Can You Afford To Sell Your Business?

One of the primary reasons business owners sell is to enter the retirement phase of their lives.  Especially when that is your motivation, you need to determine if you can afford to sell the business.

If you don’t try to ascertain affordability up-front and put your business on the market without that information, you may be surprised and it’s not unheard of for sellers to back out of an agreement just before closing.  That can be emotionally painful while also creating potential legal issues.  In addition, if a confidentiality breach occurs as a result of such a scenario, you run the risk of damaging future sale-ability of your business.

Obtain a realistic QUALIFIED estimate of the value of the business

The first step to determining if you can afford to sell a business is to obtain a realistic estimate of the current fair-market value.  Many business brokers are not interested in developing long-term relationships with prospective sellers unless they feel it is going to end in a commission.

In fact, recently, while listening to a well know broker teaching a class on MLS membership, he mentioned that brokering hasn’t changed in decades and decades. It’s basically selling J-O-B-S to whoever wants to buy one! Incredible attitude if not perspective!  As a former multiple business owner and consultant for business owners, not only did I find it offensive but cemented in my mind that differentiating your business from another is CRITICAL to building value. That’s what I have been doing for my clients for years.

Find a professional adviser / broker with business exit planning experience

Once you have a realistic idea of the current value of your business, determine if your existing professional advisers have business exit planning experience.  Exit planning can be a sub-specialty for other licensed professionals such as CPAs, attorneys, financial planners, investment consultants, etc.  Another alternative is working with a certified exit planner, a relatively new profession that specializes in helping small business owners through the business exit planning process.

Estimate your future income

Although it is not unusual for the company to be a business owner’s largest asset, there are usually other types of income and assets that should be taken into account when planning for retirement.  These may include spousal income, Social Security income, other retirement income and plans, IRAs, annuities, other types of investment securities and savings, real estate holdings, life insurance cash values, etc.  In addition to the net proceeds from a business sale, those other assets and income should also be factored into the retirement calculations.

Estimate the net proceeds of a business sale after taxes and debt repayment

In the previous sentence, note the phrase “net proceeds” from the business sale. The selling price of a business is often far more than the net proceeds ultimately retained by the seller. There will be tax implications of selling your business, and in many instances they are very significant.  In addition, out of the gross proceeds of a sale, you may have to pay off outstanding liabilities of the business, which can include accounts payable, working capital loans and other types of loans for items such as equipment, automobiles, real estate, etc. that were carried on the company’s books.

Consider your post-exit lifestyle

The type of lifestyle you want to live in retirement is also a major consideration.  If you want to travel around the world or maintain a second home, you need to determine the affordability.  Depending on individual circumstances, lifestyle and expectations, some may need $3,000/month to retire comfortably, others may need $15,000/month.  It is important to estimate your retirement living expenses and it’s best to work with a professional to get through that process.

Determine if you can afford to sell the business

Working with professionals to help gather all the data necessary to project the affordability of your desired retirement lifestyle is a critical step in the exit planning process.  In many instances, business owners need to adjust their lifestyle expectations to the reality of their personal financial situation.  It is far better to accomplish that early in the process of making the decision to sell your business.

The biggest issue I have found is not so much the Post-Sale lifestyle and expectations but the present market value and what the owner THOUGHT it was worth vs. reality!  The majority of the time we have to build or scale the company upward and increase revenues and value to try and intersect what the owner may require with what it is worth on the market.

One last fact many brokers won’t bring up is, the fact you, as the seller, may need to hold 10% or 20% or more in a Note from the Buyer. It’s a fact of the industry that 60% of businesses that sell, require seller financing to some degree. That percentage may even be higher than that, in my experience. A Note is not always a bad thing; you can earn an extra 8-12% on that outstanding money for a short period (1-5 years) but the down side is, you don’t have it at closing.

So, what’s your next move?

Obtain a realistic QUALIFIED estimate of the value for the business! Call us at 888-504-1105 to arrange for one or advice on getting one.

The Low-Cost Method to START Business Exit Planning NOW!

Although I strongly recommend you ultimately use a Certified Business Exit Adviser, like myself, to participate in the process of creating a formal business exit strategy and options, you can start the process very inexpensively by educating yourself on multiple angles of the process.

CAUTION -If you decide to start the process yourself to save on fees, start today and dedicate yourself to accomplishing the tasks.  If you can’t or won’t commit the time, or procrastinate, you are better off immediately having professionals start and guide the process and hold you accountable.

