Selling or transitioning out of your business can be a complex process from both a financial and personal perspective.
Every business owner has a unique relationship with his or her company, which includes people in the community, family, employees, and others who are tied to the business. Additionally, each owner has a unique set of circumstances when it comes to their finances.
Here are four questions to ask yourself before you prepare to transition out of your business.
1. How much will I need to get from the sale of the business to meet my personal financial goals?
Owners will need to calculate their annual expense budget and calculate their current net worth, excluding the business. This exercise is often eye-opening for owners since many fail to save significant money outside their business. The majority of privately held business owners take salary, expenses, and bonuses out of their businesses and they often ratchet up their lifestyle to match company profits. Few set aside significant sums of money earmarked for their post-business life, which means owners are highly dependent on their transition to fund their next phase of life. The amount owners need to net from their business transition is known as the “wealth gap.”
2. What is my business worth?
The next thing an owner needs to figure out is how much his or her business is worth. This can be tricky because it can be subjective. Every company has a range of values depending upon who the business is transferred to. Value is in the eye of the beholder (or, in this case, a potential owner).
The truth is most owners don’t know how much their business is really worth. They also don’t realize that different types of sale transactions bring different values. Investors are looking for a strong return on investment and growth potential. Remember to emphasize the business growth potential rather than dwell on past performance. Growth opportunities, reputation, and industry leadership are some of the many intangible qualities investors appreciate. Documenting improvements that can be made with new capital helps you to position the company better and can increase value substantially.
3. How much will I net from the sale of my business?
Oftentimes, owners don’t realize just how much of the proceeds of a sale will be diminished by taxes and fees. These numbers need to be considered in order to calculate just how much of the sales proceeds you will keep. As we discussed in “What You Need to Know About Taxes and Fees When Selling a Business,” taxes can be at least 30% and can be as high as 50% or 60% of the sale proceeds. In addition, the fees associated with an external sale can be significant. Owners who know their likely tax obligations and related fees in advance are better prepared to execute a transaction because they are one step closer to knowing whether or not they can truly afford to sell their business. You may be able to minimize the taxes by employing tax planning strategies.
4. How much time do I need to sell my business and achieve my goals?
Proper business transition planning requires sufficient time to craft the desired outcome. It will afford you the opportunity to implement strategies and changes that can increase company value, minimize taxes, maximize the amount that you keep, and bridge your wealth gap. This can have a dramatic impact on the eventual sale of your business and will drive the best possible outcome.
With sufficient time and ownership transition planning, you will be able to analyze and compare different growth and transition options. Once fully informed, you can better understand related sale prices, what you could potentially net from the sale, and most importantly which options will best meet your financial, emotional, and business goals in a timeframe that works for you.
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