Retiring and selling the business is a significant milestone for any entrepreneur. It's essential to carefully plan and execute the sale to ensure a smooth transition and a comfortable retirement. Here's a comprehensive guide to help you navigate the process:
1. Determine a Realistic Value for Your Business
Your business is your baby, so you may attach more value to it than what a buyer will pay. Unfortunately, a potential buyer doesn’t value the weekends you gave up or how often you forfeited your paycheck to meet payroll. Their only concern is their possible future cash flow and how much they can afford to pay. For a successful business sale, you must determine a realistic value and under what circumstances you can sell it at that price. If you can sell it for $2 million and end up with more than enough to retire, don’t hold out for $4 million! You’ll end up working longer rather than enjoying retirement.
2. Know How Much Money You Need to Retire
You need to be certain that the after-tax amount that you receive from selling your business will enable you to maintain the lifestyle you want in retirement. When calculating how much you need, account for more than just household expenses. Include benefits your business provides, including health insurance, auto use, meals, and entertainment. If it’s not enough, you may have to work for a few more years.
3. Understand the Tax Consequences of a Business Sale
The sale price isn’t how much money you’ll take home. There may be a significant difference between those amounts, especially if your business has many cash receivables. Calculate your expected tax burden, including your regular income. There are many different ways that business sales can be structured, which may have a significant impact on your after-tax cash flow. Make sure you are working with an expert tax advisor who has significant experience with business transactions.
4. Build a Team
At the beginning of the process, assemble a team of experts who can collaborate to ensure a smooth business sale. The team should include a knowledgeable attorney, a CPA, and a certified financial planner (CFP). The CPA and CFP must be well-versed in business sales and tax consequences. Choose an attorney who can structure the sale properly to protect you from future liabilities so you don’t get caught up in a lawsuit that reduces your proceeds.
5. Know the Timeline
Business sales don’t happen overnight. Plan ahead if you have a specific retirement date and don’t want to accept a sub-par offer because you are desperate to stop working. It can take one to two years to find the right buyer. Once you have qualified buyers, it can take weeks or months before a verbal agreement turns into a letter of intent. After that, you’ll negotiate a purchase agreement and allow the buyer time for due diligence. Finally, you can close the sale. But even then, nothing is guaranteed. The deal can fall apart at any point. Lastly, consider your role in the transition. Your buyer may require you to stay on as a consultant for as long as one to three years.
6. Evaluate Your Business Sale Options
Business sale options include selling to a key employee, a competitor, private equity, a large corporation, or an outside individual who learns about the sale through networks or brokerages. Each has pros and cons.
It might take years to prepare an employee to take the reins. You would have to take a note receivable to finance part of the sale. However, selling to an employee gives you more control over the future of the business because you can groom that future owner and include specific stipulations.
Competitors are often willing to pay more because they need your business location to fill a geographic gap or are in the same area and can minimize costs by closing your office. Always include a nondisclosure agreement. It is especially crucial when negotiating with a competitor.
Private equity or corporate investors often are willing to pay larger multiples of earnings because they are looking for strategic acquisitions that create value beyond the current business model.
7. Choose the Best Liaison for Your Business Sale
Marketing options include private equities, investment banks, or business brokers. Investment banks can market your business anonymously and identify multiple buyers to bid against each other. However, these entities charge substantial fees and generally only work with owners of businesses worth at least $10 million.
If your business is smaller, consider a business broker. Their services aren’t as comprehensive, but they can be helpful if they have extensive contacts like potential buyers. Whichever you choose, vet them first by asking how many deals they’ve competed in.
Guiding You Through a Successful Business Sale
If you’re an entrepreneur who wants to sell your business and retire, we can help! The tax experts and financial planners at Bestgate Wealth Advisors, LLC have extensive experience helping clients sell their businesses and can maximize your business sale price and minimize your tax burden so you can enjoy the results of your hard work. We’d love to meet with you and learn about your plans. Contact us for more information.