Most everyone knows that there will come a time to transition the ownership of their business, whether by a sale to a third party or a transition of ownership to employees or family members. For some business owners, this will come on an involuntary basis due to death, disability or other pressing matters. However, most business owners have the opportunity to plan for that transition with the goal of making the transition happen “when the time is right.”
Some business owners have a clear idea of when the time will be right for them. Perhaps it is when some business milestone is reached, such as reaching a certain level of sales. For some, it may be when they have built the infrastructure of the business to a certain level. For others, it may be when they determine that their designated successor, perhaps a trusted employee or family member is “ready.”
There are really two dimensions to being “ready” to sell your business. You really need to be both financially ready and mentally ready. Let’s explore these two dimensions.
What does it mean to be financially ready to sell or transfer your business? Basically, it means that you have evaluated the likely outcome of the sale or transfer process in the context of your particular financial situation.
In the case of a sale or transfer in the context of retirement, the operative question is will the after-tax proceeds of the sale of the business (or the cash flow streams associated with its transfer) together with your other assets and income streams (retirement accounts, social security, etc.) meet your lifestyle and other requirements in retirement?
If the context is not retirement, the question remains – will the sale or transfer of the business allow you to meet your objectives?
In order to answer these questions, you will need the help of professional advisors to assist in understanding the value of your business as well as the tax consequences of various options.
Determining whether or not you are mentally ready to sell your business can be an even more complicated question. When we first have a conversation with a potential; business seller, we usually ask them if they are ready to sell their business. The answer is inevitably yes. After all, why else would they be taking to me about it? The reality is that many business owners do not realize how mentally unready they are to sell their business.
Here are some questions to ask yourself in assessing your mental readiness to sell your business?
- Do you still enjoy providing the day-to-day leadership of the business?
- Is the business dependent on you for day-to-day leadership?
- Can you envision yourself saying “If you want something done right, you have to do it yourself”?
- Is it difficult for you to accept the idea of the business that you have built under someone else’s leadership?
- Is it hard for you to envision what you will be doing after the sale of the business?
- Are you dependent on the perks of business ownership for maintaining your lifestyle?
If you answered these questions yes, you may not be mentally ready to sell your business. On the other hand, yes answers to the following questions may indicate that you are mentally ready to sell your business:
- Do you enjoy working but look forward to the time when working is optional?
- Do you have a new career opportunity that you are anxious to get involved with following the sale of your business?
- Do you feel pressure or a desire to spend more time with your family?
- Do you have outside interests that will occupy your time if you are considering retirement in connection with the sale of your business?
So, what can you do if there is a question of whether you are ready, either financially or mentally, to sell your business?
If you are not financially ready for the sale of your business, some of the things you may want to consider include:
- Delaying your planned exit until you can financially prepare.
- Reconsider lifestyle decisions following the sale of the business making sure they are realistic in the circumstances.
- Taking steps to grow your business and improve its value and marketability between now and the time you would really like to exit the business.
If you are not mentally ready for the sale of the business, some of the steps you may want to consider include the following:
- Developing your management team with the objective of being less critical to the day-to-day operations of the business.
- Creating a separation between your business and personal affairs.
- Developing outside interests.
- Pursuing post-sale career opportunities.
Realistically assessing your readiness for selling your business is an important step early in the exit planning process. This will help you to avoid pursuing opportunities that aren’t really realistic given your current situation while allowing you to make business and personal changes that will facilitate the process and help achieve the best possible results in the future.