Selling your business is no simple task. The end goal appears simple, for both the buyer and the seller to agree on the transaction. But getting to that end goal is a detail-oriented process that requires significant collaboration and communication between buyer and seller. One should go into the process prepared, because making a misstep can have consequences for both parties. I have put together a series of tips that I have found useful to maximizing the outcome of a transaction while minimizing risk.
Here are six important things to keep in mind when selling your business:
- It is important to hire the right professionals to help you sell. Find the right broker and/or investment banker that are appropriate to the size of the transaction. They will have networks of the appropriate size and strength to move your business. They will also be able to assist in getting a proper valuation on your business and learning about ways that they recommend you could increase the value of your business.
- Negotiate holistically. Price is not everything. It is not how much you make; it is how much you get to keep. Pre-qualifying your buyers ensures you are spending time on due diligence with someone who can afford your business. But don’t only entertain offers from cash buyers. Keep your options open and smart. Securing all contracts to make sure that your intellectual and physical properties are owned and titled properly will also help the negotiation process run smoother.
- Pre-sale tax planning is critical to help you structure the proper deal. While a stock purchase can be advantageous to one seller, an asset sale can be best for another. Use tax mitigation strategies that apply, including allocation of purchase price, structuring an installment sale, arranging for contingent consideration or an earn-out or even maintain an equity position in the company post sale. All things to carefully consider before you pull the trigger on the sale of your business.
- Revisiting your debt structure and reviewing your expenses could open avenues to sale whereas earn-outs or payments can be easier by potentially extending the payments and reducing expenses. This can leave more money for the buyer to allocate to the seller as purchase payments rather than paying the bank for debt payments. Earn-outs can be an attractive option when a buyer and seller need to close the gap between the seller’s asking price and what the buyer is willing to pay. An earn-out will allow a client who is perhaps overly optimistic about what his or her business can achieve, to be realized. On the flip side, a buyer, who is not overpaying up front, may be willing to give the client a piece of the upside potential of the business.
- Are you planning on retiring after the sale? If so, there are important things to consider. You need to determine how much retirement will cost since your business will no longer be there to support you. Will the sold amount of the transaction cover your expenses for the future? Many business owners have half their net worth tied to their business. Is the timing right? If you have control of the timing of the transaction, be sure it’s when the marketplace of your business is strong. Are your bases covered? Be sure to build up your emergency savings, make a retirement budget, determine your health insurance options, and make an income timeline to ensure you’re ready to enjoy retirement.
- When you’ve successfully sold your business, have a post-sale plan for what you plan to be doing three and six months after you sell! Are you still planning on being involved in the business after selling? Be sure to have post-sale roles defined in order to make the transition process seamless.
As you can see, there are various factors to prepare for and consider before selling your business. Surrounding yourself with the right people, at the right time with the correct tax planning in place will be of great benefit to you and will make the process that much easier for both seller and buyer. If you are ready to close the business owner chapter of your life and start a new one, be sure to contact your financial advisor to help you navigate all areas of your financial life and set you up for post-sale success. We are here for you and want what is best for you and your business.