If you’ve been thinking about selling your business, you should put a solid sales plan in place even if you don’t act on it right away. According to Fred S. Steingold, business attorney and author of The Complete Guide to Selling a Business, planning in advance is the idea scenario.
“A business owner should start planning for a sale at least four years in advance,” he says. Early planning can enhance the market value of your business while also helping you determine your strategy for life after business ownership.
Business owners can become motivated to sell for many reasons — approaching retirement, a lucrative buyout offer, or a desire to try something new. Before entering negotiations for a buyout, Steingold suggests discussing the following questions with your Financial Advisor:
- What will I do with my time once I stop working?
- How will I replace my paycheck?
- Am I interested in staying on as consultant or employee after selling?
Once you answer these questions, it’s time to prepare your company to get the best price, consider timing for the sale, and choose the sale options that support your life goals. “Evaluate your business from the perspective of a potential buyer,” suggests Steingold. “This lets you make changes to increase the value of your business and, if necessary, consider postponing the sale to get the best price.”
Maximize the value of your business
To potentially increase the value of your business, examine how expenses balance against revenue. Reducing costs is imperative, even if it means lowering your salary and closing expense accounts. Then determine how to generate the income necessary to show two years of increased profits prior to the sale.
Other value-enhancing strategies include:
- Securing a long-term lease or lease-renewal option if your business site is critical to your bottom line
- Maintaining the premises and equipment
- Tightening your credit standards and severing ties with weaker accounts
- Creating a list of long-term contracts or clients that underscore your market strength
With these strategies complete, it’s time to work with a broker to determine a realistic price for your business. To do this, you’ll use an industry formula, your average earnings and the recent sale prices of comparable businesses.
Choosing the best sale option
How you structure the sale determines how you’ll receive the proceeds — and pay taxes on them. Some options and considerations include:
- A complete buyout, which may allow you to reinvest the proceeds or use them to start a new business venture
- Accepting an “installment” buyout with scheduled payments, which can provide income over time
- Agreeing to a lower price, plus a percentage of future profits, which splits risk between you and the buyer
- Agreeing to consult or work through a transition period, which may be important if your business depends on service relationships
- Selling an interest in the business, which lets you defer capital gains taxes
If you accept an “installment” purchase, keep in mind that it is important to check the buyer’s credit history and be realistic about his ability to succeed in providing future payments. Steingold suggests protecting your interests by retaining shares in the business, with ownership reverting to you if the buyer defaults; requiring the buyer to secure the purchase with other assets; or requiring the buyer to provide an acceptable guarantor or co-signer.
Timing your sale
Ideally, an owner wants to sell a business when the demand is high and a good price can be obtained. “The best time to sell your business is in a strong economy, when the business is on a growth curve (showing increasing profits each year) or when you have done everything you can to maximize its value,” says Steingold.
Additionally, you should work with your [Financial Advisor / Investment Professional], attorney, tax advisor, and business broker to coordinate the sale’s timing with your long-term financial strategies. Meanwhile, as you wait to sell, work with your advisor to update your business plan periodically, responding to changes in your marketplace, tax laws, and your income needs.
Our firm does not provide tax or legal advice. Please consult with your tax advisor before taking any action that may have tax consequences or an attorney when dealing with issues related to your estate.
This article was written by/for Wells Fargo Advisors and provided courtesy of Tom Jaeger, CFP®, Senior Vice President – Investments in Dubuque at 563-557-9400.
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