Deciding to own a business carries great weight, and opting to sell it can be equally momentous.
The act of selling your business entails numerous factors to consider, such as its value and financial prospects, the preferences of potential buyers, your readiness to part ways with your business, and your plans for the post-sale period. If you find yourself contemplating the sale of your business, take a moment to ponder these six questions. Doing so will enable you to evaluate your choices and determine the most suitable course of action.
1. Am I Ready to Sell?
Begin by articulating the motives behind your decision to sell. What factors are influencing your choice to sell? Perhaps you’re experiencing burnout following the pandemic and seek a fresh perspective. Maybe you feel trapped, like a hamster spinning on a wheel with no way out. In such situations, selling may not be the solution. Reflect on your objectives for the sale and envision a favorable outcome. Jotting down your thoughts or creating a pros and cons list can be beneficial.
Once you have addressed these inquiries, seek the counsel of a trusted individual. Selling your business is not solely a financial matter but also an emotional one. Take the time to delve into the root of your emotions and then explore the process involved in selling, if you still desire to do so.
2. How Much is My Company Worth?
As a business owner, it is crucial to have a solid and realistic understanding of the potential value your business holds in the open market. Based on my interactions with numerous business owners, I have observed that they often overestimate the value of their businesses by at least 50%. Hence, it is essential to seek the evaluation of a third party.
You have a couple of options to explore for assessing your business’s value. One option is to explore programs that offer a back-of-the-envelope calculation, providing a quick estimate based on the return on investment (ROI). Although this approach is commonly used, it overlooks important factors such as time, capital appreciation, risk, potential, and inflation.
Another option is to engage a professional business valuator who can provide a more accurate valuation. This involves considering various approaches and factors, including assets, market comparisons, income, and more. However, the challenge lies in finding the right valuator who specializes in your specific industry and can provide a fair appraisal price.
3. Is Knowing The Value Enough?
Gaining a comprehensive understanding of your business’s value encompasses more than simply determining its selling price. In order to facilitate the transfer of ownership, it is necessary to ensure that your financial matters are in order. This entails organizing documents such as tax filings, licenses, deeds, and profit and loss statements.
Additionally, it is important to conduct a thorough assessment of both your tangible and intangible assets, as well as any liabilities associated with the business. Taking the time to outline your business plan and model is also beneficial, as it provides potential buyers with a clear understanding of the company’s complete context and how it generates revenue. By undertaking these preparations, you can position yourself and your business for a successful transfer of ownership.
4. To Whom Will I Sell My Business?
You are likely to have multiple options available when it comes to selling your business. For instance, you could explore the possibility of selling your company to your employees through an Employee Stock Ownership Plan (ESOP), which offers several benefits but may involve certain requirements to fulfill. Alternatively, you might have capable family members who are interested in assuming the responsibility of running the company. If you are considering options beyond your immediate circle, you could contemplate selling to an individual investor, a private equity firm, or strategic buyers.
5. Which Professionals will I Require?
Selling a company entails numerous components and intricacies, making it a collaborative effort that requires a diverse set of professionals. The specific requirements for your business, including its industry, size, and nature, will determine the composition of your exit planning team. Here are some professionals that business owners typically seek to have on their exit planning team:
- Engage the services of a Certified Public Accountant (CPA) who specializes in dealmaking to ensure the proper execution of the sale and transfer process. It is crucial to find a CPA with experience in this area to navigate the various tax-related aspects associated with selling a business. Staying informed about the latest regulations and opportunities for tax savings is essential, and a knowledgeable CPA can provide valuable guidance in this regard.
- Enlist the assistance of a Certified Exit Planning Advisor (CEPA) to optimize the benefits you receive from the sale while taking into account your personal and financial objectives. A CEPA is equipped with the expertise to guide you through the process and help you achieve the best possible outcome when selling your business. Their focus extends beyond purely financial considerations and encompasses a holistic approach that aligns with your individual goals.
