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As a business owner, you’ve worked hard to build your business. And now the day has come to move on and retire. Business transitions are one of the most complex tasks a business owner encounters. You probably have a substantial portion of your family wealth invested in the business. Selling requires broad financial strategies to address taxes, retirement and estate planning needs.
Selling requires careful planning—everything from cleaning up sloppy books and tax records to dressing up a tired office, updating computer systems and ramping up marketing to juice sales and command a higher asking price. Consider these steps:
For companies with less than $10 million in annual revenue, consider a business broker who will charge a commission of 5 to 10 percent. Business brokers perform the business valuation, prepare prospectuses and tap into large networks to locate buyers. Brokers will also help establish a sales price and steer buyers to financing resources.
This will increase loyalty to your key employees and allow you to add golden handcuffs to your management team. The cash balance plan also allows you to defer portions of the proceeds of your business sale.
A third-party valuation provides a realistic estimate of your business value. For a cost ranging from $3,000 to $7,500, a qualified valuation professional will review your business and provide a range of valuations. The review typically considers everything from sales to receivables, inventories and other assets, as well as outstanding debt or liens.
Businesses are typically worth three to six times their annual cash flow, depending on their overall financial health, industry trends, market demand, and location.
Prospective buyers want financial transparency. They will perform careful due diligence, kicking the tires on everything from business financials to real estate and equipment.
An owner can avoid red flags by working with their CPA to present clean financial statements and business tax returns for the past three years.
Among the no-no’s are keeping family cars, credit cards and boats on the business books.
All too often, an unexpected factor—an aging owner, lack of interest in adult children, a competitive threat such as the arrival of a big-box store—forces small business owners to sell. If you plan to outlast your competitors, prepare your exit strategy now, before such a situation forces a sale
Consider having a trusted employee take over the business. They typically know the customers, employees and industry trends.
Buyers are interested in businesses with upside. Buyers can get skittish if a single customer represents more than 20 percent of revenue, putting sales at risk if that business is lost. Consider diversifying the customer base or jump start sales with increased marketing and promotions.
Push out bloated inventories and get systems up to date. Consider a fresh coat of paint and some new fixtures. Continue asking yourself, what can we do to increase sales.
Most business sales are paid for in part by third-party loans. A major reason many deals fall through is because buyers are unable to secure financing.
Banks usually want sellers to provide a portion of financing; this ensures the seller has a vested interest in the venture’s ongoing success.
There are a host of legal considerations when selling your business. Among those necessary to close the deal is the asset purchase agreement, the legal contract for the sale and the purchase of the business assets, including physical and intellectual property. This comprehensive document will consist of exhibits such as noncompete agreements, asset listings, employee agreements and guidelines for the use of website domain names.
Often deals will stipulate the prior owner remain in an advisory capacity for a 1 to 3 years to ensure a smooth transition.
The overall process can take two to five years So even if you are only moderately motivated, consider starting today.
Let us know how we can help.
Kelly Wood & Eric Tarver
Family Wealth Planners
Kelly.firstname.lastname@example.org & Eric.Tarver@woodtarver.com