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 Kiplinger’s expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of Kiplinger’s 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.
-
-
How Parents Can Teach Their Kids About Cryptocurrency
Starting with explaining the concept of money to begin with can help them grasp the concept of digital currencies.
-
How Do You Overcome Stage Fright? These 6 Tips Can Help
Many people fear public speaking more than they fear death, yet advancing professionally could depend on whether you make a good impression when you step up to the microphone.
-
How Parents Can Teach Their Kids About Cryptocurrency
Starting with explaining the concept of money to begin with can help them grasp the concept of digital currencies.
-
How Do You Overcome Stage Fright? These 6 Tips Can Help
Many people fear public speaking more than they fear death, yet advancing professionally could depend on whether you make a good impression when you step up to the microphone.
-
2 Ways Retirees Can Defuse a Tax Bomb (It’s Not Too Late!)
If you’re retired and find yourself sitting on a “tax bomb,” you may think there’s nothing you can do. But two strategies could seriously reduce your taxes in retirement.
-
5 Trends in High-Net-Worth Philanthropy
Wealthy families and organizations are giving more to charity but also targeting funding to fewer grants in their efforts to create bigger impacts.
-
6 Ways a DAF Can Make Your Year-End Giving Better Than Ever
Giving appreciated assets instead of cash could be the most tax-smart move you can make with a donor-advised fund, but wait, there's more…
-
Life Insurance Strategies to Consider When You Own a Family Business
Not only can life insurance replace lost income, but it can help with estate taxes and provide a sense of fairness for family members who don’t participate in the business.
-
Short-Term Investments to Protect Against Inflation and Market Volatility
Rates on Series I savings bonds, T-bills and fixed annuities are all above historical averages and could serve investors well during turbulent times like these.
-
What’s the Difference Between Average and Actual Rate of Return?
An average rate of return can mask losses over time, so what investors really want to keep an eye on is the actual rate of return.
