Are you ready to sell your baby?
Most business owners’ net worth is tied up in their business. At some point their goal is probably to sell their company to obtain liquidity to provide for their retirement, finance their next venture, or pursue charitable giving. However, many business owners have ambivalent feelings about selling their business (or their “baby”).
Business owners spend years developing their company, overcoming a myriad of challenges and building relationships with employees, customers and suppliers. In almost all instances they look proudly on what they have done. To part with their creation can be a troublesome proposition that evokes strong emotions. If not dealt with and examined, these emotions can get in the way of an owner reaching his or her ultimate objectives. As a result, determining the right time to sell your company really requires two different types of analysis: financial and emotional.
At one level, the financial analysis is the easiest. From a purely financial perspective, business owners should look at their business like any other investment. The financial calculation is quantitative, based on an owner’s financial objectives and tolerance for risk. While a successful private business will likely be your best-performing investment, it is not without significant risk. Having all of your eggs in one basket (your business) concentrates risk in what can be a volatile stream of earnings – as a younger person, absorbing this volatility and risk can be easier than when you are nearing retirement age, when you might desire less risk and more certainty because you have less time to make up for losses. Selling your company allows you to diversify your portfolio and decrease your overall investment risk.
If your risk tolerance has decreased, then the financial calculus really requires an understanding of two elements: your financial goals compared to the likely value of your business in a sale transaction. If the value of your business exceeds what you need to accomplish your financial objectives, then financially you are ready to go to market (although this may still not maximize the value of your investment, it is still sufficient). If the value of your business falls short of your financial objectives, then you can choose between moderating your financial goals or working on the business to increase its value.
Timing your decision to sell your business is sort of like trying to time the overall stock market – your odds are probably 50/50 that you will time the market correctly. Conversely, with the right types of questions and analysis, you can certainly determine if you and your business are ready to go to market. For your business, the timing to go to market depends on its readiness. Among other questions, are your business processes well organized and documented, is your management team in place and experienced, is your customer base well diversified and reliable, and are your supplier relationships healthy and in order? With some outside help, this type of analysis is relatively straightforward.
Conversely, determining if you are personally ready to sell your company is an emotional one, and as with all emotional assessments, this type of inquiry is tricky and requires you to ask yourself hard questions you may not have fully analyzed yet. In almost all cases, selling one’s company is not about the money – it is about something deeper. Some business owners are simply ready to trade the stress of business ownership for something more relaxing, some want to spend more time with family or travel, and some want to use the money to finance a new business opportunity or give charitably. It pays to clearly identify these non-financial objectives in detail, so that you are clear about why you want to sell your business and what the trade-offs are. A business provides many psychic, non-financial benefits to a business owner – it can give a business owner purpose, something to do every day, and fulfill relationship needs. As a business owner, you should take stock of these benefits, because in some cases all the money in the world won’t compensate you for what you sacrifice on a qualitative basis if you don’t have a clear plan to address these “softer” needs following a sale.
When we interview potential clients, we ask them a lot of questions about these deeper purposes, and try to help them understand the difference between life pre-sale and life post-sale. Money can create possibilities for some changes in lifestyle, but business owners without a clear purpose post-sale can feel “at sea” or directionless, which is simply another form of stress. In our experience, a business owner who has not thought about their purpose or objectives post-sale is really not ready to sell. Even the business owner who is overstressed and needs a break will have second thoughts when the time comes to sign the closing papers for a sale.
Determining if your business is ready to sell from a financial perspective is relatively straightforward, and advisors can help you sort this out. Determining if you are ready emotionally to sell your business requires different thinking than what you may be used to, but if done carefully and thoughtfully, can yield enormous clarity and benefits for you as you consider your next stage in life.