While it may seem like a strictly business decision, there are many factors to consider when determining if you’re ready to let go. If you don’t know what you’ll do after the sale, you’re likely to feel hesitant during the process. If you’re not ready to part with the business you’ve invested in, negotiations with potential buyers might not go how you want.
“You’ve worked so hard and so long to build a business and selling it really does bring up a lot of mixed emotions,” says John Heffernan, Managing Director with Business Owner Advisory Services from U.S. Bank Wealth Management. “A lot of times owners can quickly come down with a case of separation anxiety.”
To make sure you’re ready to sell, ask yourself the following three questions.
As a business owner, you likely focused on maximizing value, increasing profits, managing your employees and growth. “Your concern has been day-to-day business activities,” says Heffernan. You may not have taken time to start thinking about the business’s transition.
Your first step is to think about what you want your business’s legacy to look like. This could mean selling your business to a third party who will continue to run it, or it may mean stepping aside and allowing your children or other family members to buy out your shares in the business. It could also mean selling in a two-step approach, where you first sell a controlling stake to a financial buyer (for example, a private equity firm), help the buyer scale the business leveraging their capital, and exit in a few years at a higher price.
Legacy isn’t just a financial decision, and there's no playbook to determine what’s right for you. Think about what you want for your business, your employees and for yourself. Financial professionals and business consultants can offer input and suggestions, but you must determine what goals you have during a transition.
Whether your family works in your business or not, you should have conversations with them about what your transition plan looks like. Family discussions need to happen in parallel with business discussions. If they’re old enough, talk to your children about what the transition means for them, including if they get an inheritance from it, and discuss any details about how their lives may change.
If your family members are part of the company and will be directly affected, plan to have more extensive conversations. Families and businesses are often intertwined. Maybe your siblings own shares, or your children work for you. These connections could be affected by a transition.
You also need to start thinking early on about how the proceeds from a sale of your business would be divided. If your daughter worked her way up to second-in-command at the company, you may want to ensure she profits more than other children who weren’t active in management.
“Ideally this estate planning all starts to happen well in advance, so when the first offer comes in, there’s very few tactical family decisions that still need to be made — especially at a time when things might be emotional,” says Heffernan. Just as important is making sure expectations are set for all who will be involved.
Finally, don’t overlook potential estate tax liabilities, particularly if you reside in a state that also imposes an estate tax.
Think about your income now, as a business owner. What type of transition would let you maintain a similar lifestyle afterward? This should be factored into any business transition planning and discussions around whether you can afford to sell the business.
“We call it the third data-point in any conversation about the potential sale of a family business,” says Heffernan. “The first data point is what you think your business is worth, the second is what the buyer thinks the business is worth and the third is how much you truly need to live life post sale.”
Be sure to account for any family or personal expenses that may be covered by your business: cars, insurance, phone plans, season tickets, even the company retreat in Florida that happens to coincide with spring break. If your business pays $600 a month for your leased vehicle, taking on that cost out of pocket will affect your finances.
“There are a number of bills or services that can run through a business that you may take for granted after years of doing so,” says Heffernan. “All of those are considerations that you need to take into account when you think about whether you can afford to sell.”
As you answer these questions, give your business an honest SWOT assessment. Is it ready to be sold? Looking at your company’s strengths, weaknesses, opportunities and threats can help inform your business’s viability and identify what may make it appealing to potential buyers.
Having a sense of how you want a sale to affect your company’s future, your family, and your finances can help you as you begin the more technical aspects of a sale.