The Entrepreneur’s Toughest Decision

You’re a successful business owner. You find yourself consumed with growing the business even during downtime. You constantly strategize how to optimize efficiency, productivity, and growth. It’s a relentless process of trial and error: hiring the right talent, bootstrapping with revenue instead of debt, and navigating the ever-present risks of economic uncertainty or geopolitical turmoil.

Entrepreneurs like you sacrifice personal time and prioritize wearing many hats, but for how long? If you are like most business owners, your “retirement” plan is dependent on the sale of the business. In that case, when and how do you plan for the eventual sale, the culmination of your years of dedication?

It’s Never Too Late to Plan

If you haven’t considered an exit strategy from the outset of starting or buying the business, don’t worry, it’s never too late to start planning for ownership transition. Even if a sale is five years down the road, you can prepare to capitalize on an opportunity when it arises. You can provide yourself the peace of mind knowing your business is future-proofed and your personal transition will be as smooth as possible.

The key is to get a head start on financial matters, stay compliant with legal and regulatory requirements, and build a company that can function and grow independently. A well-operating business can weather unexpected challenges, like burnout or health issues. We’ve all heard stories of unprepared founders forced to close their doors abruptly due to unforeseen circumstances.

Planned vs. Unplanned Transitions: Building for the Future

Eventually every business will face ownership transition, planned or unplanned. Some founders are fortunate to have offspring carry on their legacy. Others face complex decisions on how and when to transfer ownership. They grapple with questions like “market timing” or “optimizing metrics for a perfect outcome.” However, aligning an exit with external factors is neither practical nor possible.

How do you decide when to sell?

What worked best for business owners that we know is breaking it into two distinct decisions. The first focuses on the readiness of the business to go to market. The second is the life-style changing, emotional decision that is a lot easier when you are fully prepared.

The second decision will be much harder for most. Many wrestle with identity fracture as long as possible, but it is best not to wait until business is down, your business partnership has soured, or you feel burned out. The time to sell is when business is good – before emergency or exasperation hits. Buyers will sense desperation and use it as leverage to make a below-market offer.

Let’s review the details of the two decisions. First is to become financially and logistically ready. One does not have to be ready to sell to generate a Fair Market Value (FMV) or produce a Company Marketability Assessment (CMA). With these two items up-to-date, you confidently know what your business might bring on the open market, and you can start deciding on a timetable. At this point it is important that you discuss the tax implications of a sale with a tax advisor. You don’t want to be in the middle of a transaction with a solid buyer and discover that the tax obligations are going to net you much less than you had figured.

Preparing for a Fair Market Valuation

Having a Fair Market Valuation in hand is key to knowing the value of the business and a deal structure, with the respective tax implications. You never know when someone will come along to make you an unsolicited offer to purchase. If they are serious, you have a document to defend your asking price. It will include a proposed deal structure indicating whether you intend to offer seller financing on a portion of a transaction, and whether you intend to stay with the new owners for a period of time. Plus, this independent, accredited FMV document will help a buyer secure financing to facilitate the purchase.

Here are some steps to prepare for the FMV:

• Ensure your financial books are solid and up-to-date.
• Shore up your workforce.
• Prepare for the scrutiny of due diligence by having ready copies of your business licenses permits, deeds, certifications, and any ongoing contracts with insurers, creditors, vendors, clients, and employees if relevant. 
• Lay out accurate revenue projections.
• Highlight your competitive advantages.
• Keep tabs on the competition and market trends.
•  Identify where infusions of talent or capital will spark further growth.
• Assemble a Balance Sheet of tangible assets.
• Highlight Intangible assets like customer database, copyrights, trademarks or patents,organic search engine results, engaged social media profiles, and positive online reviews.

Invest in Your Business, Inside and Out

This is the time to replace that old worn-out piece of equipment. Don’t assume that a new owner will want to do it or that the price will be slightly lower because you haven’t replaced it. The time to “spiff up” the business is now, even if you aren’t selling. Fix the sign, replace the carpet, paint the place – make it look good.

Craft a Compelling Exit Story

Finally, provide the prospective buyer with a clear and positive reason for selling. Not having a compelling explanation for selling will impact a buyer’s perception of the quality of your business and thereby reduce their motivation to move forward.

Assemble Your A-Team

Sellers appreciate having a team in place to guide them through what could add up to twenty steps. That means engaging a business intermediary like our firm, but also a tax advisor and a transaction attorney. As the M&A advisor, we market, screen, negotiate, facilitate due diligence, oversee timelines, provide a roadmap for the attorney, and assist with buyer financing if necessary. Our goal is to ensure that the process culminates in a successful closing.

Confidentiality is Key

All of this should be done completely confidentially, for which we have very rigorous standards in place. Disclosure of a potential sale could jeopardize closing and negatively impact the work environment, customer service, or vendor relationships that have been carefully established. These areas are critical motivations for a new owner. It’s okay to be concerned that your employees are taken care of, and that will be part of the evaluation of the proper cultural fit as you size up the new owner.

Making the Emotional Decision

Once financial and operational readiness has been established, you will be ready to make the second, harder decision that impacts you emotionally with the change in identity. The second decision to put your business on the market (or entertain the offer that a prospective buyer is proposing) is a completely different and much more emotional decision. Unless you stay with the new entity for some time, this decision usually involves completely changing your lifestyle. 

Focus on You and Your Future

For this decision, focus squarely on your future. Here you will want to include input from your loved ones, who stand to benefit most from your newly freed time. The decision needs to focus not just on “what” you want to do, but “who” you will become. Some people take this opportunity to enhance their participation in community activities, philanthropic ventures or take on completely new intellectual vocations.

By separating these two decisions and focusing on both the practical and emotional aspects, you can approach the sale of your business with confidence and a clear vision for your future.