September 10, 2020
The day you start a successful business is the day you should begin to prepare for the moment you’ll sell it. It’s not what most entrepreneurs have in mind, as they launch. But if you build a successful business, then selling it will happen, even if you don’t think you want that now. Whether it’s a large conglomerate buying up market share or a son or daughter buying the family business, sales such as these occur everyday, where the owner once thought they would never exit.
That’s why, in the WLTH Advanced Lifetime Income Model we look to optimize the sale as your growth stage ends or when that growth produces a valuation that you’re comfortable with. But beyond the simple act of cashing out, there are so many considerations to be made, including is now the right time? Is the amount enough? What will I do next? What about taxes?
Selling a business seems easy: You name a price, negotiate with a buyer and then move on, right? It’s not like that at all. Instead, don’t be surprised if every aspect of your sale turns into a struggle right down to the moment you pay the closing fees. Afterwards, you then have to search for an identity or a new project, since you no longer have your business to focus on.
This process doesn’t even account for all the potentially unforeseen reasons to sell a business. The illness of yourself or your spouse, wanderlust, or you lose your passion for the project are just some examples of why people decide to unload a company.
To properly ready you and your business for when you sell, I always recommend preparing from the moment you launch your business. Have a plan so you can execute your departure quickly and profitably. You don’t have to say ‘yes’ when the time comes, but by preparing now you’ll have options for when a buyer approaches. Also, having a plan means you can move fast, which can increase the sale price.
You’ll, of course, get bogged down by daily operations, as you should; a good leader remains in the thick of their business all the time. But don’t ignore a sale plan either. When looking to initially build this plan, here are the considerations to keep in mind.
It’s crucial to understand what you actually net off the sale of your business. I’ve seen private brokers take as much as 12% just to take a small business to market.
Beyond simple transaction costs, though, you also must factor in what happens to your capital and net worth, until you form a new business again.
There’s a very good reason the WLTH Advanced Lifetime Income model shows that selling decreases your net worth. You’ll pay fees, draw down your money before a new project and likely increase spending because you’ll have more free time. There’s a vision most people have, following the sale of their business, of buying the dream car or taking a vacation. This adds expenses and costs to your balance sheet that you didn’t have before.
It’s important to account for your plans before and after the sale, to get an accurate gauge of how your net worth will look once you sign your company away.
I often talk about the benefits of mini-retirements while running a business. It’s upon the sale of your business where your mini-retirements will come in handy, since you now have an immense amount of free time to determine what you enjoy in life, outside of the office. But discovering you have this free time to which you can use to explore passions can also be very expensive. You’ll also likely be looking to reward yourself for years of hard work (à la the dream car).
I’m not saying to avoid those things, but rather plan for them. Your expectations will determine your strategy. If you plan to live off your sale proceeds, then the level of sale required will differ from someone looking to fully invest those proceeds into a new venture. You have to be aware of what you can comfortably afford and what you want to do, post-sale.
This, no matter what you decide post-sale, will result in a dip of your net worth.
As you adjust your life, remember that after a sell cycle you’ll enter a new struggle phase. This occurs because your income will likely drop close to or below your level of expenses as you withdraw funds from savings. If this cycle lasts for an extended period of time, then it may take longer to realize returns as you build up your next business.
If you sell your business for more than enough to live off for the rest of your life, then the dip won’t matter much. But it requires a high sale price to realize that level of net worth.
There are so many reasons that force people to sell; every entrepreneur should be keenly aware of that and prepare for such inevitabilities. But there’s also plenty of owners that want to sell. Have an idea of what your business provides you from a personal and professional level. Then, when it stops providing those things, you can choose to exit.
Most businesses are designed strictly to provide the owner profits. In these businesses, you sell either when you have met your own going needs or you can get paid enough to not do the work anymore. Some businesses, however, are passion projects. In these cases, people can sell whenever they have reached their personal goals or no longer have the same passion for their project.
You should constantly evaluate and update your net worth number or personal goal. When you hit that mark, you can either redefine your goal or exit. Have a clear set of rules as to when you choose to exit and make decisions as you feel comfortable, since these rules are never set in stone.
Your business may not be the best use of your time. This is often overlooked and even hard to recognize, yet it’s a critical reason to sell. The best businesses are born when people keep asking you to do something so you learn to charge for it. You may have built your business this way and it has reached a point of stagnation. More likely, though, you’re finding you have side projects or people are asking you to do work outside your main business and that’s becoming more profitable.
You can start a new business at any point and serial entrepreneurs are always trying out new revenue streams. When something you start takes off, it can take some time to sell your main business away.
If you cover your needs or come close via a new venture and you prefer its future prospects, I’m giving you permission to sell you current business! You’re not tied to any business for your entire life. And you’re certainly not tied to being an entrepreneur your entire life. For instance, if you’re offered an amazing opportunity with another company then you can sell your current business and take on the new challenge. Upstarts and young companies can benefit greatly from the knowledge and flexible thinking an experienced entrepreneur brings to the table. By launching your own business, you’ve also increased your value in the marketplace. If your value in the marketplace surpasses the value of your company’s profits, then it makes more than enough sense to pivot.
So many people get stuck to the idea that their business and identity are tied together. They can hardly imagine selling their identity. But selling a business at the right time can be one of the best decisions you ever make as an owner.
Being aware of how that impacts you in the short-term or how your business can hold you back is vital to recognizing when the right offer comes along. With the right plan, however, you’ll know whether or not it’s an offer worth taking.
By Timm McLean, MBA |
CEO at WLTH