Planning to sell the business you’ve built over a lifetime can be difficult, but a combination of financial and emotional preparation can help create a successful transition strategy. To prepare yourself for the tough choices that lie ahead, consider these five essential questions.
Have you talked to your financial advisor?
If your primary goal after selling your business is retirement, you’ll want to start with a big picture assessment of your long-term financial goals. A look at your financial needs can help you figure out if you’re ready to sell—or if you should wait a while. Your financial advisor can help you determine:
- Your net worth in terms of assets and liabilities
- The potential growth rate of your assets during retirement
- The annual cash flow you’ll need to fund your desired lifestyle
- The weight the proceeds from your business will carry as part of your overall investment strategy
Who else needs to be a part of the conversation?
It’s important to start early in thinking about who may want to take over your business. Is there a competent family member with an interest? A key competitor with whom you are comfortable? Other potential buyers in your market?
If your preference is to keep the business within the family, begin talking to family members about your plans so you can begin to gauge their interest. For key employees, whose life-long service to your business will be impacted by your decision, hold upfront discussions about your intentions. They too, may have an interest in succeeding you. If appropriate, you may want to invite them to assist in aspects of sale preparation. Keep in mind, consistent and open communication can help dispel fears and make for an easier transition. No matter your preferred option, it is important to have conversations with essential professional advisors at the outset of your deliberations. Consult an attorney who specializes in mergers and acquisitions, an appraiser, your tax advisor and a business broker, who can guide and counsel you through the entire sales process. Each of these professionals can help you gain a working knowledge of the considerations that will drive your end decisions.
Is it the right time to sell?
Of course, the best time to sell a business is when it’s at its most profitable. Consider the overall health of your organization, including the state of your financial balance sheet. Desirable buyers often want to see at least three years of solid, sustainable performance. To increase the attractiveness of your business, assess its overall health and shore up any weak spots.
The state of the current economy can be an issue as well. A low-interest rate environment may make it easier for a suitor to finance the exchange. Current economic conditions may help or hinder the state of your industry. If sales and profits are down—no matter the reason—it may be best to hold off for a better time.
What is the value of your business?
Many business owners do not fully understand the value of their enterprise, which can cause friction during conversations with a prospective buyer. A third-party appraisal can help you gain an objective perspective on the value of your business before you’ve even begun talking to suitors. A preliminary assessment can also help you pinpoint areas for improvement, which can boost your company’s attractiveness to buyers.
As part of your assessment, be sure to incorporate the value of your key accounts, vital employees and reliable business systems. Consider strategies to keep each in place after the sale. These may be significant assets, and could be the detail that attracts your successor.
How involved do you want to be after the sale?
Some owners are ready to step aside and allow their successors to take over, while other owners prefer to stay involved with the company for a few years to help ease the transition. If you’re willing to stay on, your presence may reduce risk to the buyer, increase the value of your company and create a short-term cash flow until you ultimately bow out. At the same time, if you’re really ready to move on, staying onboard when you’re not fully invested could be detrimental to you emotionally, as well damaging to the overall organization. It’s important to do some soul searching before the sale to figure out your personal priorities and to set boundaries as to how involved you want to be—and for how long—post-sale.
For many business owners, a financially secure retirement hinges upon the ability to successfully sell their business. The answers to these questions can help set you on the right track.
This article is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein.
All analyses and projections depicted herein are for illustration only, and are not intended to be representations of performance or expected results. The results achieved by individual clients will vary and will depend on a number of factors including prevailing dividend yields, market liquidity, interest rate levels, market volatilities, and the client's expressed return and risk parameters at the time the service is initiated and during the term. Past performance is not a guarantee of future results.
Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.
The information and opinions in this article are presented as-is and may not be suitable for all readers. Please obtain appropriate advice for your particular situation.
©First Republic Investment Management, 2016