Nearing retirement? Here’s how to prepare your business for sale.
When creating an exit strategy and planning for retirement, many hopeful sellers face a challenge: how to maximize the attractiveness of their business to potential buyers and obtain the highest price.
For starters, sole proprietors and family business owners often mix their business and personal finances together, pulling cash out of the company to cover household expenses or having the company pay the lease on their personal cars. There are several tax advantages that make this practice attractive, but it also makes it more difficult for outsiders to measure a company’s true profitability. When it’s time to sell, these owners may have to invest a little more time and energy getting their books in order. For example, they will need to be able to document all of the personal expenditures and add those extras back into the company’s profit-and-loss statements.
Another challenge is that many privately held businesses have never formalized their operational procedures. This can be particularly true of family-owned businesses in which everyone has a stake or role in the company’s performance, leading to a sometimes-disorganized organizational structure. Such a situation makes it difficult for future owners to replicate previous successes.
Despite these challenges, some prep work can help make a business more attractive to potential buyers and possibly increase the sales price.
Organize the Business Financial Records
Sole proprietors tend to focus on cash flow, but buyers need more detail. Sellers will need to show two- or three-years’ worth of net profits after taxes and depreciation, debt-to-equity ratios, and future revenue projections. Potential buyers will want this information from a certified public accountant (CPA) who can affirm the validity of the numbers. Businesses that have relied on bookkeepers may want to hire an outside professional to organize their financial records.
Get an Independent Valuation of the Business
The key is to find an independent appraiser with experience in both the industry and the region. Independent valuation will provide a better idea of what the business is worth, and can help the current owners measure the true value of offers once they start coming in.
Determine How to Structure the Sale
There are several ways to sell a business, depending on both the type of business and the seller’s long-term goals. An all-cash deal is just one option. Another is to take some cash upfront and finance the rest by taking back a note — essentially a contractual “IOU.” Other business owners may want to sell hard assets, such as a building or equipment, but maintain ownership of the land it sits on, generating an income stream through a rental agreement with the buyer.
Build a Support Team
Selling a business that has been built from scratch can be an emotional proposition, and therefore, it’s important that business owners surround themselves with professionals to keep them focused. A Regions Wealth Advisor can coordinate a team of professionals to help guide negotiations and take some stress out of the business transaction.
Create a Transition Plan
Will the seller stay on part-time or as a consultant for a few weeks or months to introduce the buyer to top customers or help them work through any unanticipated problems? Are all of the business records, contracts and other legal documents in order? Is there a policies and procedures manual in place? It’s important to explain these business details in writing — even those that may seem second nature — to make it easier for the buyer to pick up where the seller leaves off.
In Episode One of Regions Wealth Podcast, Wealth Planning Executive Bryan Koepp share the factors business owners need to consider before selling their business or creating a succession plan.
Preparing a business for sale can seem overwhelming, as it can take a year or more to pull everything together. But the more effort put into the preparation for a sale, the more attractive the business will be to qualified buyers and the higher the sales price it can potentially command.
Looking for guidance? Find out how Regions’ team of wealth management professionals can help guide you through the process of retirement planning and preparing your business for sale.
