Selling your business is one of the biggest decisions you’ll ever make. It determines the futures of you, your family, your team, and their families. Beyond merely considering the financial side of things, you must also think about how a business sale will affect you emotionally. You’ll need to ask yourself questions like, “What will I do with my time, who am I outside of my business, and when is the best time to sell my business?” These are just a few of the questions you’ll need to answer when determining whether you’re ready to make an exit.
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- The factors that determine you’re ready to sell your business
- Thinking about the goals and life you want to have after business
- Evaluating your personal finances
- How to avoid regret and identity crisis after selling your business
- Putting together a transition team before selling your company
- Building a solid contingency plan
- Understanding your “trigger” events and defining the “win” for your business
- The contents of an exit plan
Owner Readiness: Is Now the Best Time to Sell My Business?
According to the Exit Planning Institute (EPI), only around 20 to 30% of businesses that go to market will actually sell. That means up to 80% of owners who want to sell their companies never will. But there are ways of improving these odds. For example, an owner who is “ready,” with an attractive business, has a greater chance of successfully selling their company than one who isn’t properly prepared for an exit. But what determines owner readiness?
Set Clear Goals for Life After Business
Many business owners think they will simply sell their businesses and live out their days living their best life. While I sincerely hope this happens for you, you must be prepared for the emotional fallout that comes with selling your company. Without a plan for what you will do once you’ve exited your business, you could find yourself in a state of depression and dealing with an identity crisis.
The same EPI survey mentioned earlier found that 75% of business owners regret selling their companies. This is a direct result of failing to plan for life beyond your business. Additionally, buyers are often deterred when the business owner has no plan for life after business. You see, buyers want to know that you have a plan for what comes after the sale. If you don’t have one, it could indicate that you’re not truly ready to let go, creating risk for the buyer.
Make Sure Your Personal Finances are in Order
You might think, your personal finances are in good shape. In fact, your monthly budget is probably pretty accurate for this phase of your life. However, you can’t properly measure your wealth gap if you’re using such inaccurate numbers. What do I mean by that? Well, the cost of living your regular lifestyle is probably more expensive than you think. Once you’ve sold the business, you’ll no longer be able to pay for things like your vehicle, cell phone, and WiFi through your business.
Additionally, The EPI projects that the average business owner has around 80% of their net worth tied to their business. This could create financial problems when you no longer have the business to provide you with an income. This should really emphasize the importance of getting your personal finances ready for life after you’ve sold your business. Have you worked with your financial planner to normalize your income? Are you diversified outside of your business? If not, now’s the time to start working with your financial advisor to create a working plan for your financial future.
Assemble Your Transition Team
In addition to creating a plan for your next season of life and personal finances, you will need to have a few key players at the ready to help you navigate the business transfer. As you consider the best time to sell your business, look at your advisory team. Do you have the right players in your lineup? Your team should consist of a strong business or tax attorney, a rock star CPA, and a CERTIFIED FINANCIAL PLANNER™, ideally, one with a CEPA designation.
If you don’t have each of these players on your team, or don’t have a team at all, now’s the time to put one together. I know, it’s an added expense, but the value that a great transition team can bring is often worth more than their added cost. Likewise, if you’re thinking, “I’ll just wait until I’m ready to sell,” don’t. Proper exit planning takes a long time (think years) and you’ll need this team to help you along the way.
Develop a Contingency Plan
Look, as much as I’d love to tell you everything is going to work out exactly the way you want it to, that’s probably not the case. Work with your transition team to develop a plan for when the business sale doesn’t go exactly as you hope it will. If your business doesn’t garner the price you’re hoping it will, your contingency plan will help you close the gap.
Working with your CFP® before it’s time to sell, could help you increase your annual savings to make up the difference between your sale price and what you need for the next phase of your life. Beyond this, you might choose a variety of suitable options to help offset some of the potential setbacks in your deal. For example, if the offer you receive isn’t quite aligned with your minimum acceptable price, you might choose to take stock options or even work in the business for a time. The bottom line is that you want to be prepared for every possibility.
