No matter your exit strategy, there are positives and negatives to each of them. Yet, the most effective exit plans have contingencies for all of them. A well-thought-out exit plan is vital to a successful transition. That’s why I want to look at some of the common blind spots owners encounter when selling a business on the open market.
Even if you’re not currently thinking of selling, at some point you’re going to exit your business. There will come a time when you will no longer be able to carry on your ownership duties. Whether by personal choice or through disability or death, reality dictates that you will one day leave your business.
Therefore, the earlier you begin planning for that exit, the better. This is especially true when you consider that finding a suitable buyer is often a long and difficult process. You see, there are thousands of businesses for sale in any given year, but there’s a relatively limited pool of buyers. The ratio of businesses on the market to prospective buyers is part of the reason that only about 20% to 30% of businesses are able to be sold.
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Likewise, the sheer volume of available businesses makes it difficult for buyers to zero in on the right one. In fact, a recent survey by BizBuySell.com revealed that 58% of buyers believe finding the right one is the most challenging aspect of the purchase process. Therefore, taking early action to prepare your business for a sale can make it more attractive to potential buyers, improving your chances of transaction.
Uncovering the Blind Spots in Your Exit Plan
Selling to a buyer on the open market presents the seller with unique advantages. But potential blind spots mean you must have an exit plan that accounts for all potential outcomes. Of course, this is difficult to do since, by nature, blind spots are unknown to you. This is why working with a Certified Exit Planning Adviser (CEPA) or business coach is so beneficial.
Working with your CEPA can help you uncover some of the holes in your exit plan, better preparing you and your business to sell on the open market. As you go through your personalized exit plan, they will provide valuable insights from their own experience. But more than this, a CEPA or business coach can see things objectively. This is invaluable for small-business owners who often suffer from proximity blindness.
When you work so closely with something, as business owners do in their businesses, it becomes difficult to see it as it truly is. This is especially true after putting years of your blood, sweat and tears into a business. Studies have shown that entrepreneurs develop a similar attachment with their businesses to that of a parent and their child. Since no parent thinks their baby is ugly, very few business owners are going to see all the problems with their business. So, having an objective set of eyes can really help with your exit planning.
It’s clear that planning for your exit is necessary and that having someone who can objectively work alongside of you through the process is important. But what are the benefits of selling your company on the open market? Perhaps more important, what are some of the potential blind spots entrepreneurs face when choosing this type of exit?
The Financial Aspect
Third-party sales often have the highest ceiling for potential payment among all exit paths. This is especially true if the buyer is making a strategic purchase. Unlike selling to a family member or key employee, typically you’ll receive most of the purchase price at closing, rather than over the course of several years. This combination of having a higher ceiling on the sale price and receiving it in a lump-sum payment makes this method of exit very attractive to business owners.
However, this benefit doesn’t come without its perils. Oftentimes, purchase agreements have some provisions. These can be in the form of earnouts, clawbacks, retention rates, etc. The problem is that you may not receive the full purchase price at closing. The remaining balance could be greatly diminished through these provisions.
For example, if you get an offer of $10 million for your business and receive 50% at closing, the remaining $5 million is dependent upon the company’s performance during the clawback period. Therefore, you can’t depend on receiving the full purchase price. That’s a blind spot that many business owners miss. A CEPA could help you prepare for this possibility before you ever even get to the closing table.
Time Issues Can Sneak Up on You
Selling a business takes time. Although selling to an open-market buyer is typically one of the faster methods of transaction, it still takes time. This leaves you open to another potential blind spot. You’ve spent years preparing your business for this moment. Yet, it’s this very moment that could cost you. Let me explain.
When you begin to transact, your attention shifts away from your business and to the transaction. Because you’re no longer focused on the business, something breaks. Perhaps it’s an internal system that you didn’t have locked down as well as you thought. But it worked as long as your full attention was on the business. Whatever it may be, something breaks while you’re focusing all of your time and energy on closing the deal.
The buyer will view this as a risk and, oftentimes, will attempt to renegotiate. Now, you’re stuck. At this point, you’ve likely spent hundreds of hours working on the sale, and you’re emotionally invested. Do you walk away from the deal, or do you concede and accept the new terms? You certainly don’t want to negotiate against yourself. Once again, the time investment is something a coach can help you with.
Mitigate Your Tax Burden
One of the only sure things in life is that you will pay taxes. This is especially true when selling a business. Regardless of how your business is structured, you will face tax land mines specific to your entity. For example, if you started your company as a C corp and never converted it to an S corp, you could be taxed twice on the final sale price (once at the corporate level and again at the personal level).
This is where you need to really lean into your advisers. Determine your exit path and take the necessary steps to mitigate the tax burden that will come with a sale before you go to market. Avoid this costly blind spot by staying in close communication with your tax planner or adviser.
Although there are myriad potential pitfalls when exiting your business, working closely with a CEPA or business coach could save you a lot of grief in the end.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
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