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.
-
Ten Cheapest Places to Live in TexasProperty Tax Looking for a cheap place to live in Texas? Look no further. These counties have the lowest property tax bills in the Lone Star State.
-
AI Is Missing the Wisdom of Older Adults: What It Means for YouAI will increasingly affect your healthcare and finances, but young workers are primarily designing the systems and getting most of the jobs.
-
The Three C's to Financial Success: A Financial Planner's Guide to Build WealthConsistency, commitment and confidence in your chosen strategy are more critical to your financial success than finding the 'perfect' financial plan.
-
A Financial Adviser's Guide to Solving Your Retirement Puzzle: Five Key PiecesIf retirement's a puzzle you're struggling with, try answering these five questions. The answers will guide you toward a solution.
-
You're Close to Retirement and Cashed Out: How Do You Get Back In?If you've been scared into an all-cash position, it's wise to consider reinvesting your money in the markets. Here's how a financial planner recommends you can get back in the saddle.
-
After the Disaster: An Expert's Guide to Deciding Whether to Rebuild or RelocateHomeowners hit by disaster must weigh the emotional desire to rebuild against the financial realities of insurance coverage, unexpected costs and future risk.
-
A Financial Expert's Tips for Lending Money to Family and FriendsWhat starts as a lifeline can turn into a minefield if the borrower ghosts the lender. Following these three steps can help you avoid family feuds over funds.
-
What the HECM? Combine It With a QLAC and See What HappensCombining a reverse mortgage known as a HECM with a QLAC (qualifying longevity annuity contract) can provide longevity protection, tax savings and liquidity for unplanned expenses.
-
721 UPREIT DSTs: Real Estate Investing Expert Explores the Hidden RisksPotential investors need to understand the crucial distinction between a REIT's option to buy a Delaware statutory trust's property and its obligation.
-
I'm an Insurance Expert: Yes, You Need Life Insurance Even if the Kids Are Grown and the House Is Paid OffLife insurance isn't about you. It's about providing for loved ones and covering expenses after you're gone. Here are five key reasons to have it.