What is Your Trigger Event?
The trigger event is your motivation for selling your business. It’s important to identify your trigger event so you can measure the strength of the external pull to exit. If it isn’t urgent, then your exit becomes a planned choice. For example, you might say, “I’ll sell my business if someone offers me ‘X.’” In this case, you may find that your “X” is higher than most buyers are willing to go. If so, you could remain in the business and shift your focus to value growth until the actual value is more in line with “X.”
The Five Ds
In his book, Walking to Destiny, Chris Snider outlines five trigger events that can lead to a business owner’s exit. However, without a well-thought-out exit plan, each of these events could also negatively impact your business’s value. Let’s look at these trigger events that Snider calls, The Five Ds.
- Death. Death is a part of life, but it can be very disruptive to your business. Whether it’s the passing of a loved one or a business partner, death is often a catalyst for business owners to sell their companies.
- Divorce. Whether you’re divorcing your spouse or splitting up with your business partners, divorce gets messy and it can create all sorts of problems for your business.
- Disability. If you were to suddenly become disabled and no longer had the ability to operate your company, that could be a trigger. Likewise, the sudden disability of a loved one that you must care for could cause you to sell.
- Distress. You don’t need me to tell you that there are some precarious times in the life of a business owner. Sometimes, the normal business cycle can cause enough distress to trigger a need to sell.
- Disagreement. This is often seen in partnerships and family enterprises. When you encounter irreconcilable disagreements, it could be a trigger event.
Even if you’re not planning to sell your business, work with your attorney and insurance agent to mitigate the risk involved with the Five Ds. But the five Ds aren’t the only reasons to sell. Yours could be as simple as being ready to retire or wanting to take on a new business challenge. Whatever your reason, identify it as early as you can.
What Does a Win Look Like for You?
Once you understand where you are with your owner readiness and what your trigger event is, identify the win. What is your goal? Do you want to spend the rest of your days lounging on the beach with an ice-cold beverage? Are you looking for seed money for your next business project? Knowing what you want to achieve with your exit, makes it possible to outline your path to victory.
Business Sale Checklist
With so many moving parts, knowing the best time to sell your business can be tricky. That’s why I like to use what I call a preparedness checklist. By listing each milestone for your exit plan, you can create a quick reference to easily determine your readiness for a sale. Take a look at the following questions to see if now is a good time to sell your business.
- Have you prepared your finances (personal and business) for an eventual exit?
- Have you chosen an exit strategy, i.e., liquidation, selling to a key employee, or selling on the open market?
- Have you informed your investors, stakeholders, customers, and vendors of your intention?
- Have you decentralized? Transferring responsibilities to competent team members will ease the transition and help to improve value.
- Have you worked out a plan for life after business?
- Do you have a contingency plan in place?
- Does the Fair Market Value align with the minimum price you’re willing to accept? If not, you will need to continue working on the business or risk making concessions.
- Will you work with a broker or attempt to sell “By Owner”?
- Do you have a tax plan in place for your succession?
So, when is the best time to sell your business? The answer is simple. The best time to sell is when you’re ready. When you can answer each question on your preparedness checklist, and feel confident in your decision, you’re ready. Exit planning requires years of preparation. Don’t wait until you’re ready to get out of your business to begin these preparations. Doing so will only make the process more difficult, and at worst, cause you to be unable to sell your biggest asset.
Look, friends, life is hard. Believe me. I know. Life is hard, but life is good. Knowing how to answer, “When is the best time to sell my business,” can be frustrating. But it doesn’t have to be. Exit planning isn’t a DIY endeavor. There are far too many moving parts and missing any of them can cost you, severely. So, reach out to our team. We have Certified Exit Planners™ and CFP®s across the nation who are here to help you achieve your goals. If you haven’t already begun working on your exit, don’t waste another minute!
Selling your business before you’re ready could mean leaving significant money on the table. Our team can help you work through an exit plan designed to achieve the results you desire. Reach out to us to begin preparing for your exit!