Six preliminary steps to start the exit planning process without spending much on professional fees.

 

1.Self-education: 

There are lots of books that address this very issue.

2. Obtain a realistic estimate of the value of your business

To plan where you are going, you need to know where you are currently.  As a business owner, you need to realistically assess the current market value of your business.  Pay for a real, unbiased market valuation from a broker of consultant! If a broker requires a fee for the work to be performed, it is worthwhile.

In addition, you need to identify the obstacles you face in selling your business.  And it would help to know what you can do to improve the value of the business.

This is a great way to start the exit planning process and in most instances, can be achieved at a low cost. 

3. If you own the Real Estate your business sits on, obtain a realistic estimate of the value of your real estate holdings

So Important! Your business is a separate entity regardless of where i sits.If you are unsure of the realistic values of your real estate holdings, most residential and commercial real estate agents will provide a comparative market analysis (CMA) at no charge. Because commercial real estate valuations are more difficult to ascertain, consider obtaining multiple CMAs from multiple agents.

4. Prepare a list of your personal financial assets and liabilities

To enable a productive meeting with a personal financial planner to help with retirement planning, future income requirements and tax consequences of selling your business. We can make trusted recommendations to you on this. Then meet with personal financial planners.

5. Consider your post-exit interests

Determine your post-exit interests, discussing with your spouse or significant other where applicable, and try to develop preliminary but flexible plans.  One aspect of exit planning is projecting your future income needs; those are totally dependent on your lifestyle expectations after you leave your business.  Even if you are more than ten years from selling your business, have this preliminary discussion.  It doesn’t have to be decisive and can be flexible, but it’s very important that the conversation take place.

6. Talk with your Certified Exit Strategist!

After receiving feedback from business brokers and personal financial planners, begin the discussion with your certified business exit planners.  Once again, you can expect a free initial consultation.  Provide them with the information you’ve developed so far and ask what they can do for you and how they will go about it.  Based on the data you provide, they should be able to provide a proposal with a fairly tight estimate of their fees to coordinate and complete a comprehensive business exit plan.

Again, we, at Max Business Profits not only provide the above, but are also qualified and experienced to bring your business value & revenues in line or at least closer to your financial goal when selling!

I cannot stress this enough!

Whats the point of selling for $350,000 when clearly you need or expected $500,000! Doesn’t matter if its 3.5 million dollars or 5 million dollars either! It’s just a question of decimal placement! what you need is what YOU NEED!

This approach gets you personally involved and helps provide a preliminary education before a comprehensive exit plan is completed.  That’s a good thing, but only if you do not procrastinate in the information-gathering process.  If you are unwilling or unable to commit to the self-education time required, then simply start with identifying and interviewing certified business exit planners.  You’ll likely spend just a little more on professional fees, but it will still be one of the best investments you’ll ever make and minimize the time required on your part.

 

 

 

Why It’s Important to Plan the Future of your Business

 There are several important reasons that can and will affect your future:

 

  • Approximately 80% of businesses never sell.  Startling, but true!
  • The primary reason businesses do not sell is that business owners fail to realize the need to plan for the sale of a business. When the majority of owners finally decide to sell, their businesses are not sale-able.
  • Typically, the business represents 50-90% of a business owner’s net worth. If you are unable to sell a business, it can be devastating.
  • It takes time to implement changes in your business to prepare for an exit strategy –  at least a couple of years.  But, it is never too early to start planning for the future of the business and your finances.
  • 98% of all owner I work with, have no idea what the present market value of their business is today.
  • Once they do, almost all realize they are no where near where they need to be to extract the appropriate or expected sales price to support their Post Ownership Lifestyle.
  • Having a strategy early, allows for revenues to be grown, systems perfected and value instilled.

In theory, you should have started to plan your exit the day you started or acquired the business.  Realistically, a very small percentage of business owners do that.  In fact, based on my experience as a business broker, most small business owners never plan for their exit, and many miss the opportunity to maximize the process of “cashing out” to collect the funds they should have earned from their sweat equity investment.

One of the first and best steps you can take positive control, is to call me for a free consultation regarding the sale your business.  Many business brokers offer market evaluations of small businesses, but we can provide a business growth strategy and an Exit Plan based on maximized business value & revenues.

  • Provide a broker opinion of market value
  • Help identify your specific obstacles to a successful sale of your  business
  • Help identify opportunities for improvement to increase the value of your business.
 

That is a great way to start planning for a successful and profitable sale of your business.