If you’re planning to hand over the reins to your business, there’s a lot to think about. And it can be hard to know where to start. A good first step is to visualize how you would like it all to happen. Then, ask yourself the following five questions to gauge the feasibility of your vision.
How much is your company really worth?
This can be a tough question, especially if you’ve put a lot of sweat equity into your business. But having a realistic idea of your company’s value is critical to sorting out other aspects of the sale. This could require a simple cash flow analysis or a full-blown valuation, depending on the size and complexity of your operations.
Will this amount work for me?
Once you have an accurate idea of what your sale price could be, you have to determine if this amount will meet your needs. If not, will you delay the sale or reconfigure your retirement plans? Remember, you’ll need to think about net cash after taxes—the sale price isn’t necessarily what will end up in your account.
Have you identified potential buyers?
Having a sale price in mind also lets you narrow down the field of potential buyers. Some business owners have a child, relative or key employee who is ready to take over. Others look outside of the business to find a buyer. If you identify with the former, will this potential buyer be able to purchase your business for the amount you need to get? If not, are you OK with selling to an external buyer?
Will you accept seller financing?
A seller-financing package can make it easier for a buyer to purchase your business. If you’re open to this, you must think about the level of risk you’re willing to accept. How large of a down payment do you need? How quickly do you need to be paid off, and at what interest rate? In many cases, business owners will do seller financing for an heir or employee, but not for an external buyer. There are tax consequences to consider, too. For instance, a gain over time could be more tax advantageous than getting the full amount up front.
What’s your timing?
In a perfect world, you would be answering these questions two to three years before you plan to sell. Determining your company’s worth, figuring out your retirement needs, identifying potential buyers and structuring a deal requires serious thought. What’s more, planning ahead can give you more control over the sale price, as there are things you can do to up the pre-sale value of your business. It’s also important to think about the timing of your exit. Will you completely walk away after the sale, or will you stick around for a while? Will health insurance or other benefits be a factor?
Taking time to plan and evaluate your options should be non-negotiable. Regardless of when you begin the process of selling your business, there are advisors and consultants available to walk you through it. Your CPA can help you understand the options and tax implications associated with the transition. With the right sale strategy, you could have a better chance of walking away with your goals met.
If you’re ready to start discussing these issues contact JAK today to schedule a consultation!