Should I Sell My Business? 4 Important Considerations
From your first day as an entrepreneur to your most recent payroll period, your business is likely at the forefront of your mind. It’s very likely that as your business grows, it becomes an even greater part of your life.
With this in mind, deciding to sell your business or accepting a purchase offer is one of the most important crossroads of your financial (and personal) life. If you’re in the Houston area, which ranks as one of the best cities for small businesses, read below for important considerations to keep in mind when deciding to sell your company and aim to discuss your options with a financial advisor who has the specialized expertise business owners need.
We've also put together this informative video on the subject:
An Offer to Buy is Good News
If you ever find yourself in the somewhat unique position of being able to sell your business profitably, give yourself credit, because reaching this point is difficult enough. Reports show that about 20 percent of small businesses fail in their first year, and 50 percent of small businesses fail by year five. The very fact that your business has sustained itself and is of interest to buyers is a mark of personal achievement.
Unfortunately, Coronavirus, the pandemic, has caused more than 100,000 businesses to close nationwide, and defaults on small business debt are predicted to increase sharply to 5 or 6 percent in 2021. What’s more, nearly one in four business owners expect to be out of business by mid-2021, if economic conditions don’t change.
The opportunity to capture liquidity from your business is a great thing, especially amid the pandemic-induced slowdown. While Houston led the country in small business optimism last year, consider how your business will continue to operate in today’s “new normal.”
In order to know if the math behind an acquisition makes sense, consider the “why” behind the sale. Is your company financially healthy? For some business owners, selling the business may be the best option to avoid layoffs or bankruptcy, not simply to capture a significant payday. If this is the case, remember that it may be years before you can sell your business again, and your current offer may be a point of no return.
The root cause of small business failure is usually cash flow, not overall market conditions. In fact, 82 percent of small businesses fail because of cash flow problems, making your company’s growth and cash flow balance mission-critical. If you decide not to sell, do you have a plan to turn things around?
Is Your Company Ready to be Sold?
Selling your business can mean thousands, and possibly even millions, of dollars coming your way. Making the right decisions now is actually much easier if you developed a plan beforehand, even when selling your business. Your business should have its "ducks in a row."
Goals for the Company
A great way to ensure that your needs are met when selling your business is to create your criteria beforehand. If you (and your partners) decide on what parameters should be met before you sell your company, analyzing an offer and making a decision is significantly easier. By setting goals or conditions in advance, you are aware of your needs as a business owner, and you’re more likely to stay on the same page as your partners and stakeholders. This strategy also highlights the importance of keeping track of your financial records.
Transferring ownership of a valuable asset isn’t always a simple process. It requires a heavy amount of due diligence, verification and deal-making. To make this process smoother, it’s important that your company’s financials are accurate, preferably audited, and easily accessible. Your buyer will be more likely to accept your terms if you can substantiate the value of your business with data that has been independently verified.
If a potential deal is delayed too long, your buyer may have lost liquidity, or market conditions may require them to change or postpone their offer. Plus, if you know where you stand financially, you can accurately assess the health of your company and possibly realize that things are going too well for you to sell.
Technology is also an important factor in your company’s readiness. The rapid rate of change in today’s technology requires firms to constantly keep up with new technological solutions to stay competitive and serve customers. If your technology tools are lacking or not up-to-date, your business may be exposed to security risks, and this may become a financial point of contention for your buyer.
Do You Have a Financial Plan for After the Sale?
For example, it’s extremely important to have an idea of how you will sustain your quality of life if you decided to sell your business. While selling your business can mean a significant windfall, you need to have a financial plan in place to properly maintain your income that goes beyond just sitting on the proceeds.
Speak with a financial advisor who has the specialized expertise that business owners rely on to find a way to invest the funds so they can generate extra income or grow while you continue to work or start a new business. If you decide to retire, you can fund your lifestyle through a combination of your savings, Social Security income and business proceeds invested well to produce investment returns.
If you sell your business without a financial plan, you may have to scramble to figure out your next steps. Rushing financial decisions too quickly can lead to financial missteps.
Alternatives to Selling Your Business
Saying "yes" or "no" to a buy offer is straightforward, but there is also a gray area that can mutually benefit you and your buyer. It all depends on your specific needs.
Stay on as Consultant
The first thing you’ll want to consider is if you’d rather stay with limited capacity, or walk away completely.
As the former owner, you know the ins and outs of your business. You represent an extremely useful amount of knowledge capital pertaining to your customers, your core business and the overall market. If you operate as a consultant, you can still earn income, gain some flexibility over your schedule, and have a crucial hand in how your business is ran. The new ownership may also appreciate having you as a team member, so they can learn faster and avoid common pitfalls.
Sell in Installments
Taxes are a top issue for any businessperson. A lump sum offer for your business can be very enticing, but keep in mind that you will likely be on the hook for federal capital gains taxes. One way around this is to sell your business in installments and potentially break-up the tax obligation over two or three years.
Your prospective buyer may also find this agreement appealing, as it means less money out of pocket all at once, while still assuming control of your company. This also gives you time to create a plan with management and your employees, and have more precision for your own financial plan.
Sell to Your Employees With an ESOP
Your employees are the lifeblood of your company. By utilizing an Employee Stock Ownership Plan (ESOP), employees can invest their own cash into the business, which essentially guarantees that they are committed to the company’s future success.
Additionally, as the business owner, you can defer federal income tax by using an ESOP and pay the taxes later. If you are comfortable with selling your business to employees over time, this can be a great option for all parties involved. Typically, you'll need a specialized ESOP consultant to help you navigate this process.
You’re in the Driver Seat
There are a multitude of ideas and opinions on how to assess the sale of your business. Ultimately, your decision should be based on your goals and needs. What works for one business owner may not be ideal for another.
Therefore, it’s important to keep your personal and financial goals in mind with a plan that works to achieve them. It’s imperative that you work with a financial advisor who has specialized expertise and can help you make these key financial decisions and establish a financial plan that encompasses every facet of your financial life. Running a successful business is hard enough. Selling it doesn’t have to be.