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Exit stage right: Many factors feed into a successful business sale

How much will you need to live on, after selling the business you’ve spent a lifetime to build? When’s a good time to sell your business and retire, and what’s the best way to make that happen?

When thinking about life after work becomes an uneasy but constant companion, take action by making a plan that reflects your lifestyle choices, retirement goals, personal and family health care, as well as legacy and catastrophic planning – and tally the costs.

“Think about the next chapter and what you’d like to do. That can drive how you structure the sale and how much you can get,” said S. Graham Simmons, a partner at law firm Norris McLaughlin P.A. in Allentown.

What sellers need to ask

Essential questions business owners should be asking themselves when preparing to exit the workplace should include:

  • What are my goals? How will I accomplish them?
  • How much do I need to live on, assuming no further employment or income?
  • What is the impact after taxes are paid? How much is left?
  • How will my retirement earnings be taxed?
  • Where will I live and how much will that cost?
  • What’s my estate planning component?

He noted some owners exit their businesses only to begin another, while others might want funds for living expenses while helping children or grandchildren achieve their goals.

How much does it cost to stop working?

It depends how much is needed to fund everyday living and finance your short- and long-term goals.

The answer isn’t always an easy one for business owners.

They often don’t have a good handle on their income or expenses, because the business may have absorbed some of the costs of daily living, said Christopher A. Cassel, a certified public accountant and senior wealth advisor with RKL Wealth Management LLC in Wyomissing.

“Are the vehicles picked up through the business? Is the health insurance or are phone bills picked up? All of a sudden at the back end, this becomes real,” Cassel said.

He said “a gut check” is the best place to start to figure out the real amount an owner needs to live and meet any additional financial goals.

Timing matters

While it’s never too early to consider an exit plan, Andrea Brady said many clients she works with get serious within two to five years of selling and exiting the workplace.

Brady is a certified public accountant and shareholder of Concannon Miller in Hanover Township, Northampton County.

She said a sobering survey by the Exit Planning Institute found that “two thirds of business owners don’t know their exit options, 78 percent don’t have a transition team, 83 percent have not written a transition plan, and 49 percent have no plan at all.”

“The good news is business owners can change these statistics,” with a team to guide steps for successfully transitioning after the sale, Brady said.

Business owners also must balance personal and outside factors when deciding when or whether to sell.

A second act?

Former business owners often are approached by entrepreneurs seeking funding for their startups. Think twice before plunking down the cash and becoming an angel or venture investor, experts said.

“Venture capital is ‘patient’ capital – not someone who is coming in to maximize and sell out in five years,” said S. Graham Simmons, a partner at law firm Norris McLaughlin P.A. in Allentown.

Simmons encouraged talking to people with venture capital experience, or tapping into groups already in the game. “Don’t just throw money at businesses,” Simmons said.

Being savvy about securities regulations, or connected to those who are, is always a good idea, too. “(Venture investing) is often not something people are naturally good at,” he said. Simmons recommending seeking an existing fund that is looking for an investor. “You have an existing infrastructure and pipeline,” Simmons said. “That’s a great way to begin.”

Christopher A. Cassel, a certified public accountant and senior wealth advisor with RKL Wealth Management LLC in Wyomissing, said he recommends that clients who are “ultra-high-wealth” individuals – or those worth $20 million or more – look in their own backyards first.

“In each community in which we live, there tends to be a group of these folks in the local community,” Cassel said.

Pros: 

  • The potential for excess return. Venture investment payoffs tend to be very high or very low returns.
  • A sense of accomplishment. Being an investor allows you to remain involved in some sort of a business for enjoyment, or to learn something new. 

Cons:

  • Assets aren’t liquid, so it’s difficult to cash out easily.
  • Transferability of ownership is difficult. Contract ownership may be non-transferable.
  • Unknown risks associated with any business. When you’re in charge, you know and understand the risks. When you invest, you may not.

“Market conditions, personal health, an unsolicited offer from a competitor, death of a family member or partner, winning or losing a major contract or customer. Be prepared to capitalize on these factors rather than react to them,” she said.

Upfront preparation should include a business and books house cleaning to get affairs in order. Having a third-party valuation goes a long way to setting realistic sale expectations as well, Brady noted.

“The biggest mistake most owners make is thinking the business is worth more than it actually is,” Brady said.

She said business owners often think more sales equals more value. But that’s not always true. Instead, look to differentiate the business in its market with a product or service that is attractive to another company.

Standing apart from the pack does add value, as does having “runway” where there is still plenty of room for growth.

Go team

Experts agreed a team approach to planning is best and should include business and estate planning attorneys, a financial adviser, an accountant and an investment banker, if appropriate.

Other core team members could include a Realtor or real estate broker, if a buyer isn’t already on board; or an insurance professional.

Cassel said one of the biggest mistakes clients make is treating the professional team as separate entities without having them talking all together.

“I think when [clients] have all those professionals in the room and it’s costing $2,000 per hour – and they’re not a cheap group of folks, that’s a big check to write,” he said.

He concedes those are expensive meetings to call and fund, which could explain some of the reluctance to host them. But they are important nonetheless.

“Before you even contemplate the sale all those folks need to be at the table,” Cassel said.

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