There are a number of reasons why you might want to sell or transfer your business. Some serial entrepreneurs find they like to start businesses but don’t really like to run them. Others have been around for a long time and are just getting tired or too old to stay in their role.
Some owners may have maximized the value of their company. Perhaps your personal balance sheet needs more diversification because 95 percent of your value comes from the business, so you bring in partners or sell a portion to employees, giving yourself more options and downside protection.
Whatever the reason, Norman M. Boone, founder and president of Mosaic Financial Partners Inc., says there are a number of questions to answer if you’re a business owner moving through the transition process.
“It’s really important to focus on your personal needs, both financially and emotionally,” he says.
Smart Business spoke with Boone about asking the right questions prior to a sale and how to deal with the financial and emotional issues.
What are some key factors business owners need to understand about selling or transitioning from a business?
There are six key things that they have to be thinking about and understand:
• What’s the business worth?
• Do you have a plan of who is going to come in and operate the business successfully when you are gone?
• Have you been too busy running the company to consider personal issues like your own estate plan, will and insurance?
• What do you want in terms of lifestyle? Do you want to keep running this business until you drop dead, or do you want to sell it and go onto the next business? What are your criteria and where do those triggers happen? Do you want to be working full time or part time? Do you need control of the business or not?
• If your personal finances are completely reliant on the business, what’s your extra exposure of not having diversification? If something were to happen to the business, would you and your family be OK going forward?
• What are some tax issues you could face with a sale or transition?
Why is it so important to ‘know your number’?
One of the key issues when it comes to selling a business is that people don’t know how much money they need to be able to live their life comfortably and successfully for as long as they and their spouse might live, factoring things in like medical care and Social Security. For example, if somebody spends $100,000 a year, maybe they need $2.5 million in assets to support that. If your lifestyle is more expensive, then you need more dollars, and knowing what that number is, whether it’s $2.5 million, $5 million or $15 million, is pretty important before you start to negotiate a sale.
If you sold your business for $6 million and after taxes you’re left with $4 million, you’re going to be frustrated if that’s not enough to support your lifestyle for as long as you might live. You may not be able to continue living as comfortably as you were before.
Is there a disconnect between what people need to live on and what their company will actually sell for?
As a general rule, people overestimate what a company could sell for, particularly on an after-tax basis, and underestimate how much capital they need to support their current expenses. That combination means that often people are really frustrated. They might get right to the edge of the deal, and suddenly realize, ‘Oh gee, I can’t do it on this. I need 2 million extra dollars to sell the business.’ You see deals fall through reasonably frequently because of that.
Once you know your number, you can do things to make the company more valuable. Get your accounting in good order. Minimize expenses in order to raise profitability. Grow the business in terms of sales. Have a brand that is as well known as possible. In addition, the less dependent the business is on you as an individual, the more it’s worth to somebody else, because if you’re critical and are replaced, then it’s very possible that operation could fall apart. Therefore, build in systems, processes and procedures to bring along key employees so they can continue to manage the business without skipping a heartbeat.
Why is it important to focus on what comes before selling?
If you’ve been running a business for 25 years and you’re being asked to let go, it’s not easy. You get emotionally attached to it and, as important, your identity is tied up in being the owner of that business. If you sell the business, what is your identity? What are you getting up for in the morning? This issue comes up all of the time. It’s one of the reasons why people don’t have a succession plan and why they don’t sell when they need to.
Owners need to try to think about what other things they want their life to involve, and then prepare and practice doing that before the sale. It could be getting involved in nonprofit organizations or sitting on the board of a couple of your friends’ companies. Business owners should retire to something, rather than from something. In the ideal world, the person who is selling the business is inevitably sad, but ideally, they are excited about what it is that they are going to do once they have more free time.
Norman M. Boone is founder and president of Mosaic Financial Partners Inc., which is celebrating, this year, its 25th anniversary. Reach him at (415) 788-1952 or email@example.com.
Insights Wealth Management & Family Business Consulting is brought to you by Mosaic Financial Partners