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.
What do you mean it is too difficult to do it? The bulk of this wealth is found in small businesses that were either started by parents, who then transferred it to baby boomers, who are now going to transfer it to someone else. Someone else is always the problem.
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.”
That adage does not hold to a certain extent, if in fact, the second generation acts prudently and starts trying to sell the family business at the appropriate time.
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.
Oftentimes when the business goes up for sale a lot of folks will come by and kick the tires, make a lowball offer, and see if they can steal it. It takes a while to find someone; 1) who wants the business, and 2) who can pay for it.
3. Prepare your business to sell.
So, what should you begin doing? First of all, you should consider who are your potential buyers. Generally, your potential buyer is a competitor, larger than you. It may also be a competitor in another State who wants to expand into Mississippi. 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.
Small businesses often have balance sheets that do not read like anyone else’s, because children, parents, grandparents, family friends, second and third wives, etc., are all getting something from the business. You also find that oftentimes during times of cash flow problems monies were loaned to the business, and those loans have been sitting on the balance sheet for years.
The first thing you need to think about doing is cleaning up your balance sheet, getting all of that garbage off of it, so that when the appropriate purchaser comes along, he, she, or it, is not going to look at your business as a disaster and walk away before they will even consider it.
4. Determine the value of your business.
The next question is, what is your business worth? 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. No, an appraisal does not necessarily mean that is the value for which you can sell your business, nor does it even mean it is the fair market value. It simply is something to represent what you should be asking for the business.
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. You are not going to find anything in the marketplace (that’s legal) that makes that sort of return on investment. Likewise, two (2) to three (3) cars, health insurance, “family trips disguised as corporate vacations,” and the like, are going to disappear once the business is sold. So, you better make sure that you are able to sell the business and still retire. That means you have to start preparing even longer than five (5) years out. That’s a source for another discussion.
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.
Do you know what a Covenant Not to Compete means? What is an Ordinary Income Asset versus a Capital Gains Asset? What happens when you agree to finance a business? If you agree to finance the business, do you take collateral, and if so, what? There are many, many problems with individuals who try to negotiate their own deals.
Example: We had one where the individual agreed to transfer the business free and clear of all liens. The problem was is 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. The problem was the payment was to pay off the loan and thus was non-deductible, so, on the $400,000 that 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.
