When the Curtains Close: Selling Your Business
Original article written and published in Women’s Lifestyle Magazine
When you start a business, it’s often to follow a dream, to follow in the footsteps of family or friends, or to meet an unmet need in the world. You see the opportunity, start it, nurture it, and work hard, ultimately growing it into a successful business. As sometimes happens with the passage of time, your mind turns to what’s next. What other adventures and challenges lie ahead?
A natural reaction to this change is a mixture of anticipation, sadness, and anxiety. Considering the sale of your business is a big step, as big a step as starting the business in the first place. A positive way to approach this change is to not think of it as the end of something. You are not just selling your business; you are planning the start of the next phase of your journey.
Planning the start of something is always more fun and motivating than planning the end, but it needs to start very early. We talked with GROW supporter and past board member, Peggy Murphy, a certified public accountant and shareholder at Hungerford Nichols. She is a specialist in advising small business sellers and recommends that business owners should start planning for this milestone five years prior to selling.
Here are three business succession planning categories to consider
Understanding why you’re selling and what that means for the process
The goal of selling your business should be a smooth transition into what’s next for you and what’s next for the business. The first step is understanding why you’re selling and setting your goals and expectations accordingly. Some of the most common reasons to sell a business include passing the business to the next generation, an unexpected life event, or approaching retirement. Typically, in a sale to fund retirement, your goal will be maximizing the value of the sale. For Denise Kolesar, former owner of Kohler Expos and a GROW mentor, changing family plans prompted her to kick off a three-year process that ended with the sale of her business in 2016. She had a long-time trusted employee as a potential buyer, which Murphy states is not unusual. Thus, Kolesar’s sale had the characteristics of a succession event rather than a sale to outside buyers. In this situation her advice is, “Have successors be part of the planning process.”
Prepare your business for sale
A realistic business valuation is a crucial early step and will be the basis for future discussions with bankers and buyers. To ensure a strong valuation, get your house in order. Murphy advises, “buyers will be looking at five years of records, keep them clean. Address problem employees and build a good management team.”
Key financial topics are funding and taxes. Some buyers may request that sellers defer payments over time so you’ll, in effect, be acting as a banker for the buyer. If the business starts to perform poorly after the sale, your proceeds may be at risk. Tax considerations should be part of the planning conversation from the beginning to ensure your tax liability is minimized.
Legal considerations involve the accuracy of representations you make to the buyer prior to the sale and how this aligns with the reality they encounter after the sale. We also recommend that you have legal experts ensure paperwork is done correctly and contracts with customers, landlords, and key employees are renewed and transferable to the new owners.
Selling your business, just like starting your business, can be an emotional process. Your business has been a constant presence in your life, including close employees who are often friends. Sellers often worry about what will happen to employees after the sale, and it is a very valid concern. Both Murphy and Kolesar recognized the emotional part of a sale in both positive and negative ways.
Murphy: “The emotional component is the most important factor. Most owners of small businesses truly care about their employees, their customers, and vendors, which can lead to delaying a sale.”
Kolesar, asked about the best part of the sale of her business: “Selling it to someone I knew. I may have gotten more money (with another buyer), but I wouldn’t have gotten the same character.”
The length of the planning process can help you adjust to the emotional aspects, but Murphy warns of “seller fatigue” if it stretches on too long. Know going in that the process will likely be more work and take longer – several months to more than a year longer – than you may like.
The diligence and care you brought to the process of starting and building your business will be needed when you’re thinking of selling. It’s important to keep in mind that you’re not planning the end of something, you’re planning the start of something new. Both experts we talked to recommend planning early and taking a team approach.
If you’re looking for advice in succession planning for your business, there are many resources available to you including GROW, your financial advisors, tax advisor or accountant, and business mentors.
Kolesar: “Bring all the pieces to the table at once to go over the numbers and see what’s right for you.”
Murphy: “You’re playing poker. Advisors help you get the best cards and play them at the right time.”