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When business owners are considering the confidential sale of their business, it is imperative that they first fully understand what selling a business truly entails, because a lack of a complete understanding can lead to disappointment. This becomes a waste of both parties’ time and money.
In order to help prospective sellers avoid this problematic situation, we have provided the top five questions a seller should ask themselves when considering the sale of their company. These questions must be answered honestly in order to determine whether it is an appropriate time to sell a business.
It goes without saying that this is the number one question a business owner asks themselves before selling their business. However, it is important to determine the true motives behind a decision to sell. An impulsive choice to sell will often lead to a rushed deal and inferior results, such as settling for a lower selling price. If a business owner rushes into a deal, important information may be overlooked (such as company strengths and the seller may not receive full value.
Oftentimes, the desired sale price in the business owner’s mind is not equivalent to the actual valuation number set by an intermediary. Emotional valuations are common among business owners, and they occur when a business owner marks the business at an elevated price due to the amount of hard work that they have poured into the company or the emotional attachment to the work he/she has put in over the years. Emotional valuations tend to generate a much higher number than what a business is worth in the market.
Even if the business owner does possess a reasonable valuation, the seller may not see the total sum of that money on the day of closing. Typically, if the business has not been professionally prepared for sale by an experienced investment banker or M&A intermediary, the seller may receive a payout in increments. Inexperienced sellers will often exit a deal at the last minute when the buyer is not offering the desired payout price under the right terms.
However, it is often in the best interest of the seller to accept a lower sale price in exchange for another benefit, such as a full cash payout.
Note: A seller should have their company appraised before contacting potential buyers.
If a business owner is selling his or her business in order to retire, then it is imperative that a retirement plan already be set in place. The seller will often receive the deals’ sale money in the form of an earn-out. An earn-out is when a buyer will pay a particular sum at closing and then pay a percentage based on client retention and business success over time. Consequently, the seller’s retirement plan should not be fully dependent on the cash from the sale of the business.
Business owners sacrifice a large amount of time and energy on their businesses. Oftentimes business owners become so accustomed to this lifestyle that once the business is no longer an outlet, they are lost as to occupy their time.
Many assume that upon retirement, free time can be spent focusing on hobbies and relaxation. However, we encourage sellers to examine the ways in which they intend to devote their time. While one may love playing golf, playing the sport all day, every day, can become tiresome. Taking time to relax can also be difficult for business owners as they are unfamiliar with having substantial amounts of time to themselves.
The tax consequences of selling a business can lessen the cash received from the payout. Many sellers do not consider the taxes that will have to be paid when planning to sell their business. While there are ways to avoid large tax ramifications (such as exchanging stock or a proper allocation of the assets being sold), it can be difficult to come out of a deal without having to pay any excess taxes without the proper advice. An M&A intermediary can help a business owner lower taxes and further understand the tax implications they will face in the future.
If you answered “yes” to all of the questions above, then you are prepared to begin the process of selling your business. This task is best completed through an M&A intermediary or investment banker with the professional knowledge to negotiate the optimal deal. George & Company would happy to assist you in your mergers and acquisitions transaction.
If you require assistance to decide if you are truly ready to sell your business, please confidentially contact George & Company for a free consultation.