Five Things Every Business Owner Should Consider Now If They Want To Sell Their Business in the Next 5 Years

In my years of planning for clients, business owners often have more complexity associated with their overall wealth planning. If I were to put a business owners’ assets in a pie chart, it tends to be skewed where the business itself represents the majority of their net worth.  In addition, small businesses tend to be illiquid and the success of the business can vary greatly on a year over year basis.   Owners often wonder how they can dedicate time to their planning with so much uncertainty out there.  This uncertainty is the exact reason why business owners need an exit plan.

Creating an exit plan may not be their top priority if selling their business is a few years away.  However, it likely took the owner of such business years or decades to get it to where it is today.  Planning to sell or leave the business should start years in advance of the ultimate sale or transition.  As they say, “Rome Wasn’t Built in a day”.  Here are five things every business owner should consider now if they want to sell their business in the next 5 years.

• Define Goals & Objectives
• Get a Valuation of Your Business
• Focus on Creating Transferable Value
• Who are the Likely Buyers?
• What is Plan for the Business if you become disabled or pass away prior to selling?

1. Define Goals & Objectives

These goals can be divided into three areas:

Financial Goals – How much would you receive in after-tax proceeds if you sold your business today and what is your income replacement plan?  Often times, business owners are focused on maximizing the value they receive and they overlook these critical pieces until after the sale of the business.  With potential changes to the tax code in the years ahead, it is important to have a plan that can adjust these variables in your planning to gauge its overall impact to your plan.

Departure Date – When do you want to leave or sell the business?  Some business owners might say they want to leave tomorrow or maybe never.  Whether the owner likes it or not, 100% of owners will stop being an owner at some point.  Each owner is different and your overall planning should adjust based on the timeline that you have in mind.

Likely Successor/Buyer – Is a third party the most likely buyer?  Do you have a key employee or family member that you have designated to take over the business?  Planning for a third-party sale is very different that an insider/family transfer.

2. Get a Valuation of Your Business

When I help business owners develop an exit plan, the owner often has a number in their head of what their business is worth.  When I ask these owners how they derived that number, it typically comes from someone other than a professional that is qualified to do an unbiased, objective valuation of their business.  Getting a professional valuation of the business is critical to building a successful exit plan.  If you know what the business is worth, it makes planning for the ultimate sale/transition a much easier process for all parties involved.

3. Focus on Creating Transferable Value

The question that needs to be answered at the start of any planning engagement with a business owner is “Do They Have a Business That Has Transferable Value”.  In some cases, whether the owner likes it or not, they may not have a business they can sell or transfer for any monetary value regardless of what they do.  In other cases, the owner might not have a business that has transferable value today, but it can transition to a business that can be sold or monetized for value with some proper planning.

4. Who are the Likely buyers?

If you are planning to sell to a third party, is a strategic buyer the most likely path?  What does the M&A environment look like?  Should a financial buyer be given consideration?

Do you have key employee or group of employees that you believe are interested in taking over the business if you were to sell?  Often, I hear from business owners that they would like to transfer the business to some employees, but the employees do not have the money needed to buy the business.  This warrants a deeper discussion as there are many ways buyouts can be structured in creative ways that allows owners to still accomplish their goals.

What about family members running the business?  Is the heir apparent in the family someone that is capable of running the business?  How would other family members be impacted if you had one member of the family run the business while the others were not involved?

5. What is the Plan for the Business if you become disabled or pass away prior to selling?

If the owner were to be unable to run the business due to disability or death, would the business shut down or close?  Who would take over the business in the owner’s absence?  Is all of the knowledge of the business locked inside the owner’s head?

The five items above can be explored in much greater detail.  We will plan tackle each of the five areas in greater detail with some additional commentary in the future.

If you are a business owner who is looking to sell your business, now is the time to get started on formalizing your exit & wealth with your ACM Wealth Advisor.

Advisors Capital Management, LLC is an investment advisor registered with the United States Securities and Exchange Commission. Registration does not imply any degree of skill or training. All investing carries risk, including the potential for the loss of principal and past performance is no guarantee of future results. This content is for informational purposes only, can change at any time without notice, and is not investment advice or a recommendation to trade any security. Indices are not available for direct investment. We only provide services in jurisdictions where we are registered. Our disclosure brochure (ADV Part 2A) and customer relationship summary (ADV Part 3) are available at https://adviserinfo.sec.gov and upon request.