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Is it Time to Sell? Business Readiness

Hands on Investing

Hands on Investing

Selling your business is a major step many business owners take when they are ready to retire. When the question, “Are you ready to sell your business?” comes up though it can send a business owner into panic mode. The truth is no one really knows if they are ready in that sense. What am I getting at?

Well most of the time, people assume being ready is making the decision to sell your business. In reality, being ready to sell isn’t the readiness of whether you want to sell it; readiness is a state of fact. In other words, do the facts and figures indicate you are ready to sell your business? It is not a state of mind. It’s important to drive this point home so that you truly understand how to answer the question when you hear it.

When dealing with readiness, there are two ways to look at it. The first one deals with the owner. Are they personally ready? (Remember we are not talking about a mentality. We are dealing with a physical state.) The second way to assess readiness is to know whether the business is fiscally ready. Let’s dive in and explore each of these a little closer.

Personal Readiness

First, the business owner must have set clear personal goals and objectives. In other words, is there a plan in place for their personal life? What will they do for income without their business? How does their day look like since there won’t be a job to go to? You need to know what life after your business looks like, or at least have an idea. Without a plan in place, after they sell the business, they will undoubtedly feel lost. There is a reason why only 4% of business owners are happy after they sell their business according to the Exit Planning Institute. Typically business owners do not often think about what their specific goals or objectives are for life after their endeavor.

Sadly, for most business owners, their identity is their business. They are the CEO of a company that they likely founded and built themselves from the ground up, their whole lives have revolved around that. They probably spent 70-90 hours a week in that business and just cannot fathom life outside it.

Also, from the personal perspective, the business owner statistically will not have an advisory board or formal team in place. If you honestly believe that you are going to wake up one day and say, “ I want to sell my business, ” and somebody is going to come riding in on a white horse, offering you exactly what you want, good luck. I hate to tell you, but it just isn’t going to happen. That’s not reality. You’re living in some utopian dream. By obtaining professional to help to ready yourself, you’re actually setting your business apart from most of the competition.

Planning to sell a business is an endeavor that requires a personal transition team. The team should include a  good attorney—traditionally you employ a good tax attorney; a good CPA; as well as a good Certified Financial Planner™.

These three players are absolutely vital to your team. If one those team members boasts Certified Exit Planning credentials too, then you’ve knocked it out of the ball park. This team will not only help you transition through the sale, but they’ll be there to help for the rest of your life.

You also MUST have contingency plans. What happens when the business doesn’t sell for the value you think is worth? It could be possible that the buying company wants you to maintain a five to six-year contract with them? What happens if there are hold backs like they don’t give you 100 % cash, instead, they give you stock? Many times, on the owner’s side of things, they personally have not thought about all the various issues, and they are personally not ready.

Business Readiness

The next readiness issue to investigate is that of fiscal readiness. There are numerous reasons preventing a business from being ready financially. For instance, the owner may stipulate he or she needs $5 million dollars from the sale of the company. In actuality, they need $7 million dollars of the selling price in order to meet their personal goals. The owner needs to assess their standard of living for the period after they sell their business. They might not have enough money to maintain their standard of living if they don’t get the right amount from the sale.

One critical attention to detail which is often overlooked, taxes. Tax planning may not have started soon enough. Tax planning for your business should be an ongoing systematic approach with your CFP®, CPA and tax attorney. It has to be. You will shoot yourself in the foot if you don’t.

There is a litany of things to go through for your business to financially be ready. Many times, the business isn’t ready because the valuation is not accurate or the multiplier is concentrated. What that means is you have the EBITDA, which is roughly your current income statement, then the multiplier which gives you the value of your company. The two numbers just don’t provide numbers which jive. Therefore leading to a valuation that the seller and the buyer just don’t agree on.

In some instances, the business may not be bankable. Basically, a banker won’t lend money to a buyer for the purchase of the business because the financials and the valuation of the company don’t support it. That happens numerous times despite the fact that the owner is taking home an exuberant amount of money. The owner may have an unbelievably amazing lifestyle, but that doesn’t get the bank on board, which stops the sale.

Situations of credibility with the financial reporting could become an issue. An accurate financial report is imperative to the selling of your business. There is no way large sums of money or stock or whatever is going to exchange hands for the sale of a company without accurate financial information. It just is not going to happen.

A couple of other readiness issues that may arise when it comes to selling a business are management and customer base. From a business standpoint, your management team might not be ready. You may have a management team who is the same age as the business owner. This is unacceptable.

You can also have a customer concentration. Perhaps you have one client that holds 25% of your companies total sales. That is a huge red flag for a potential buyer. What if that customer doesn’t want to stick around after you leave sell? Well, there goes the buyers biggest client.

So, when it comes to readiness, look at it from a factual point of view. Set your goals. Get your team together and run with it. Remember that team consists of a Certified Financial Planner™, a Certified Public Accountant, and a tax attorney. All three think differently. Each will give you insight that will maximize your capital. And again if one of them is Certified Exit Planner Advisor, then your business is ready or at least will be when the time is right.

 

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