The process of selling a business involves fine-tuning every piece of its financials before marketing it and seeking a buyer. But even if everything seems in order, it may not be the right time to sell. Perhaps something — or rather, someone — isn’t ready
An important question to ask before you sell your business: Can you actually afford to do it? With a multimillion-dollar payday in the offing, the answer seems simple. But in all of the fine-tuning of the business, could you have neglected your personal finances to the point that a sale won’t offer enough financial freedom?
Too frequently business owners sacrifice their own financial health or unknowingly tie it too close to their company, only realizing the situation upon the sale, creating anxiety as the regular income and safety of the business disappears. This begs two questions: Why can’t some owners afford the sale of their business, and what are their options?
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Question No. 1: Why can’t some folks afford to sell?
Let’s say a 55-year-old owner is ready to sell their business for $5 million cash with additional rolled equity. They don’t have an extravagant lifestyle, spending $200,000 per year. The $5 million sales price seems like a reasonable amount to continue living their lifestyle, right?
But what if they’re neglecting the fact that their car is owned by the business; their travel is taken care of by a company card; their health and life insurance were covered by the business; and countless other expenses are about to be the responsibility of their personal checking account, not their soon-to-be former business? Suddenly, that sale price might not be enough to live comfortably on for the next couple of decades.
Sellers must understand their true spending before thinking about any potential sale. The adjusted figure will drive all related decisions. In addition, having a handle on personal liquidity and spending assists with estate planning decisions prior to the transaction.
Question No. 2: What are my options?
It looks like $5 million just isn’t going to work to meet the lifestyle our example owner requires. There are plenty of options to get back on track, including:
- Make a push to ramp up the business’s value. This can be easier said than done, but it’s time to get aggressive, grind it out and find creative solutions. Perhaps new partners with differing skillsets can inject some life into the venture and increase the value of the company.
- Evaluate your capital structure. Some people make the error of leaving liquidity in the business for their own vanity, rather than any true opportunity. Ask yourself if you can start taking money out of your business earlier so you can stay on target for your growth objectives while building personal liquidity. Can your business support debt and servicing the debt? Debt brings its own inherent challenges and risks. Additionally, it may be time to bring in a minority partner that can infuse some capital and allow you to relinquish some of your financial stake in the business.
- Reassess the original deal. Is it possible to get more cash upfront and decrease the rolled equity amount or overall value of the business? There are risks to shrinking any offered rolled equity or declining it altogether (not the least of which, insulting the buyer), but it can buff the seller’s personal finances to get more cash up front.
The best option, of course, is avoiding this situation entirely. No matter where they are in their business’s lifecycle, owners must understand the true value of their personal spending and overall financial health. This process needs to start early, or else by the long-awaited time they’re ready to sell, they might not be.
-
Which Generation Pays the Most Taxes in the US?Tax Burden Polls show that most people feel like taxes are unfair. But which age group bears the brunt of the tax burden in the United States?
-
How Much Will Car Prices Go Up With Tariffs?Tariffs could drive car prices up even higher, for new and used cars, as well as for American brands.
-
A QLAC Does So Much More Than Simply Defer TaxesHere are the multiple ways you can use a QLAC, from managing retirement risks to creating income for specific retirement needs and wants.
-
Self-Directed Brokerage Accounts: Retirement's Hidden Gem?SDBAs are often overlooked, but they can offer more flexibility and growth potential inside your 401(k) when actively managed by a professional.
-
Early-Stage Startup Deals: How Does a SAFE Work?Investing in an early-stage startup can get complicated fast, so the venture capital industry turns to other investing options. One is a SAFE.
-
Should You Hire a Public Adjuster for Your Insurance Claim?As natural disasters strike more often, insurance clients are asking, 'What should I do, or who should I hire, if my insurance company is jerking me around?'
-
Tips to Help Entrepreneurs Create Self-Sustaining BusinessesWith the right processes and people in place, a truly sustainable business can be efficiently passed on to a successor and run profitably on its own.
-
Navigating Annuity Taxation: A Guide for Financial AdvisersUnderstanding the essentials of taxation in retirement income strategies involving annuities helps ensure positive outcomes for clients.
-
How Google Reviews Can Help (or Hurt) Financial AdvisersDon't leave your Google Business Profile unclaimed — someone else can make changes if they claim it. Also, here's what you can (and cannot) do with the reviews.
-
How Baby Boomers and Gen Xers Are Redefining Retirement LivingBoth generations need to embrace change and leverage real estate as a dynamic asset in their retirement planning. Here's how financial advisers can help, too.
