There are more than 28 million small businesses in the U.S. According to BizBuySell, in the third quarter of 2015, there were about 35,000 small businesses listed for sale. That may sound like a small number, but if you’re one of them, or thinking of becoming one of them, it’s a big deal to you. As a business owner, you usually have discretion on timing the sale of your company, although sometimes things happen to force a sale. It’s always a good idea to optimize your price by timing your sale for your advantage where possible. Here are some sale triggers to consider.
1. You Get a Great Offer
If someone makes you an offer for your business that’s too good to refuse, would you accept it? Many business owners who can find themselves in the enviable position of receiving an offer will go for it, assuming the terms are right. This is so whether they’ve been in business for many years or just a short time, whether they’re young or old, and whether or not they have plans for the future. One report found that the median small business asking price rose 13% in the past year and the median sale price was up by 12%, so the timing may be good for some business owners now.
If you find yourself in this enviable situation, evaluate the offer carefully before you make any decision. There are several standard methods for valuing a business, which are based on the numbers. The National Federation of Independent Business (NFIB) offers a good overview on the three basic valuation methods. Look at your financial statements to see what your business can command. Work with your CPA or other financial advisor to make sure the offer is a good one in view of your company’s current financial position.
2. You Want to Retire
While there are no statistics, it’s probable that the most common reason business owners sell is because of retirement. This may occur at different ages for different owners, with many waiting until they’ve reached their full retirement age for Social Security benefits purposes. Today, with 10,000 baby boomers reaching this age every day, certainly some of those who own businesses are thinking about selling, even if they are not already actively pursuing this objective. Of course, despite age, not every owner thinks about selling. For some, running their businesses is a joy they don’t plan to give up until health – or death – forces them to do so.
If the sale of the business is motivated by retirement, it may be possible for the owner to continue working with the company in a limited capacity, such as an employee for a term of two or three years, or as a consultant. This continued association with the company after the sale can help the buyer(s) grow into their new roles, transition customers to a new team and ease the owner out of a daily work schedule. It can also provide additional income to the owner following the sale. This may be a concern where the sale price was not sufficient to sustain the owner’s desired lifestyle or where the transaction was structured as an installment sale where payments are spread out over time (say five years).
3. You Want to Jump on a New Business Opportunity
Some business owners are serial entrepreneurs, developing one great business idea after another. For some serial entrepreneurs, it’s the process of creating the business that gives them a charge; they aren’t necessarily buoyed up from running the business day-to-day. For others, capital from one business makes it possible to move on to bigger and better things.
According to the National Bureau of Economic Research, “once one becomes an entrepreneur for a second time, the probability of becoming one a third time, or fourth time, and so on, keeps rising.” Selling a business gives serial entrepreneurs capital, experience and time to devote to a new endeavor.
4. Health and Family Issues Come Up
Things happen – to business owners or members of their family – that can force the sale of a business in order to concentrate on personal matters. An owner’s child develops a life-threatening condition; the owner becomes disabled; the owner’s elderly parent needs full-time attention.
Before selling under these circumstances, determine whether the situation demands a permanent exit or can be accommodated by a temporary leave of absence. For example, disability insurance may cover the owner’s living expenses during a period away from the company. If the owner’s talents are central to business activities, even a limited period away from the company can be detrimental to its health; in this situation a sale while the business is thriving may be a better choice.
5. The Owner Has Died
When an owner dies, his or her family may be unwilling or incapable of continuing the business. For example, a florist dies and her spouse who inherits the business knows nothing about flowers or may have no interest in running this business. Or children inheriting a business already have their own careers. These owners’ heirs may decide to sell.
Some post-death sales are prearranged through buy-sell agreements. These contracts for sale obligate the company to buy back or have co-owners buy out the deceased owner’s interest. If properly drafted, these agreements can fix the value of the business for estate tax purposes and avoid valuation disputes with the IRS. Of course, thought must be given to how the buyer will have the money on hand to complete the sale when the owner dies; life insurance usually is used to fund buy-sell agreements.
The Bottom Line
Whatever the motivating factor for selling a business turns out to be, the underlying fundamentals of valuing the business apply. Those who are thinking about selling their company for any reason can optimize their sale price by making sure they have solid financial information to share with prospective buyers.