November 4, 2019
Most business owners don’t think about selling their business until they want to get out. While this is understandable, it is not in your best interest. Owners frequently get the most out of their business when they set goals at least five to ten years before they plan to sell. Some owners plan to sell when they launch their companies. Why? Everything they do will lead to the results that they want. It’s just as important to have a sell plan and a business plan.
Three important questions you should ask are:
- How much money do I want to get out the business?
- How would I like to live in retirement?
- Do I want to sell to a family member, internal team member, or outside party?
The answers to these questions will help to establish life goals. Everything that you do within your business should lead you closer to obtaining your goals. For example, if you want to walk away from your business with $5 million dollars in your pocket you need to make sure that is it worth more than $5 million dollars. “Worth” is not the amount that you think you can sell your company for; it is the Fair Market Value (FMV) of your company or what someone is willing to pay. A lot goes into calculating the FMV of your business. My advice is to hire a valuation expert with in-depth knowledge of your industry to determine the FMV years before you want to sell. This is important. If you know the FMV ahead of time, you can work on the areas that need improvement to maximize the amount a buyer will pay.
If you want to travel the world and live a glamorous life in retirement you are going to need a lot more money than if you want to live simply in a cabin on a lake. You need to consider your lifestyle goals when deciding how much money you want to get out of the business. You may need to scale your business to earn higher margins and profits. Or, if you want to continue to work in the business after the sale, you must determine in what capacity and for how long. Some buyers will pay more money for a business if the owner agrees to stay on for five years because it helps with customer and employee retention.
It is also important to determine if you are going to transition ownership to a family member, another person on your team, or an outside party. This person or team needs to be groomed and trained to take over your role. Start mentoring and coaching your ideal candidate(s) early in their career. Give them the opportunity to take over your responsibilities at least a year before you want to transition ownership. This will give them the opportunity to learn from you while you are still around and gives you the chance to assess if they are the right person/team for the job. Another course of action needs to be taken if you want to sell to an outside party. You might decide to hire a business broker or establish a transition team of professional advisors to help.
There are many valuable resources online to help you. One is a presentation from the FDIC entitled “
Small Business Exit Strategy
”. Feel free to call any member of our team to discuss your goals and exit strategy at 610-828-1900 (PA) or 732-341-3893 (NJ). You can contact David Gibbs, CPA, CCIFP, MBA, partner at
or me at
. We are always happy to help.
Martin C. McCarthy, CPA, CCIFP
McCarthy & Company, PC
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).