There are countless reasons you might be thinking of selling your business, from the personal (wanting to spend more time with family) to the financial (ready to cash in on years of hard work) to the psychological (the risk has become more stressful than the reward).
Your decision to sell is a highly personal one, and one that shouldn’t be taken lightly. If you’re beginning to think about an exit, here are a few of the most important things to consider first.
Is the business ready to be sold?
Oftentimes, the decision to sell isn’t yours to make. If your business isn’t attractive to buyers, there’s not much else in the equation.
First and foremost, you’ll need to have all your financial ducks in a row—and a painstakingly precise row at that. Experts recommend two to three years of tax returns that show maximum profitability, along with a slew of other documents disclosing everything from your financials to your clients.
Next, you’ll want to have the right executive team in place, along with employment agreements that guarantee they’ll stick around during and after a sale.
According to business sale expert and New York Times contributor Josh Patrick, you’ll also want to enlist the best team of advisers to help you navigate the sale. This will likely include an accountant, an attorney, a broker and a financial adviser.
Finally, your business needs the systems in place to run without you. If you’re the gasoline that’s powering the entire engine, a buyer will quickly see this and realize it’s not a viable investment.
It needs to be able to run both without you and without its largest client in a worst-case scenario. Seasoned M&A intermediary Allan Siposs advises that in order for your business to be sale-ready, no single customer should make up more than 5% of your revenue.
Are YOU ready to sell the business?
Once the business side of things is in order, you’ve got another half of the puzzle to consider: yourself.
Are your own finances such that you can maintain your current lifestyle after you sell the business? Will you be retiring, launching a new business venture, or some other alternative?
It’s a wise idea to meet with a financial planner to understand the true implications selling the business will have on your personal cash flow and investments. Many entrepreneurs neglect to account for things like S distributions, business perks like company vehicles, and tax write-offs that can dramatically impact your finances once you no longer own the business.
Another important—yet often underestimated—aspect of selling your business is coming to terms with the fact that it will no longer be yours. The person who buys it will inevitably make changes, and depending on the scope of those changes, it may end up a completely different business from the one you started.
Lastly, if you go through with the sale, what will you do with all your newfound free time? Chances are you’re used to spending 40 (or 60, or 100) hours a week at work, and you may feel lost when you no longer have a place to go and an office of people expecting you every morning.
If you’ve already got a new venture in mind, all that free time may be a welcome change. If you’re planning on retiring, though, it can have some unexpected effects on your mental health—namely, clinical depression. Doctors say people are most at risk when their social lives and their careers were strongly intertwined, and the risks are also higher for retirees who live alone.
It’s important to have some semblance of a plan in place for your personal life before you call the business quits, whether that’s volunteering or travel or a part-time job to keep you busy.
Is the timing right?
Just as panicked investors foolishly cash out when the market tanks, some unwise entrepreneurs will take a negative shift in business as a signal that it’s time to sell. In reality, experts advise, just the opposite is true.
When you initiate a sale, the health and prospects of your business should be on the upswing, not the other way around. A management shake-up, a downturn in the economy or a sudden profit loss should not be factors that contribute to your desire to sell.
The market itself is also an important consideration. Take the 2008 housing crisis as an example. Many business owners in the real estate and construction industry would have taken a major loss if they sold their businesses during that time. Instead, waiting it out a few years would have made for much better sales prospects.
Ideally, you’ll give yourself several years of lead time before preparing to sell, so you can strike when the timing is right and not be at the mercy of the marketplace.
Have you made a successful exit from a business? Leave a comment and tell us how you knew it was the right time to sell!
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