Photo by Ambro
CAN YOU AFFORD TO SELL YOUR BUSINESS?
by John Leighbody
One of the tougher decisions business owners face is the decision to sell their company. Thousands of articles have been written about how to avoid pitfalls in selling your company, how to interview investment banking firms, tax implications, tax strategies etc., etc. While all of the above is important, there is one question that is crucial to the process, but is often overlooked: "Can you afford to sell your business?"
Over the years we have counseled hundreds of business owners on whether they can realistically afford to sell. Often the after-tax proceeds from the sale will not enable the owner to maintain his/her current life style, and few people want to go backwards.
How do you determine if you can realistically sell? Start with your accountants, as they have all of the financial information on the company, and can probably give you a ball park idea of what the company is worth. Also, they can estimate the taxes you can expect to pay as a result of the sale. This will give you a net number to work with.
Next in the process is to meet with your financial advisors. For this meeting you will need to determine all of your living expenses, including the expenses covered by the company. Our experience has taught us that a great number of business owners do not know how much they spend on a monthly basis, and that a number of expenses such as cars, gas, country clubs,
dinners and trips are covered through the company. We recognize that many of these expenses are directly related to business expenses, but not all. Also recognize that you will pay for your health care after the sale, and that this is not a small expense. Don't forget to include charitable contributions, both corporate and personal, in these numbers.
Armed with this information, your financial advisor can give you a realistic picture as to whether you can maintain a comfortable lifestyle after the sale of the business based on realistic returns on your investments, including the sale proceeds. This exercise may inform both the price you are seeking in a sale and the various elements of the sale, such as price, employment
or consulting agreement, perks, etc.
Finally, you must determine if you should gift some stock to children or employees so they can benefit from the sale. Your financial advisors can help you with this process, but you will need to bring your objectives to their attention.
You wouldn't be incorrect if you are thinking this seems somewhat simplistic. Unfortunately, as simple as it seems, very few business owners go through this exercise in the beginning. A harsh reality is that running your business is much different from managing cash. Most business owners are terrified of running out of money and haven't developed the money
and risk management skills involved in managing their new found wealth. By doing the above analysis before the sale, you will have a good handle on what your needs are, what to do with the proceeds of the sale, what sort of investments to seek, and what returns you can expect.
Selling a business is not necessarily a simple process, but it is a process which becomes much easier if you begin it by answering one simple question: "Can I afford to sell my business?"