By John McAlister
Cash Now vs. upside later - (how much money am I leaving on the table)
Lower Taxes vs. immediate liquidity - (how much will end up in my bank account?)
Continued family ownership vs. maximum liquidity - (financial or strategic buyer)
Contingent proceeds vs. maximum valuation - (second bite at the apple)
Minimize risk vs. your preferred timeline - (this is probably the last thing most business owners consider until it's too late)
These are only a few of the many trade-off considerations you must consider when buying or selling a business. That is the reality of almost every business transition. Where are you willing to be flexible, and what is non-negotiable? The most significant risk is making trade-offs that you never considered. Today's article will explore why not addressing your options early can cost far more than you realize.
Start With What Matters Most
Before talking about valuation, taxes, deal structure, or potential buyers, think about your personal and financial objectives and what you want from any type of exit. How much money will you need each year to replace the income and the corresponding lifestyle you have enjoyed for so many years? Sadly, many owners start counting their money a few weeks before closing on the transaction, and they become dismayed with what lands in their bank account.
Many owners may not be ready to sell but they would like to be able to reduce some or all of the financial risk associated with business ownership and continue to work for a few years while maintaining control.
Once you know what is truly non-negotiable, you can begin evaluating transition options based on what you want to accomplish, rather than simply following the path that looks best on paper when approached by a buyer.
Price Is Important, But It's Not the Only Consideration
For most owners, their company represents much of the wealth they have spent a lifetime building. It is the financial "mother Goose" so to speak because nearly every financial decision made ties back to what is best for the company.
Rarely does a business sell at the top of the market cycle. There are dozens of things buyers consider when it comes to submitting a Letter of Intent to purchase your business. These include how dependent are your customers on you being at the helm vs. having a well-qualified bench of talent. Customer concentration, geography, profit margins, yearly capital expenditures, scalability, and work in progress are other important considerations.
What should matter most to you is prioritizing your objectives and running the numbers through several scenarios to determine which exit is feasible to maintain your lifestyle.
Keeping It in the Family Comes with Trade-Offs Too
Are your children interested in running the business? Are they ready? If more than one child is involved, how will responsibilities and ownership be divided? What about children who are not involved in the company? Can the next generation afford to purchase the business while still leaving enough capital in the company to operate and grow?
A third-party buyer may be able to provide more cash at closing. A family transition may require the owner to receive payments over many years and remain financially connected to the company to include loan guarantees.
Control Is Often the Hardest Thing to Give Up
You may be thinking, "I am just not ready to think about selling right now. I am still having fun, and we are making great money - I will look at this again in a couple of years, when I am closer to my planned exit." Would you give up some control in exchange for taking some financial risk off the table, and then have a chance for a 2nd bite at a much larger apple?
This is the point to this exercise. Once you are close to a deal, a lot of what determines your final payout is already baked in. Knowing your numbers far in advance is like having your own personal road-map to your exit and removing much of the stress and guesswork. Time can be your greatest advantage or your worst nightmare. Knowing the range of values for your enterprise is a key detail you must not gloss over.
Starting early does not mean you are ready to sell tomorrow. In fact, it may mean the opposite because developing the next generation of leadership is what makes or breaks the underlying value of your enterprise. Strengthen your management team, address estate planning, and reduce your personal financial dependence on the company. A transition should not force you into choosing between things you care about because you ran out of time to prepare. The earlier you understand your priorities, the more opportunity you have to build a transition around them.
At The Beringer Group, we help business owners understand the financial side of these decisions before they have to make them. We work alongside your CPA, attorney, estate planning professionals, and explore what different paths could mean for you and your family.
Know where you can be flexible. Know what you are not willing to compromise on. And most importantly, know what a successful transition looks like to you.