What Small Business Owners Need to Know About Selling Their Greatest Asset

It’s generally taught that there are several cycles that reflect where a business is in preparedness for a sale. These capture the economy, the market, the mindset and planning of business owners. With 80-90% of a business owners’ wealth tied up in their small business, planning ahead is paramount to unlocking often decades of hard work, sacrifice and dedication.

From an economic standpoint, the liquidity cycle is the one that matters most to a lot of business owners. This cycle gauges the amount of available capital and the current appetite of investors willing to invest in companies. With record amounts of cash sloshing around looking for investments and with interest rates continuing to be low, the liquidity cycle is currently at an advantageous point, and looks to potentially remain so for the foreseeable future. While getting the right price is clearly a big consideration, there are a lot of other things to think through that are just as, if not more important.

From setting a realistic timeline to thinking about the implications of the sale on other family members, to planning for a life after the sale, each stage brings its own challenges. Assembling a team of advisors with specialized knowledge in every area will be critical, and since this will have a major impact on your wealth and your legacy, you’ll need a quarterback that can keep your big picture in focus all the way through.

This is your collaborative exit planning team.

The Timeline

We’re going to be talking exit planning basics here, but  it is good practice to start well before you want to sell which can allow for a lot more flexibility in the future. Timing a good exit starts at a minimum of 2 years before a sale but we like to see planning initiated between 3 and 5 years for a solid exit.

Why so far in advance?

It gives you time to surface – and mitigate – any issues that come up, which eventually leaves you in a stronger position during negotiations. It also provides time to ensure that all shareholders and stakeholders such as creditors, vendors, and employees have the time to adjust to slow moving changes that the sale may bring, which can facilitate a successful transition. Finally, a longer timeline means you can keep growing the business while you give thought to where you want to be after the sale.

Generally speaking, there are 4 intangible capitals that make up 80% of a business’s value. We call them the 4 C’s:

Customer Capital

Customer capital relates to the types of customers your business serves and whether you have a diversified base of them, enough to provide the company ongoing profits. In other words, you don’t want all of your business to be dependent on one or two customers. You want to have business coming from multiple income sources – much like when we create a retirement income plan.

Structural Capital

Structural capital is what your business owns as an asset that drives revenues. Big machinery, proprietary products or services, IP, processes, real estate etc. are all classified as “structural” as it is an asset the business owns.

Human Capital

As it sounds, human capital is your work force. Without a good, reliable and intelligent team of like minded individuals, your business isn’t in an ideal place for sale.

Social Capital

Social capital can be summarized by your company culture. If you have a phenomenal company culture, your people will more likely stay with businesses regardless of who owns it. The stronger the relationships are between the people who drive the business’s success, there better chance the value of the business will be predictable through a transition of ownership.

Selecting Your Team

Selling a privately held business is a very specialized transaction. Depending on the size and complexity of your business and the market you compete in, you’ll need to hire a number of people including an investment banker, business broker, third-party business appraiser, tax attorney, financial planner, estate planning attorney, insurance broker and others.

Besides advising on the value and the sale, they should be able to help you structure the transaction. Be sure to find a Certified Exit Planning Advisor® , or CEPA® who understands and can help you through this process.

Gauging the Cycles

We’ve already discussed the liquidity cycle. The other externally focused cycle to think about is the business cycle for your company’s sector. You’ll need to determine the potential for growth and whether the business is well-positioned to take advantage of opportunities as they arise, or if there are headwinds that can be mitigated.

The last cycle to think about is whether you are ready to sell. What will your life look like after the transition? If you’ve been very involved in the business, how will your new life be structured? Will you continue to play a role, or will you cut all ties? How do family stakeholders feel about the change?

90% of business owners who sell their businesses regret selling. Not because they made a good amount of profit when they sold, but because they didn’t take into account the change in lifestyle after they’ve passed off their most intimate asset.

Whether the other cycles are at strong points or not – you should seriously think about what will happen after you’ve retired. Regardless, it does make sense to assemble your team and proceed with information gathering even if you aren’t sure about an eventual sale. Once you have a clear idea of what the company is worth, you may be able to make a more informed decision.

Breathe

What happens after you’ve decided to sell, have your cycles lined up and have structured everything correctly? This is where having a solid plan and a trusted team of professional advisors comes into play.

Acquiring potentially life-changing monetary wealth can be disorienting, to say the least. Imposing a period of time to create and assess various plans, get used to your new life, and have time to decompress can help you to avoid mistakes and when you are ready, you’ll have a better idea of what is really important to you. Eventually, you’ll need a good investment plan that protects your capital, provides you with what you want, and allows you to create the legacy you’d like. But initially, it’s important to maintain a flexible investment plan that can change as you explore your new life.

Conclusion

Selling a business can be stressful and complicated. Assembling a strong team that works hand-in-hand as a collaborative group can smooth the road and potentially help you better position the three legs of the business owner stool. The financial, business and personal pieces that encompass your life as a business owner.

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