
In addition, a competent lawyer will represent your interests in making sure all agreements are workable such that the seller’s post-sale obligations as they relate to seller representations and warranties are crafted to minimize the possibilities of lawsuits or reduction of any future payments that may be part of the deal.
Passing the business to the next generation. Do you have family members that are interested and or competent enough to take over the business and keep it growing profitably to ensure payments to the seller adhere to the plan? The last thing you want to do is take back the business once you are retired because the family member who took over the business doesn’t have the skill set to continue your legacy. If keeping the business in the family is the plan, make sure your son, daughter or other family is well-trained and understands the operation and the vision. This includes proper training in operations, accounting, marketing and management.
Have you contacted an attorney that specializes in generational issues? A sale to a family member can be complicated and may involve working through gift and estate tax planning. Does your CPA have experience in these areas? Assembling this team of advisers early will make the process much smoother even if the transaction is several years in the future.
Selling to an outside party. The time to start the process is now, even if your plan is to sell in the future. It may not be your intention to sell immediately but sometimes life can throw us curves. Health and other issues may dictate that a sale happen sooner rather than later. A quick sale may not always yield the best price for the seller. For this reason, it’s never too early to begin your exit plan. A two-pronged approach in this regard may be warranted. Determine when an exit might be desirable and how much you’d like the business to be worth. Then you can build the business to this value over time.
The second prong might include a plan in case a health issue or death befalls you prematurely. How easy would it be for your family to sell the business and would they be provided for adequately?
When crafting your future exit plan, the following points need to be considered:
- Who will be the potential buyer? Will it be one of the larger players in the industry or perhaps a local competitor? What will they be looking for in a potential acquisition?
- Have you put together a solid financial plan for after the sale? Depending upon when you sell, you may have a lot of life to live. Will you be taken care of by the proceeds or will you be seeking another job after the sale?
- How will your firm be valued by the acquirer? Do you have a large customer base that provides recurring revenue? Is the recurring revenue profitable revenue? Businesses that answer yes to both of these questions are usually worth more than those that don’t.
- Is your business in order such that you will pass the purchaser due diligence? This is an extremely important point as a purchaser will want to “look under the hood.” A sloppy operation and messy books and records will make a potential buyer uneasy and may reduce the price and/or scare him away.
- Will your plan maximize the after-tax proceeds? At the end of the day, the price you get for your firm is not as important as what you put in your pocket. Uncle Sam will want his share of the proceeds and it’s extremely important to get the proper advice early in the process from a competent CPA or tax attorney on your options for structuring a potential deal.
- What consideration have you given to a potential payout? Is this something that is acceptable? Do you need all your money up front to invest in another business or purchase that retirement house? Or will a payout work for you? If a payout works, you need to make sure the acquirer is financially stable. A little due diligence on potential buyers will help determine if you may have problems collecting your payment in the future.
- What happens to valuable employees after the sale? Like most successful business people, it’s hard to build a business without competent help. Many business owners want to make sure their valued employees are taken care of by the acquirer. Ask potential acquirers what they would do with your employees.
Like selling any other asset, it’s always easier to sell your business if it has been maintained and properly cared for over the years. If your current business philosophy and plan consider the endgame as laid out in this article, you will be in a much better position to maximize the fruits of your efforts when you do exit your business.
The author is a CPA in New Jersey and owns an accounting firm that caters to lawn care contractors throughout the U.S. He can be reached at email@example.com.
For advice on how to prepare your company for your unexpected death, visit bit.ly/lldeathbook