- Consult with a Certified Financial Planner (CFP) to address the financial aspects of the deal, including gaining insights into your future financial outlook. A CFP possesses the necessary expertise to assist you in navigating the financial implications associated with the sale of your business. They can provide valuable guidance and help you plan for your financial future, taking into account the proceeds from the sale and your long-term financial goals.
- Engage the services of a business attorney who will develop legal strategies to facilitate the sale and protect your interests, aiming to ensure a smooth transaction while minimizing potential legal risks. A proficient business attorney will assist you in creating comprehensive legal plans that address the intricacies of the sale process, providing guidance to safeguard your rights and mitigate any potential legal pitfalls that may arise along the way.
- Seek the expertise of an estate attorney who can assist you in capitalizing on significant advantages through effective pre-liquidity planning. An estate attorney is knowledgeable in the intricacies of estate planning and can help you leverage strategic opportunities to maximize your benefits in preparation for the liquidity event. By collaborating with an experienced estate attorney, you can ensure that your assets and estate are structured optimally to capitalize on the advantages available to you.
- Engage the services of a business valuation expert who can provide a precise and accurate assessment of your company’s value. If you prefer a more detailed and accurate valuation rather than a rough estimate, a business valuation expert is essential. They possess the expertise and knowledge to evaluate your business using comprehensive methodologies, considering various factors and variables. By consulting a business valuation expert, you can obtain a reliable and in-depth understanding of the true value of your company.
- Collaborate with M&A advisors who specialize in identifying strategic or financial buyers for your business. M&A advisors primarily cater to mid-market and larger companies, leveraging their expertise to search for potential buyers who align with your business’s objectives. These advisors possess extensive knowledge and networks within the mergers and acquisitions landscape, enabling them to identify suitable acquisition opportunities and guide you through the negotiation and deal-making process.
- Engage the services of a business broker who will reach out to potential buyers and assist in screening interested parties based on their financial capacity and other relevant qualifications. Business brokers specialize in facilitating transactions within the lower middle market segment. With their industry expertise and network, they can identify and connect you with prospective buyers who are genuinely interested in acquiring your business. Their role includes guiding you through the buyer screening process, ensuring that you engage with qualified and suitable individuals or entities.
- Consult an insurance professional who can evaluate your insurance coverage and make necessary adjustments to align with your specific needs. By engaging with an insurance professional, you can ensure that your insurance policies adequately protect your business and assets. They will assess your current coverage, identify any gaps or overlaps, and recommend appropriate modifications to optimize your insurance portfolio. This ensures that you have the right level of coverage for potential risks and potential future contingencies.
While some professionals may have expertise in overlapping areas, adopting a team approach is advisable to ensure comprehensive support. Collaborating with a diverse team of professionals will greatly enhance the likelihood of achieving a successful outcome and a smooth transition. By working with the right individuals, you can benefit from their collective knowledge and experience, leveraging their respective specialties to address various aspects of the business sale process. This collaborative effort will provide you with the necessary guidance and support required for a seamless and effective transition.
6. What are my Plans for the Post-sale Period?
It is crucial to prepare for and have a clear understanding of your plans for the post-sale period, as it significantly impacts your mental well-being. Many small business owners, including myself, tend to define themselves through their businesses. Their focus is primarily on growing the business and eventually selling it for the best possible offer. However, it is important to consider how you will utilize the extra time you’ll have after the sale.
Surprisingly, when asked about their plans for the post-sale period, many small business owners haven’t given it much thought. Answers like “I haven’t considered that” or “I suppose I’ll spend time with my grandkids” are common. While spending time with family is wonderful, it is essential to acknowledge that they have their own lives and interests, and you will soon find yourself seeking other meaningful activities.
Asking yourself these six questions will likely raise additional inquiries. Taking the time to genuinely contemplate and answer each question offers a valuable opportunity to explore your next steps, whether it involves selling your business or not. Providing honest answers and engaging the right professionals at the appropriate time will help ensure that you obtain the maximum value for the work you have invested in your business throughout your life.
Originally published at ‘Business d’Or’ on May 17, 2023