If you’re a business owner, you’ve likely worked very hard to make your company a success. But eventually, the time will come to retire. Some business owners decide to simply close their business down, while others hand it over to their children. But many look to sell the business and cash in on all their hard work. How does retirement planning and the sale of a business work? At Global View, we work with a lot of small business owners, so it’s a question we get often.
While the answer can be complex and is unique to each person, all business owners should enlist qualified help from a lawyer, an accountant, a tax specialist and, most of all, a financial advisor to make sure the proceeds go where they will do the most good. When you can find all these specialists under the same roof, it can be easier, more proficient and offer less risk of missing something through poor communication. Find out why Global View’s full-service, family-office style services are so beneficial.
Let’s take a look at some important steps to take when considering the sale of your business.
Understand Your Reason to Sell
You might think it’s obvious, but the buyer will want to know why you are selling your business. Typical reasons include:
- Disputes with partners
- The want to pursue new opportunities
- The need to spend more time with family
- Trouble with the business
That last reason can be a problem. Buyers will still purchase a troubled business but typically will not pay top dollar. It makes sense to showcase the good aspects of your business. For example, you can talk up consistent income, growing profits, loyal customers or lucrative contracts.
Know How to Time the Sale
If you are sure you want to sell the business, immediately begin preparations. Under ideal circumstances, you can time the sale for six months to a year in the future so that you have adequate time to prepare. Use the lead time to improve your business, including:
- Restructuring your business to facilitate ease of sale. For example, you might be able to create one or more subsidiaries that you can sell separately.
- Reviewing your financial records. It sometimes happens that owners of small businesses can get a little sloppy with their record-keeping. Take the opportunity to whip your financial records into shape so that you can make a professional presentation.
- Growing your customer base. This is an asset that really interests buyers.
- Shoring up your debt. If possible, pay down your outstanding loans and tighten up your accounts receivable. Get rid of unnecessary or impaired inventory. Streamline your staff.
You want the buyer to feel that it will be easy to take over your role after the sale. After all, the buyer is extremely interested in keeping your business humming.
Value Your Business
After you’ve cleared out the cobwebs, it’s time to figure out what you can get for your business. If you set the price too high, you may not get a buyer. If you sell it too low, you’ll risk going to your grave with a bitter taste in your mouth. A business appraiser can help with this. These professionals are trained to provide a valuation that is based on the facts. There are the internal details, including assets and liabilities. But there are external considerations as well, such as:
- Industry: Is your industry in good shape? Does it have a declining market (think video rental stores)? Do you adhere to the industry’s best practices?
- Investment: Does your business need a considerable investment to stay viable? If so, your buyer may reduce the offer. Use your lead time to make the investments you need to facilitate the sale. This is especially true if you aren’t using digital tools to achieve maximum efficiency.
- Competition: How crowded is your industry? If you’re selling a retail store, location is a huge factor. Are you surrounded by competitors or do you have the neighborhood to yourself? Are there barriers to entry that elevate the value of your business? Do you have patents or trademarks that set you apart?
- Problems: Are you trying to palm off a troubled company? There can be labor problems, union problems, legal problems, lousy merchandise, etc. Fix up what you can but if you try to hide material facts, you may achieve the sale only to be greeted by a lawsuit from a disgruntled buyer.
Get Help from a Professional
Have you ever scratched your head when you drive by a house for sale by owner? You like the idea of saving the commission, but there is that nagging feeling that you’ll do something wrong that will cost you money. It’s the same when you sell a business.
You might not need an agent if you are selling to a trusted partner, employee or relative. Otherwise, a professional could save you a lot of time so that you can devote your attention to running your business. Also, a professional should try to maximize the sale price in order to earn a larger commission. Make sure you understand the marketing budget and stay in constant touch with the professional you enlist to help.
Prepare the Paperwork
You will need at least three or four prior years of financials and tax returns. As mentioned, it’s wise to work with an accountant to review your documents and correct any problems. You should also prepare a list of equipment for sale as well as lists of vendors, suppliers and customers. Have your current lease, licenses and certificates ready for inspection. You will want to create a sale book with all the information a buyer will want, arranged in a professional and pleasing manner.
Your business may require specialized documents, such as procedure manuals, equipment-operating instructions, supplier interfaces and data processing documentation. And don’t forget to tidy up the place — the equivalent of baking bread when a homebuyer visits. Consider fixing, replacing or selling old or broken equipment before putting the business up for sale.
Locate a Buyer
It can take years to sell a business. You may want to enlist the help of professional advertising to attract more buyers and shorten the selling time. Try to find several buyers in case one drops out and stay in contact with all potential buyers. Verify that a buyer has proper financing. Work with a lawyer to create an acceptable purchase agreement and bill of sale. Be ready to negotiate but know your limits. You may also have to assign your lease and arrange a security agreement.
Deal with Your Profits
Know how you will use your profits before you collect them. Work with your financial advisor to review your retirement, charitable and estate plans. Taxes are an important aspect, so make sure you understand all your options. Remember, a wild weekend in Las Vegas is no way to spend the profits from a lifetime of work.
When it comes to retirement planning and the sale of a business, there are many factors to take into consideration. There are many ways you can use the profits – and there are many mistakes you can make.
Don’t be a retirement horror story. Contact Global View to see how we can help. You can read a client case study here.