Why would a business owner sell a business?
Most business owners sell business operations due to "human factors". These include:
- Retirement
- Health Issues
- Partnership Issues
- Divorce
- Relocation
- Burn-Out
A business owner looking to retire may sell a business to a family member or look for an outside party such as an individual or another company to take over the company. Other business owners are possibly looking to relocate out of the area and it is not feasible for them to manage the business from a distance. Health issues can be another reason that a business owner will sell a business. They may not be physically able to handle the activities needed to operate the business. Divorce may also lead to an owner selling a business. The company may need to be sold so that the proceeds are split between the two individuals. Some owners become burn out on doing the same thing over a number of years. Burn out is the number one reason owners sell business operations. The owner may be overworked, stressed, take business problems home with them at night, frustrated with employee issues, or a number of other reasons. The owner realizes that they need to make a change in their life. This change is also usually good for the company as well.
The sale of the business can be an emotional roller coaster. 90% of owners are first time business sellers so the business sales process is something new to them in which they don’t have experience. Business sellers often have mistaken the process of selling a business with a real estate transaction. There are very few similarities of the sale of a business and a sale of residential or commercial real estate. Business brokers have the experience needed to guide these first time sellers through the process. In addition, the ten percent of buyers that sell multiple businesses over their lifetime see the value of a business broker in the process and use them in their future business transactions. A focused business brokerage firm doesn't cross over and do commercial or residential real estate. They prefer real estate agents to handle these transactions since they are much better at selling property. A similar analogy is that the family doctor doesn’t usually perform heart surgery. Heart surgeons have a special skill set just like business brokers have a special skill set in comparison to real estate agents.
A major difference is that businesses are sold confidentially while property is sold by advertising to the world. Selling your business requires the skills needed to understand and convey complexities in your financial statements, relay to buyers the value in existing employees, customers, and suppliers. It also requires specialized marketing, understanding of creative deal structuring, and assisting in negotiations with the buyer and their legal and accounting advisors.
An Exit Plan to Prepare for the Eventual Sale
Knowing that a human reason may lead to a company owner to sell a business, one may ask “How can I prepare?” An exit plan is a comprehensive road map that addresses all of the business, personal, financial, legal and tax issues involved in selling a business. A good exit plan includes contingencies for illness, burnout, divorce, and even death. Its purpose is to ensure the survival of the business which will provide continuity to employees, customers, vendors, and to preserve wealth.
Without a predetermined exit plan, a business owner will probably:
- Undervalue the company and leave hard earned wealth on the table
- Pay too much in taxes when they sell a business
- Lose control over the process by being reactive, rather than proactive
On the other hand, a well designed and implemented exit plan enables:
- Control how and when to exit
- Maximize company value in good times and bad
- Minimize or eliminate capital gains taxes
- Ensure business and personal goals are achieved when you sell a business
- Have strategic options from which to choose
- Reduce uncertainty for family and employees
A business transition or exit plan needs to have clear goals established taking into account business, personal and financial goals. Part of this plan includes a business valuation to establish an understanding of the business value at time of beginning the process. Without a business value, it is hard to set up an action plan. The action plan consists of value enhancement strategies that are based on the time frame that you have to implement. A plan that is established in advance provides additional options for a business owner. These options along with their pros and cons are outlined for the business owner. Transaction deal structure also needs to be analyzed to see the effects on taxes. A properly executed exit strategy will minimize capital gains, ordinary income, and estate taxes related to the exit.
Perhaps the most important thing to remember is that developing a good exit plan requires a multi-disciplinary professional advisor team to include a business attorney with M&A experience, financial advisor who does planning work, a tax specialist, an insurance professional, and a business broker. You should meet with your advisors on a regular basis to ensure that crucial steps are being completed on schedule. Nobody likes to pay unnecessary fees, but the cost of developing a good exit plan is usually tiny compared to the additional value received at the time of sale. After all, selling your business is probably going to be the most important deal of your life time.