You’ve owned your small business for many years. It may be time to investigate what it would take to sell your business and retire somewhere wonderful.
But selling a small business can be a complicated process and one that needs time to do it right. It can be complicated emotionally because you have built the business and poured many hours into it to ensure it was successful. It is also complicated logistically because you need to figure out what your business is worth and how to best prepare it for the sale.
However, there are important factors to contemplate. Succession planning is a process that takes time. Many small businesses make several mistakes that hinder the transaction.
As with any financial decision, there will be unique considerations based on your personal situation to think about before making the decision to sell. Read on to learn what you need to consider.
What are the reasons you want to sell your small business?
Before you start the process, you need to determine the reason why you want to sell your business. Some of these reasons include:
- It’s time to retire. We all love our work but at some point, you may want to wind down.
- You want to do something else. If you are not retiring, you may wish to undertake something else that is more challenging or just different.
- You need to separate from your business partner. Sometimes it is better to sell the business before your disputes turn into issues that drive the business into bankruptcy.
How much money do you need to walk away with?
If the reason you want to sell your small business is to retire, it’s critical to analyze how much money you need to net from the sale. Meaning how much after taxes will you actually walk away from the sale with. This is an important factor, as you’ll want to maintain the lifestyle you’re living now. And you’ll want to be able to sustain that lifestyle throughout your retirement. Because at the end of the day, who wants to pinch pennies in their retirement? Nobody does! The last thing you’ll want to do is worry about money.
Contact a financial advisor to help with this decision. The financial advisor will help determine the amount of money you’ll need (after taxes) to have the lifestyle you want in retirement. This is a critical factor in deciding if it’s the right time for you to sell.
How much is your business worth?
Once you determine the amount you need to sell your company for, next find out how much your business is worth now. Valuating a company isn’t an exact science. Although, there are metrics in certain industries that are typically used (i.e., a function of revenue). The good news is you’re not alone with this decision either. There are professionals available to help determine how much your business is worth. This is another important factor. Even though it’s a good economic climate, if the amount you’re offered won’t work for you, then it’s likely not a good time to sell.
As an alternative, identify how much you’d need in additional earnings to retire and then make a plan to fill the gap after you sell. For example, you could stay and work with the company you’re selling to for a few years. Another option would be to hire a consultant and make some changes within your company to grow the business. That way it could increase in value, and you could sell it for more money in the coming years. A third option would be to drum up additional offers to try and get a better price for your business.
What’s the best way to do this? Hire a team of professionals i.e., your financial advisor, your certified public accountant, a business attorney, a merger and acquisition (M&A) specialist or depending on the type of business, a business broker. The role of the M&A specialist is to create an auction-like environment and obtain multiple offers for the sale of your company. A business broker does a similar role, just for businesses that are simpler to evaluate.
Just remember at the end of the day your decision to sell should be based on your personal situation. So, it’s important to really think through the factors we’ve identified above. And as always, work with your financial planner to make the best decision for you.