Deciding when and how to sell your business is difficult as your mind is probably flooded with questions such as: How will the pandemic affect the value of my business? What will happen to my people? Will my business and family legacy be upheld? How do I maximize value? What will my life look after a sale? How much money will I need to retire comfortably?
Not knowing the answers can be daunting and may have kept you from selling in the past, but let’s consider some of the most common reasons that business owners decide to sell:
Retirement—As owners of privately held businesses near retirement age, stepping away from day-to-day operations can be extremely challenging. A change of ownership can be the right solution, creating the necessary catalyst to augment the management team and allow the current owner to transition out.
No internal succession option—A number of owners are the first, second, or third generation of their family to run the business. But if you don’t have family members or a management team that are interested or able to buy you out, what do you do? In that case, selling to a third party might be the only option.
You want to de-risk—It’s common for many owners to have invested all or a substantial portion of their wealth in the business. Like someone holding 100% of their investment portfolio in a single company stock, this can be an extremely risky position. Taking on a partner or selling the entire business will allow you to diversify your assets and reduce portfolio risk.
Avoiding a forced sale—Unfortunately, there are situations when owners are forced to sell their business. A death or major illness in the family or a significant decline in financial performance as a result of the pandemic, for example, may necessitate a sale at an inopportune time. A sale process is most effective when you can maintain control and flexibility so ideally you sell when you can and not when you have to.
When to sell
While deciding whether to sell is hard, picking the right time to sell is another challenge altogether. Here are some of common inflection points that push owners to sell:
Significant industry shifts—Most industries will be disrupted at some point by technology or some other form of innovation. The investment required to navigate disruption and stay ahead of the competition may be too much for some owners given their available capital, risk tolerance, or time horizon for required payback. If they’re not willing or able to make necessary investments for the long term, it might be the right time to look at selling.
Opportunity knocks—Owners may be approached with an unsolicited offer that’s just too attractive to refuse. You may not have been planning to sell, but if the right price, deal structure, and cultural fit come along, it could be the right time to pursue it.
Living in a seller’s market—When banks are ready to lend, investors are looking to spend, and valuations are high, this seller’s market can be too compelling to skip. Market and M&A cycles are typically long term, so you should consider whether you’re willing and able to wait out another cycle of downturn and rebound before looking to transact. Selling in a downturn is always a possibility, but does come with the added risk of being drowned out by other sellers.
The next generation is ready—If you’re considering passing the business on to your children or management team, they need to be appropriately seasoned and prepared. That said, recognizing when your team has the capabilities to step in as owners is important. The next generation may be eager to take on the risks and rewards that come with equity ownership, and may even feel stifled when the opportunity doesn’t exist. Additionally, a phased ownership transition may be the right approach to drive management and owner alignment as well as optimal business performance in the interim.
You may also want to consider completing a tax due diligence on your company prior to going to market. If there are any issues, you can fix them before a buyer finds them and uses it as a negotiation tool to drive down the price.
Whether you decide that now is the right time to sell or that it’s still years away, preparation in advance of a sale is a key to achieving your objectives. Maximizing after-tax proceeds, finding the right home for your business, its people and legacy, and setting yourself up for retirement are the result of thorough preparation and planning.
BDO can help
Selling your business is a lengthy and time-consuming process. However, bringing in a trusted advisor ahead of time can help you increase the value of your business and prepare you for what lies ahead.
Our Transaction Advisory Services and Tax teams assist owners who want to sell their business. We’ve helped a number of businesses by providing strategic advice before, during, and after the transaction process. Think of us as a one-stop shop. Contact us to find out how we can help you sell your business.