5 Things to Consider Before Selling Your Business
1. Don’t wait too long. Based on the studies that we are seeing, approximately 40% of the wealth in this country will transition from the baby boomers to the next generation. By and large, most of these individuals are ill-prepared to transfer this wealth either because they have done no planning to do so, or it is very difficult to transfer it.
It is very hard to get a business from the first to the second generation, and it is almost impossible to get it from the second to the third. There is an age-old expression, shirt sleeves to shirt sleeves in three generations, or, “the first one finds it, the second one makes it, and the third one spends it.”
2. Choose the right time to sell. When is the appropriate time to sell your business? It is usually long before you think you need to sell. Most businesses take anywhere between three (3) to five (5) years to sell for the price that the seller wants, or for something approaching the fair market value of the business.
3. Prepare your business to sell. Generally, your potential buyer is a competitor, larger than you. If the buyer is sophisticated, the first thing they are going to want is all of your financials, i.e., your tax returns, profit and loss statements, balance sheets, and cash flow statements. The first thing you need to think about doing is cleaning up your balance sheet.
4. Determine the value of your business. Many people know what they would like to sell it for, they just do not know what the market is. We oftentimes go out and get appraisals for businesses, so we will at least know whether we are high or low in the negotiations. Likewise, many individuals think that once they sell their business, they can continue their lifestyle as they had with the business — most businesses hopefully return between 10 to 30% on investment.
5. Don’t do it yourself. Occasionally, we find individuals who come to us and bring us the deal that they have negotiated and want us to simply “close the sale.” Without exception, we have found these deals to be disastrous. You may know how to run your business, but usually you do not know how to sell it.
Example: We had one where the individual agreed to transfer the business free and clear of all liens. The problem was that she owed almost $400,000 on one of the buildings, and further agreed to finance the sale of the business. Thus, 100% of her first payment went to pay off the debt, which was non-deductible, so on the $400,000 she paid out, she still owed $120,000 in taxes, but did not have the money to pay it. Had this sale been properly negotiated, those contingencies would have been addressed.
So, if you want to sell your business, 1) don’t wait too long, and, 2) don’t try to negotiate the deal for yourself. Contact us today to schedule a consultation.