The Four D's That Could Force You to Sell Your Business

A business owner sits in front of his laptop at his desk with his face in his hands.

(Image credit: Getty Images)

Optimism bias, as it sounds, causes us to be overly optimistic about the future and to underestimate the likelihood of negative events.

I remember watching COVID break out in China and thinking, “I’m sure glad that isn’t here.” I remember Trump saying (again and again) that he was going to introduce tariffs and thinking, “There’s no way Treasury Secretary Bessent will let that fly.” And yet, here we are.

As I think about my business, and my young children, it’s easy to paint a pretty picture of a business that lives at least until my birds fly the nest and, ideally, far beyond that.

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The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

The reality for all business owners, though, is that there are many things that could cause your business to cease to exist in its current form, much before your planned exit date. Below are five of the most common.

1. Divorce

No, 50% of marriages do not end in divorce. This overstated and overly simplistic statistic makes this risk seem higher than it is. That said, divorce is a significant risk, especially for owners of private companies.

Businesses are often formed and built during marriage and are therefore considered part of marital assets in divorce. Most states will seek an “equitable division” of property in the event of divorce.

So, if half of the balance sheet is stocks and bonds and the other half is the business, you may be fine. But as a business owner, you know this is uncommon.

Successful businesses often represent the lion’s share of your total assets, which could lead to tough decisions in the event of divorce.

There are strategies to get in front of this, but all of them will be tough to execute if divorce is already on the table.

Pre-nuptial and post-nuptial agreements can address certain assets like a business.
Cross-purchase agreements can provide a mechanism to buy out ex-spouses.

The key is recognizing the exposure and working with an attorney and financial planner to address it. Businesses selling due to divorce will likely carry a much lower multiple.

2. Disagreement

I have a family of five. The decision as to where to go to dinner on Friday night is harder than it was when we were a family of two. The more shareholders, the more room for disagreement, in all of life.

In the wealth management space, the most common thing I have seen are 50/50 ownership, two-person teams that simply dissolve over big or small disagreements.

When owners disagree, growth stalls, and often those owners want out before things get worse. It is very difficult to sell a business with declining earnings for a fair price.

Depending on the legal structure of the business, having a shareholder, partnership or operating agreement in place is critical.

Buy-sell agreements establish the terms for owners to exit when reaching certain triggers.

3. Disability

I still remember the visits from disability insurance wholesalers when I first got into this business. Their job is to convince you that deflecting a portion of your income to protect your income is worthwhile.

The statistics around disability were and are shocking. According to the Social Security Administration, 1 in 4 of today’s 20-year-olds will become disabled at some point before retirement.

In my previous life, I bought disability insurance from my employer to cover this risk. As a business owner, there are a few more things to think about.

Business owners can buy disability insurance. Business overhead expense insurance keeps the lights on in the event of your disability. Key-person disability insurance covers this risk for a key employee or owner of the business.

The worst outcome from a sales perspective is being forced to sell a business that has no revenue because of your disability.

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Because of this, what’s most important, and much more difficult than purchasing insurance, is building a business that can function without you.

4. Death

I’m ending this column on an even more depressing note than where we started. I have seen businesses fetch multiples beyond my wildest imagination.

I have also seen the flip side, where someone who could have perhaps fetched a similar sales price died unexpectedly.

Even those owners who had the foresight to draft a buy-sell agreement are selling below market if they predecease their business.

Obviously, in the case of an accident or a sudden terminal illness, this is a risk that’s tough to manage.

My best advice here goes back to my column The Four Worst Mistakes to Make When Selling Your Business. Number one on that list is waiting too long.

Selling at the right time requires finding a sweet spot based on business growth, age and hitting your number.

We rely on financial planning software to figure out if you’ve hit your number. (You can access a free version of that software online.) That sweet spot may mean selling earlier than you’d expected.

Perhaps easier than selling your business at the perfect time is carrying ample life insurance. The same software above can help you estimate life insurance needs.

The lower you enter the value of the business, the more insurance the software will suggest.

If you want to drive in the right lane, overinsure. It will help you sleep at night knowing your heirs won’t have to knock it out of the park selling your business after you die.

Disclaimer

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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After graduating from the University of Delaware and Georgetown University, I pursued a career in financial planning. At age 26, I earned my CERTIFIED FINANCIAL PLANNER™ certification. I also hold the IRS Enrolled Agent license, which allows for a unique approach to planning that can be beneficial to retirees and those selling their businesses, who are eager to minimize lifetime taxes and maximize income.