Timing is Everything: When should I start to consider selling my business?
Before reading this article, we suggest you read our article on “The Next Chapter: How Do I Create a Succession Plan?”
Planning the successful succession of a business takes years. The answer to when you should start the plan is easy – you need to start today. Most successful transaction plans take three to five years to fully implement. In fact, many can take up to ten years depending on the complexity and the length in which you wish to remain with the company in some capacity before fully retiring.
The longer you can take to build the succession plan and see it through, the more financial reward you will achieve in the transaction. You spent your whole life building up this business. It has become a part of your family and a significant part of your identity. You want to make sure your hard work is passed on to the right buyer, at the right time, and for the right price.
Here are a few reasons why you should start planning for tomorrow, today.
You Can Clarify Your Options
You may have a vague idea of how you see the transition of your business and your transition into retirement going, but until you dedicate the time to discussing the options and possible scenarios you likely are not exactly sure what options are available to you. Who will be your buyer? Do you want to sell and immediately retire? Do you want to stay on in some capacity if even just as an external consultant to the new owner? Do you want to sell this business and start a new one?
All of your options must be reviewed and specifically understood in order to know the best way to proceed with the same.
You Can Prepare the Company Financials
Before you can sell your business you need time to get everything in place to maximize your return on the sale; start with ensuring the customers are well taken care of and the company is positioned well in the industry. All buyers will want to review two to three years of past financials to ensure the company has a history of profitability and stable revenues. You may need to invest some personal funds to strengthen the balance sheet by purchasing new assets or to pay down any large debt. You will also want to start to remove personal expenses and minimize your shareholder draws.
Prepare the Human Capital for a Smooth Transition
Most likely the success of your business has been the direct result of you, the business owner. You have built the customer relationships and you have worked to build the company reputation. Successful planning of the transition for your business involves a lot of work around having the right people in place to take over the business after you are gone. Whatever roles you predominantly handle on a daily basis need to start being filled by existing or even new staff. You need to help train and develop the skill set of the next owners and staff. Documenting processes and procedures to ease the transition is imperative. Training and development of the human capital of the business is as important as the financial capital.
Purity Test on the Sale of Qualified Small Business Corporation Shares
Many owners want to sell the shares of their business to maximize the capital gains exemption, but one often overlooked fact with respect to selling the shares is the purity test. In order for your shares to qualify as small business corporation shares and be eligible for the capital gains exemption is to ensure that 90% of the assets of the business are used in the daily operation of the company for 24 months prior to the sale of the shares. If your company has built up an excess amount of cash or investments and does not need all of it in the daily operations, there is a chance the company will not be considered a qualified small business corporation and you will not be able to access the capital gains exemption. Therefore, taking at least 24 months before the eventual sale of your shares to clean up the balance sheet and purify the assets is a very valuable step in the sale process.
Estate Planning
Undoubtedly, you are starting to consider the idea of selling your business because you are getting into the later stages of your working life. As such, the risk of something happening to you health wise most likely has gone up in the last number of years. As noted in the previous article, succession planning is not just about a plan for your business, it is also about a plan for you, the business owner, and your family. It means you have a plan and an exit strategy set in place in the event that something happens to you. Tax planning and estate planning on what will happen to your investment before, during and after the sale of the business can ensure you and your family are not left with a tax burden. It also ensures the business will be able to continue to operate without you whether due to retirement or an unforeseen emergency.
Once you have started the process of planning to sell the business, the important next step is to accurately know the value of your company. To do so, we suggest you read our article, “Dollars and Sense: Why is it Important to Know the Value of My Business?”
Jared Burwell is the author of this article. He is the founder and director of Viros Group, a capital investment and financial management firm focused on business growth and succession planning. He has spent the last 20 years in public accounting with a primary focus on providing advisory services and financial oversight to a wide sector of small and medium-sized owner managed businesses.
