So, you have this thing. You have poured your heart and soul into it, and you may not really want it to go away, but it is time to pull some hard-earned cash out. You are also smart enough to know 2 things:
- Monetizing your business is probably the most consequential financial decision you will make for your family.
- You don’t know what you don’t know about the process of selling your business – The Sale Game.
This blog post will help with the second. We will do a quick overview of The Sale Game gameboard day.
Winning means that you will sell your business when you want to, for the money you need, to the person you choose. You have options. And you have control.
The most important thing to manage in The Sale Game is time. Time is the enemy, and time is your friend. Getting started on your sale 3-5 years ahead of when you envision selling is best. The earlier you start, the more options and control you have.
However, this may be an urgent situation. This usually stems from what we refer to as “The Five D’s” - divorce, disagreement, disinterest, disability, and death. In these cases, your options and your control in The Sale Game are limited.
Now that the elephant in the room - time - is out of the way, here are 3 things that you need to complete before stepping onto the sale path:
1. Know your numbers. Be prepared to share them with your advisor that will be helping you inThe Sale Game. This is critical. If you cannot or will not present your numbers, or if they are disorganized, you will not sell. Period.
2. Know your Four Capitals (4C’s), which are your intangible assets: Human Capital Customer Capital Structural Capital Social Capital
3. Know what you want and need. Your financial advisor and tax professional will help you with this. I often hear business owners say, “Someday I’m going to sell this thing for $X million and go sit on a beach!” No, you are not. Your business as it sits will sell for roughly 1/3 of what you think. (Historical average, EPI, 2019)* Notice I said, “sell for.” I did not say, “is worth.” Besides, how much do you need for that beach? Can you do it for <$X Million? Work that out with your financial advisor and know what you want/need.
Now we can begin The Sale Game. You started planning early and have a solid handle on the 3 factors I just outlined. These are your game pieces to move on the board. I imagine The Sale Game is like “Life” or “Candyland” or “Monopoly,” or any other board game that has a path to follow and pitfalls along the way. The path looks like this, generally speaking, of course:
1. Establish a base valuation for the business. This is a “quickie” valuation only. You will not use it for the sale. It is simply a place to start and to find places where you and your advisor can increase the value of the business.
2. Establish a comparison between your valuation number and your family’s wants and needs. What is that gap?
3. This gap creates a prioritized action plan that will be unique to your situation.
4. Identify how you want to sell the business. Quickest sale?Highest price possible? Family member who can’t afford it that you want to own it? Lowest taxes? Strategic partner?
5. Keep in mind, the sale ties into your personal values, too. Are you staying in town and want the business to be a major employer, then run for mayor? There may be many considerations here. Bottom line, we need to get serious about your post-ownership plans.
6. De-risk the business. This means you are preparing the business for sale by improving it and making it more interesting to potential buyers. This is another prioritized action plan. Time is your biggest friend here!
7. Assemble proof. Now you have de-risked the business, have a plan for your family, and everyone is on board.
8. Many times, the business is now running on all cylinders and the owner is refreshed. Creating a plan is not an obligation to liquidate. You have more options and more control and that can feel good. You may change your mind here. Do you want to grow or exit? Maybe go part time? Did one of the kids suddenly get interested?
9. Announce to employees and other stakeholders. We have been keeping this quiet so far but now that you have a plan, you have something tangible to communicate.
10. Get a formal valuation. At this point we frequently bring in a business broker, a banker, or other professionals to assist in the sale. They will likely need a formal valuation to move forward. They will use that formal valuation and assess your company’s value in the current market cycle. Are we in a recession? Are rates low? Is your business in a growth cycle?
None of the above is set in stone. Every case is different.
Prosperity Advisors will help you win The Sale Game. Our Certified Exit Planning Advisor (CEPA)® and Certified Financial Planners (CFP)® are well seasoned, knowledgeable, and understand The Sale Game.
Here at Prosperity Advisors, we are at the intersection of business and family. Give us a call!
Questions? Comments? Funny Jokes? Let me know!
*Exit-Planning Institute