What is your endgame? What is your short- and long-term plan, and are you setting yourself up properly for a transfer to the next generation or for a possible sale five or 10 years down the road?
Whether you are looking to retire, move on to another venture, merge multiple businesses or plan for a transition, selling your business can present a variety of problems, stressors and uncomfortable situations. In any event, setting up your business so that it’s ripe for a future transfer should be a primary goal of any business owner, even if it’s a decade down the road. The benefits of doing so will not only ensure maximum value when you decide to transfer, but it 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 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 equaled to what they need in order to retire. Unfortunately, buyers are not interested in what you need; 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 then 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 and show you how to structure a deal so 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 so that the seller’s after 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.
So, what is the endgame?
Passing the business to the next generation:
Do you have family members who 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, then make sure your son, daughter or other family member 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 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. That is determining when an exit might be desirable and how much you’d like the business to be worth. In this regard 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, consider the following points:
- 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 so you will pass purchaser due diligence? This is an extremely important point because a purchaser will want to “look under the hood.” If your operation is sloppy and the books and records are a mess, this will make a potential buyer uneasy and may reduce the price and or scare him away.
- Have you crafted a plan that will 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 and is this something that is acceptable? Do you need all your money upfront to invest in another business or purchase a retirement home? 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.
- Have you thought about what happens to valuable employees after the sale? Like most successful business people, it’s difficult to build a business without competent help. Many business owners want to make sure their valued employees are taken care of by the acquirer. If this is something that is important to you, make sure it’s part of the plan. 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’s been maintained and properly cared for over the years. If your current business philosophy and plan consider the end game 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.
