By Trent Lee, the recipient of the award as the No. 1 business broker in the country by the International Business Broker Association (IBBA).
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As a business broker, I’ve been at the closing table finalizing a business acquisition and seen all types of emotions. Some business owners jump for joy while others cry all the way through it — some people do both!
There is no question that if you’ve spent years starting, expanding and operating your own business, there will be mixed emotions when it comes time to move on. For those who don’t have employees or family who will be taking over the business, you’ll want to ask yourself some questions before determining when the right time is to step away from your company.
1. What are you going to do next?
I see this often: A business owner is burned out, feels overworked and ready to sell. Once I value the company, take it to market and find them a buyer, they are overjoyed thinking retirement is going to be amazing. A few months go by and they call me, bored, not sure what to do with their free time. Turns out they needed a long vacation rather than selling their business. They’ve gone from working 50+ hours a week, with busy calendars and to-do lists to too much free time and no more desire to golf. Here is the key: If you feel that it’s time to completely exit the business and sell, you need to find a hobby, passion or another love to keep you busy and engaged. Business owners who retire to nothing often regret it.
2. What have you done to replace yourself in the business?
The best thing you can do to increase the valuation and likelihood of selling your business is to have clean financials and develop the manager or employees in your business to be able to operate without you. Consider what would happen if you took off for 30 days. If the business would come to a grinding halt, then your business is overly dependent on you and you need to train others around you to handle day-to-day operations. Remember, you want to sell a business, not sell a job. Selling a job (a business overly dependent on the owner) is likely not going to get you a valuation to make sure your retirement nest egg is sufficient.
3. Who do I need to hire to help me accomplish my goals?
Hiring the right team is vital to help you not only know how to accomplish the valuation, sales process and closing, but also to keep things confidential while getting you top dollar. Selling your business is not like selling your home; you don’t post it on social media and tell the whole world your business is for sale. That’s likely the kiss of death of customers, employees and vendors. You’ll need a few people on your team. You’ll need a good CPA who specializes in business transactions, tax planning and due diligence. Depending on your state, you’ll need an escrow agent or transactional attorney who can help with the legal aspects and closing the transaction. Lastly, you’ll need an experienced and competent business broker who can help you value and market to find the right buyer. In a previous article, I addressed eight questions to ask before hiring a business broker. Be sure to ask these questions before you hire any business broker to ensure that you are hiring the best, most experienced broker in your area.
4. Do you know what your business is worth, and will this price be something you can retire on?
Again, this is where hiring the right team becomes so important. You’ll need to work with a business broker or business appraiser as well as your financial planner and CPA to ensure that you have a feasible road map in place for financial security in retirement. Most businesses are sold on a “debt-free, cash-free” basis, so all debt and/or liability are typically expected to be paid off prior to close of escrow. This may or may not impact the amount of money you’ll net from the transaction.
5. Are you willing to stay on for a period of time post-transaction?
Depending on the size of the transaction, there could be — and often is — some period that you’ll stay on. As deals get larger, it’s quite common to have some type of earn-out structure. This means while you may get 70% or 80% cash at closing, a significant balance will be tied to you helping the new owner for a smooth transition. That transition period could be for one or two years and have clauses in the earn-out that ensure the company maintains or hits certain benchmarks. You’ll need to plan and prepare for this, depending on the size and nature of the business you are in.
6. Are you willing to carry a portion of the transaction on seller financing terms?
Again, another common deal structure is to have the owner carry a portion of the transaction value in seller financing. I would not recommend you carry more than 50%, as a general rule, but you’ll need to be prepared for how you will respond to a seller who wants you to finance a portion of the transaction. In this situation, you really only have a couple of options. Either ensure that the company has a very clean and profitable financial history (including showing as much profit as you can on the tax returns) so a buyer can get financing through the SBA or some hybrid of cash down from the buyer with the balance carried on seller financing from the owner. Unless your business valuation is less than $100,000, it is unlikely you’ll find a buyer who has or wants to put 100% cash down at closing.
Ask these six questions of yourself to help you determine when it’s the right time to sell your company, otherwise, you might find yourself bored and unprepared for retirement. In that case, you may end up looking for another business to buy!
