Strategies Every Entrepreneur Needs to Know Before Selling a Business
The thought of selling a business can be both exciting and daunting. After years of building a successful company, an owner may want to retire, tackle other business ventures or simply take a breather to pursue long-delayed personal interests. Whatever the reason, millions of business owners sell each year. In fact, one study estimates that more than half of all current entrepreneurs will part with their companies over the next decade.
Selling a company is complex and entails a variety of decisions. Owners want to feel confident that they’re selling at an opportune time, securing the best price and structuring the transaction wisely. Entrepreneurs also need to understand the potential financial implications for themselves — including the effects of income and estate taxes — and should consult with a legal or tax professional before taking any action. Though no single formula is right for everyone, here are eight steps that can benefit those contemplating a business sale.
1. Plan well in advance.
It’s best to begin preparing months or even years before conducting an actual transaction. Early preparation and a well-conceived exit strategy help owners make the best decisions for themselves, their families and their companies. Among other benefits, early planning provides time to think through one’s options and goals, including long- range financial objectives.
Our Investment Counselors can provide assistance throughout the sales process. Although Capital Group Private Client Services doesn’t provide legal or tax advice, we have extensive experience in business sales and transitions. For example, we can help owners select advisors with investment banking and legal expertise. We can also assess whether the proceeds from the sale would be sufficient to maintain one’s chosen lifestyle well into the future.
2. Understand the emotional element.
Beyond financial matters, selling a company — particularly if it has been in the family for decades — can be deeply personal. In many cases, an owner has devoted many years to building a venture, and parting can be bittersweet. One’s self-image and sense of purpose — not to mention the simple rhythms of everyday life — can be bound up in the company. Thus, it’s important to consider both the financial and emotional issues one may encounter.
3. Prepare the business for sale.
It’s crucial to ensure that a company is as financially attractive to a potential buyer as possible. This includes having efficient operations and a clearly articulated vision for growth. Depending on the circumstances, an owner may need to slash costs or widen a customer base before putting a business on the market. Additionally, it’s advisable to get audited financial statements going back several years to prove that the venture is profitable and its accounting methods are sound.
As part of the preparation, an owner should gradually reduce his or her role. This is a chance to demonstrate that the company is self-sustaining and won’t miss a beat under new stewardship. It’s also wise to structure employee compensation to retain valuable employees. Buyers don’t want to worry about a brain drain after they take over.
4. Pick experienced advisors.
Selling a business requires a team of specialists with expertise in multiple disciplines, including investment banking, accounting and legal matters. It’s important for entrepreneurs, who may not be accustomed to relying on outsiders, to realize that they will need to lean on outside advice. If we are brought in early enough, we can help owners select and oversee a slate of experienced advisors to facilitate a seamless transition.
5. Determine matters of family succession.
One of the most basic decisions an entrepreneur must make is whether to transfer a business to his or her children. This can be straightforward if one’s kids lack passion for the family enterprise. In cases where children want to succeed their parents, owners must determine whether their offspring can be successful. Ideally, there would be enough time for a child to assume a variety of management roles with increasing responsibility. Even in such cases, it’s important for owners to ask themselves whether they want to remain even tangentially linked to the enterprise. When a company stays in the family, the older generation often remains involved in some capacity, even if simply to provide opinions or general guidance to a successor. That’s ideal for some, but others prefer an outright sale that frees them from all involvement.
People with more than one child have additional decisions to make, including whether to give equal ownership stakes to each sibling. The issue can be especially tricky if only one child is involved in running the company. The goal, of course, is to avoid conflict or resentment, and the ultimate decision will rest on family dynamics.
6. Gauge the interest of co-owners and employees.
Beyond family members, other options include selling to a partner who already holds a stake in the company or to long-time employees. If there is a co-owner, there already may be an agreement in place that spells out the terms for transferring ownership. If selling to employees is a possibility, owners must be comfortable that the workers can secure the necessary financing and manage the company successfully. One option is to sell company shares through an employee stock ownership plan. ESOPs have grown in popularity lately, in part for their flexibility and tax-efficient structure.
7. Consider the benefits of selling to a third party.
There’s also the possibility of a third-party sale. A recent report found that half of small- business owners who plan to part with their companies expect to sell to a competitor or other third party. A major benefit of such a sale is the potential to receive a significant portion of cash up front. Selling to a third party avoids concerns about treating one’s children unfairly or finding a child or employee capable of running a business. However, unless one chooses to stay on board to help run the business, the company’s culture may suffer a significant change.
8. Develop a thorough wealth strategy plan.
Of course, the ultimate goal of a sale is to financially prepare owners for the next phase of their lives. Thus, it’s essential to have a comprehensive wealth strategy tailored to one’s individual financial circumstances and personal goals. Our Wealth Advisory Group can conduct an analysis based on market assumptions to quantify the after-tax amount needed to endow one’s lifestyle with a high degree of confidence. We consider all personal goals to most effectively accomplish wealth transfer and charitable objectives. As part of that, we assess term sheets from potential buyers to understand the pros and cons of each offer as it relates to the owner’s long-range wealth planning. This can help, for example, in comparing the trade-offs of an all-cash sale and a staged payment plan, which defers the proceeds until later dates.
Although there are many considerations involved in selling a business, advance planning can help it all go smoothly. Taking these steps should give owners greater control of the process so that they can make the right decisions for themselves and their families.