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Business owners, is now the time to sell? 5 steps every business owner should take to prepare.

By Kelly Pedersen, CFP®

The numbers can be eye-popping.

Even amid the pandemic (in some cases because of the pandemic), many businesses are experiencing record valuations. In fact, global merger and acquisition volumes topped $5 trillion for the first time ever last year, eclipsing the previous record of $4.55 trillion set in 2007.

The reality is there is a tremendous amount of cash out there chasing deals right now, much of it private equity money. For business owners who’ve been heads down running their businesses for years (often decades), the current environment is enough for them to stop and ask themselves, “Is now the time?”

That time – to exit your business that is – will of course eventually arrive for every business owner. But before an unexpected offer lands in your lap that seems too good to be true, take the time to do reflection and planning for what will likely be one of the biggest decisions of your life.

There are key steps every business owner should take well before actually selling a business. Below, are five that I recommend:

Take time with your advisor to plan for the future

Search your soul first. Are you looking to sell simply because you are burned out or suffering from “COVID fatigue”? That’s not necessarily the best reason to exit your business. You should approach a sale from a position of strength. In other words, most successful sales happen when a business is performing well and positioned to thrive for the long-term. That requires careful planning and preparation well in advance of a sale – at least a year or two.

Working with your advisor, take your “business hat” off and look closely at your personal life and finances. How much money do you need to maintain the quality of life you desire? Carefully consider how many years (or decades) that could be. Will your business valuation and likely sale price support that lifestyle? Run the numbers.

If you expect a significant influx of money from a sale, you’ll want to develop or update your estate plan and any trusts and asset titling. You’ll also want to engage in some thoughtful tax planning related to the buyout (do you take one lump sum or a deferred payment?), as there are pros and cons for both. Your advisor can help with that.

Figuring all this out takes deep introspection, but when done well, it can remove much of the emotion from the selling process. That allows you to enter negotiations with a clear head knowing exactly what you want for the business, yourself and your family going forward.

Make your business look as attractive as possible to buyers

So, you know why you want to sell, and the timing is right. The next step is to make your business appear as attractive as possible to potential buyers. That starts with taking a hard look at your balance sheet and making any adjustments needed to present your business as profitable as possible. If you plan to value your business based on last year’s revenues, how do those numbers look? The pandemic has significantly impacted the revenues of many businesses. If the past year doesn’t look so great for your business, you may want to delay a sale. If delaying is not an option, be prepared to explain why your balance sheet looks the way it does to a prospective buyer.

You’ve probably spent your entire career making your financials look as minimal as possible in order to mitigate tax consequences. That needs to end leading up to a sale. Stop maximizing your deductions. It’s better to take the short-term tax hit if you can boost your sale price. Also, stop running any personal expenses through your business (gas, health insurance premiums, you name it). Not only will that help shore up your balance sheet, but it will also give you clarity into what your personal expenses will look like after the sale.

Know what your business is worth and who you want to partner with

This seems so straightforward: determine what your business is worth. There are any number of firms or investment banks that can help you come up with a sale price. However, the concept of “valuation” is more complex than many business owners may think.

For example, do you want to get the absolute highest dollar amount possible for your business, regardless of who the buyer is or what they might do to the business after you exit? Or would you happily accept a lower offer knowing that your business and employees will be well taken care of in the long run? Afterall, for many business owners, their business is their legacy – their “baby” if you will – and it matters a great deal what happens to their business.

Share your plans with the right people at the right time

Many business owners keep their exit plans a closely held secret. There is good reason for not “spilling the beans” too early, as it can jeopardize early-stage negotiations with a potential buyer. However, there is equally good reason not to keep your plans to yourself for too long. The sale of a business affects more than just the business owner, after all. It affects your spouse, children, grandchildren, and especially the employees of a business.

They have every right to know your plans when the time is right. The last thing you want to do is surprise them just days or weeks before a sale is finalized. That is a recipe for resentment. Instead, bring them into your planning process when it is most appropriate – and beneficial for everyone involved – to do so. Share your rationale for selling, your hopes for the future (for the business and the team) and the steps you’ve taken to ensure they are “taken care of.” Particularly with the senior leadership of a business, the acquiring firm is “buying” them as much as it is buying the other assets of the business. Give your key employees an incentive to stay with the company through and after the sale. A buyer will expect that, and the deal may depend on it.

Plan for your post-liquidity life

Planning for “what’s next” can be the most challenging component of a sale, and often the most overlooked or dismissed by the business owner. Afterall, once you sell your business, you are on easy street, right? Life is all about sleeping in and hanging out on the golf course or the beach, isn’t it?

The reality is many business owners find themselves in an existential crisis after a sale, if not downright depressed. For too many of them, their whole sense of purpose in life vanishes after the sale. Their business was their life. It’s what drove them to be their best every day. Without that, what?

Don’t think it can’t or won’t happen to you. Plan for what will give you and your family meaning and purpose going forward. Be concrete and work with your advisor to develop an actionable plan. Perhaps you create a donor-advised fund or family foundation? Maybe you start a new business or invest in other companies? Think long and hard about what will keep you engaged going forward. By doing so, you’ll have every reason to be excited about your post-business life.

Explore how you can prepare your business for a sale.